Setting the New Margins for Tax Hikes

Last week, Ricochet's John Gabriel linked to one of our old charts in his article Athens on the Potomac:

Since most graphs look like this, I created my own user-friendly debt chart focused on three big numbers: Deficit, revenue and debt. (My first version was published a couple of years ago. This one is updated with the most recent figures).

America's Finances - Source: Ricochet (John Gabriel) -

It’s an imperfect analogy, but imagine the green is your salary, the yellow is the amount you’re spending over your salary, and the red is your MasterCard statement.

Call us surprised, but when we post a chart visualizing the U.S.' national debt, it most often looks like this one, or if we're showing its trend over time, it will look like one of these.

We don't know what it says about the producers of other charts that Gabriel looks at on a regular basis, but the chart of ours he linked to was designed to fulfill a very different purpose - it is a visual tool that may be used to predict how high the top income tax rate in the U.S. would be set by U.S. politicians given the size of the national debt, the national population and the nation's economy.

The way we did that was to mathematically describe how U.S. politicians have done that in the past, where we also identified the margins where some degree of political equilibrium would appear to have been established. Here's the chart as we last featured it in October 2011:

U.S. Maximum Personal Income Tax Rate vs National Debt Burden per Capita, 1913-2011

Using that tool back in 2011, we predicted, based on President Obama's proposed spending, that U.S. politicians would attempt to increase the top marginal income tax rate in the U.S. to the 49-50% level.

Catching things up to today, that didn't happen, although a large number of U.S. politicians definitely wanted to do just that. The resolution of the so-called "fiscal cliff" crisis in January 2013 combined with the adoption of President Obama's proposed "sequester" spending levels limited the increase in the nation's top marginal income tax rate to 43.4%, the effective top marginal tax rate that applies when the topmost personal marginal income tax rate of 39.6% is combined with the Affordable Care Act's net investment income tax of 3.8% for the highest income earning individuals in the U.S.

But because of that lesser tax hike, we now have a new data point that we can use to better define where the margins for setting the nation's topmost effective marginal income tax rate are. Our updated chart showing that updated political equilibrium is below:

U.S. Maximum Personal Income Tax Rate vs National Debt Burden per Capita, 1913-2014

It's basically the same as the previous chart, but with the margins drawn to be 1.5 standard deviations away from the curve describing the main historical trend, which coincidentally appears to better describe the debt-GDP-population dynamics that apply to the high end of the nation's political tax equilibrium. With that updated margin, our model predicts a top effective marginal income tax rate of 44%. Being so close to the actual top income tax rate, it is unlikely that the top tax rate will be increased further in the near future, provided that the growth of the national debt is adequately constrained with respect to the nation's economic and population growth.

But if anybody can screw that up by going on an unnecessary spending binge and racking up even more national debt without having adequate economic or population growth to support it, today's crop of establishment U.S. politicians are the ones who can render that short-term forecast obsolete!