The Effects of Tax-Financed Spending v. Debt-Financed Spending

By Patricia L Johnson and Richard E Walrath

President Clinton was voted into office in 1992 and served for eight years. When he took over the office of President we had three tax rates, 15%, 28% and 31% and the country had been running deficits that added to the national debt for decades.

During his first term in office; the income tax rates in this country were raised by adding two additional categories, 35% and 39.6% for high earners. The tax increases turned the entire system around and by the time Clinton left office we had a $236 billion dollar surplus for FY 2000.

The first thing President Bush did when he entered office was reduce tax rates, mostly benefiting the rich and big business until we reached the current low rate of 10% and high rate of 35%. These rates are scheduled to stay in effect until the end of 2012 due to the fact our Republican controlled congress refuses to increase taxes on the wealthy.

*Republican controlled congress refuses to increase taxes on wealthy.

Whether the various tax increases/decreases were initiated under Republican and/or Democratic Presidents is not as important as the results achieved by the changes.

In the area of Jobs

Under higher taxes 23.1 million jobs were added to the economy during the eight years of the Clinton administration. Under lower taxes approximately 3.0 million jobs were added during the eight years of the George W. Bush administration. On a per year basis, Clinton created more jobs per year than 10 other presidents, from George W. Bush, through Harry S. Truman.

In the area of the National Debt in real numbers and as a percentage of GDP

The National Debt after Clinton’s two terms in office, with higher taxes, stood at $5.7 trillion. When Clinton went into office the debt as a percentage of GDP was 66.1 percent. When he left office eight years later, debt as a percentage of GDP was 56.4 percent or an eight-year decrease of 9.7 percent.

The National Debt after Bush’s two terms in office, with lowered taxes, stood at $10.0 trillion. When Bush went into office the debt as a percentage of GDP was 56.4 percent. When he left office eight years later, debt as a percentage of GDP was 63.5 percent or an eight-year increase of 7.1 percent.

In the area of Defense

The two wars started in 2001 and 2003 by President George W. Bush will end up costing U.S. taxpayers an estimated $1.3 trillion dollars through FY 2011, as estimated by Congressional Research Service in September of 2010.

This is the first time in the history of the United States that we have gone to war without increasing taxes to provide funding to cover the war costs. Instead of increasing taxes to fund not one, but two separate wars, we lowered base tax rates, increased exemption amounts, increased deduction amounts and added one loophole after another.

The first time taxes were raised to cover expenses due to a war was in 1917 when the War Revenue Act of 1917 raised the top tax rate from 15% to 67%. One year later, the top tax was raised again from 67% to 77%. Whenever this country had additional costs from any war and/or any type of unusual expenses, taxes were raised to cover the extraordinary expenses. In instances where tax rates were not raised to cover the additional costs of war, a surcharge was put in place. During 1944 and 1945 the top tax was raised to a record 94% to cover the costs of World War II.

Raising taxes for high income earners, isn’t some sort of punishment for the wealthy due to accomplishments they have achieved in life, it’s the right thing to do. It’s the way this country has been run since inception. The first tax rate ever imposed on U.S. taxpayers was a low rate of 1% and a high rate of 7%. Using that same logic, our current tax rate for the wealthiest of wealthy should be at 70%, and we are currently taxing the rich at ½ that rate.

Cutting our budget to the bone isn’t going to change the fact that the primary reason our country is teetering on the edge of collapse is greed. The next time you hear one of our politicians telling you tax cuts create jobs, encourage investment and are the answer to all our fiscal prayers, check their net worth on www.opensecrets.org

John Boehner, Eric Cantor, Mitch McConnell and Paul Ryan besides being legislators that are proponents of tax cuts all have something else in common. They are exceptionally wealthy.

Government spending, financed by a tax increase on the rich, gets “more bang for the buck” because it uses money that was not being efficiently and effectively used, while costing the government little or nothing. The cost of borrowing when the spending is deficit financed must be added to the national debt as well as the amount borrowed.

© Patricia L Johnson and Richard E Walrath

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2 Responses to The Effects of Tax-Financed Spending v. Debt-Financed Spending

  1. Administrator says:

    I’m not sure, but it appears it’s going to be financed by: Citigroup Global Markets, Inc., Greenwich Capital Markets, Inc., J.P. Morgan Securities, Inc., Banc of America Securities, LLC and Barclay’s Capital for Conocco Phillips. Looks like Koch Industries may donate a few bucks
    too since they are responsible for approximately 25% of the oil tar sands imported into the U.S. (according to SolveClimate News). They (Koch) also own a tar sands refinery based in Canada, so they are poised to benefit nicely if this goes through.

    If the above is true then Keystone won’t be tax-financed or funded by U.S. borrowing.

    Thank you for your comment.

  2. My point is that the Keystone Pipeline should be Tax-Financed not funded by borrowing.

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