Morning Coffee

(Photo by Basheer Tome via Flickr

I’m like most of you out there. I feel like I pay way too much in taxes. Federal income tax, state income tax, FICA and Medicare taxes, gasoline tax, sales tax, property tax and lots of other taxes and user fees tacked on to utility bills and phone bills. When we fly to Arizona, there is a special landing tax added onto my ticket price, like where else are we going to land? If we crash, do they refund that to my estate?  Arizona even has a special rental car tax accessed onto my rental car price that nearly doubles the daily rental price.

I was looking at tax rates in years gone by, wondering what people paid in taxes. I could really only find information on federal income tax rates, but even that actually made me feel better. In 1945, as we were exiting World War II, the highest marginal income tax rate was 94%! That would be a little disheartening to reach that level where 94 cents of every extra dollar you earned went to Uncle Sam and you only got to keep 6 cents! In 1980, the year Ronald Reagan was elected, the top marginal tax rate was 70%. Better, but still not much incentive to work and earn more once you cross into that marginal bracket. Today, the highest marginal tax bracket is a mere 35%. I say mere, only because it is about 1/3 of what it was in 1945 and ½ of what it was in 1980.

For almost 70 years, we have actually been in a declining federal income tax cycle. We’ve been able to do that because we have had more people enter the labor pool and therefore the tax system. Productivity has increased dramatically, and that has led to higher profits for businesses and to higher wages for individuals. Unfortunately government’s appetite for money has grown faster than our ability to pay and we have created deficits while reducing the tax rates. Kicking the payment can down the road, so to speak.

Now it appears to this advisor that times are changing. Real wages here in the U.S. haven’t risen for a decade. We have the lowest participation in the workforce since 1978 at 63%. Under our current federal income tax structure over 45% of people pay no federal income tax at all! And the majority of those that do, pay less than a 20% tax rate. None of those trends bodes well from a tax system that needs participation to keep rates low for everyone.

If we are going to keep the present system of collecting revenue for the federal government, then we are all going to have to expect that we are seeing the end of declining tax rates and the beginning of a new cycle or rising rates.

Mike Berry is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice.

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