A lot can be learned about economics by simply reflecting over the past 120+ years of taxation in the United States. Economists and politicians generally believe that budget deficits are bad and surpluses are good, and they have been striving to achieve the latter for as long as there have been taxes. The historical record tells a different story: budget surpluses have been the cause of immeasurable harm, including causing the Great Depression.
The following table examines the history of taxation in the U.S. from 1901 to present (2023). For each year, we have federal government revenue, federal government spending, the surplus or deficit for the year, and the total economic activity / gross domestic product which resulted. The final two columns show the tax rates for the lowest income tax bracket and the highest income tax bracket in effect in the U.S. that year. (Note: the income tax was introduced in 1913.)
As you familiarize yourself with the chart, there are a few things you should notice: prior to the establishment of the income tax in 1913, surpluses (highlighted in green) and deficits were equally likely and were small relative to government spending. From 1920 to 1930 there was a surplus every year, and these surpluses were much larger relative to government spending than in the years leading up to 1913. Beginning in 1970 there were very few surpluses, only a cluster of four consecutive years from 1998 to 2001.
Take note of the highest tax rates; Sixty percent or more from 1932 to 1981, including 15 years above 90% — earn $1,000 and give the government $900 (or more) of it, with the highest rate at 94%!! Even during peace time the highest income tax rate exceeded 90% for 13 years. When you see that the income tax rate should have been a flat 1.85%, it should make you sad that so many businesses and lives were destroyed by excessive taxation by an inexpert Congress.
See below the chart for discussion of these observations.
[ Green highlights correspond to Budget surpluses ]
[ Blue highlights correspond to the two World Wars ]
Year | Revenue (Billions) |
Spending (Billions) |
Surplus (Billions) |
GDP (Billions) |
Income Tax Low |
Income Tax High |
---|---|---|---|---|---|---|
1901 | 0.588 | 0.525 | 0.063 | 22.4 | ||
1902 | 0.562 | 0.485 | 0.077 | 24.2 | ||
1903 | 0.562 | 0.517 | 0.045 | 26.1 | ||
1904 | 0.541 | 0.584 | −0.043 | 25.8 | ||
1905 | 0.544 | 0.567 | −0.023 | 28.9 | ||
1906 | 0.595 | 0.570 | 0.025 | 30.9 | ||
1907 | 0.666 | 0.579 | 0.087 | 34.0 | ||
1908 | 0.602 | 0.659 | −0.057 | 30.3 | ||
1909 | 0.604 | 0.694 | −0.089 | 32.2 | ||
1910 | 0.676 | 0.694 | −0.018 | 33.4 | ||
1911 | 0.702 | 0.691 | 0.011 | 34.3 | ||
1912 | 0.693 | 0.690 | 0.003 | 37.4 | ||
1913 | 0.714 | 0.715 | −0.001 | 39.1 | 1 | 7 |
1914 | 0.725 | 0.726 | −0.001 | 36.5 | 1 | 7 |
1915 | 0.683 | 0.746 | −0.063 | 38.7 | 1 | 7 |
1916 | 0.761 | 0.713 | 0.048 | 49.6 | 2 | 15 |
1917 | 1.101 | 1.954 | −0.853 | 59.7 | 2 | 67 |
1918 | 3.645 | 12.677 | −9.032 | 75.8 | 6 | 77 |
1919 | 5.130 | 18.493 | −13.363 | 78.3 | 4 | 73 |
1920 | 6.649 | 6.358 | 0.291 | 88.4 | 4 | 73 |
1921 | 5.571 | 5.062 | 0.509 | 73.6 | 4 | 73 |
1922 | 4.026 | 3.289 | 0.736 | 73.4 | 4 | 58 |
1923 | 3.853 | 3.140 | 0.713 | 85.4 | 3 | 43.5 |
1924 | 3.871 | 2.908 | 0.963 | 87.0 | 1.5 | 46 |
1925 | 3.641 | 2.924 | 0.717 | 90.6 | 1.125 | 25 |
1926 | 3.795 | 2.930 | 0.865 | 97.0 | 1.125 | 25 |
1927 | 4.013 | 2.857 | 1.155 | 95.5 | 1.125 | 25 |
1928 | 3.900 | 2.961 | 0.939 | 97.4 | 1.125 | 25 |
1929 | 3.862 | 3.127 | 0.734 | 103.6 | 0.375 | 24 |
1930 | 4.058 | 3.320 | 0.738 | 91.2 | 1.125 | 25 |
1931 | 3.116 | 3.577 | −0.462 | 76.5 | 1.125 | 25 |
1932 | 1.924 | 4.659 | −2.735 | 58.7 | 4 | 63 |
1933 | 1.997 | 4.598 | −2.602 | 56.4 | 4 | 63 |
1934 | 2.955 | 6.541 | −3.586 | 66.0 | 4 | 63 |
1935 | 3.609 | 6.412 | −2.803 | 73.3 | 4 | 63 |
1936 | 3.923 | 8.228 | −4.304 | 83.8 | 4 | 79 |
1937 | 5.387 | 7.580 | −2.193 | 91.9 | 4 | 79 |
1938 | 6.751 | 6.840 | −0.089 | 86.1 | 4 | 79 |
1939 | 6.295 | 9.141 | −2.846 | 92.2 | 4 | 79 |
1940 | 6.548 | 9.468 | −2.920 | 98.2 | 4.4 | 81.1 |
1941 | 8.712 | 13.653 | −4.941 | 116.2 | 10 | 81 |
1942 | 14.634 | 35.137 | −20.503 | 147.7 | 19 | 88 |
1943 | 24.001 | 78.555 | −54.554 | 184.6 | 19 | 88 |
1944 | 43.747 | 91.304 | −47.557 | 213.8 | 23 | 94 |
1945 | 45.159 | 92.712 | −47.553 | 226.4 | 23 | 94 |
1946 | 39.296 | 55.232 | −15.936 | 228.0 | 19 | 86.45 |
1947 | 38.514 | 34.496 | 4.018 | 238.9 | 19 | 86.45 |
1948 | 41.560 | 29.764 | 11.796 | 261.9 | 16.6 | 82.13 |
1949 | 39.415 | 38.835 | 0.580 | 276.5 | 16.6 | 82.13 |
1950 | 39.443 | 42.562 | −3.119 | 278.7 | 17.4 | 84.36 |
1951 | 51.616 | 45.514 | 6.102 | 327.1 | 20.4 | 91 |
1952 | 66.167 | 67.686 | −1.519 | 357.1 | 22.2 | 92 |
1953 | 69.608 | 76.101 | −6.493 | 382.1 | 22.2 | 92 |
1954 | 69.701 | 70.855 | −1.154 | 387.2 | 20 | 91 |
1955 | 65.451 | 68.444 | −2.993 | 406.3 | 20 | 91 |
1956 | 74.587 | 70.640 | 3.947 | 438.3 | 20 | 91 |
1957 | 79.990 | 76.578 | 3.412 | 463.4 | 20 | 91 |
1958 | 79.636 | 82.405 | −2.769 | 473.5 | 20 | 91 |
1959 | 79.249 | 92.098 | −12.849 | 504.6 | 20 | 91 |
1960 | 92.492 | 92.191 | 0.301 | 534.3 | 20 | 91 |
1961 | 94.388 | 97.723 | −3.335 | 546.6 | 20 | 91 |
1962 | 99.676 | 106.821 | −7.146 | 585.7 | 20 | 91 |
1963 | 106.560 | 111.316 | −4.756 | 618.2 | 20 | 91 |
1964 | 112.613 | 118.528 | −5.915 | 661.7 | 16 | 77 |
1965 | 116.817 | 118.228 | −1.411 | 709.3 | 14 | 70 |
1966 | 130.835 | 134.532 | −3.698 | 780.5 | 14 | 70 |
1967 | 148.822 | 157.464 | −8.643 | 836.5 | 14 | 70 |
1968 | 152.973 | 178.134 | −25.161 | 897.6 | 14 | 75.25 |
1969 | 186.882 | 183.640 | 3.242 | 980.3 | 14 | 77 |
1970 | 192.807 | 195.649 | −2.842 | 1046.7 | 14 | 71.75 |
1971 | 187.139 | 210.172 | −23.033 | 1116.6 | 14 | 70 |
1972 | 207.309 | 230.681 | −23.373 | 1216.3 | 14 | 70 |
1973 | 230.799 | 245.707 | −14.908 | 1352.7 | 14 | 70 |
1974 | 263.224 | 269.359 | −6.135 | 1482.9 | 14 | 70 |
1975 | 279.090 | 332.332 | −53.242 | 1606.9 | 14 | 70 |
1976 | 298.060 | 371.792 | −73.732 | 1786.1 | 14 | 70 |
1977 | 355.559 | 409.218 | −53.659 | 2024.3 | 14 | 70 |
1978 | 399.561 | 458.746 | −59.185 | 2273.5 | 14 | 70 |
1979 | 463.302 | 504.028 | −40.726 | 2565.6 | 14 | 70 |
1980 | 517.112 | 590.941 | −73.830 | 2791.9 | 14 | 70 |
1981 | 599.272 | 678.241 | −78.968 | 3133.2 | 13.825 | 69.125 |
1982 | 617.766 | 745.743 | −127.977 | 3313.4 | 12 | 50 |
1983 | 600.562 | 808.364 | −207.802 | 3536.0 | 11 | 50 |
1984 | 666.438 | 851.805 | −185.367 | 3949.2 | 11 | 50 |
1985 | 734.037 | 946.344 | −212.308 | 4265.1 | 11 | 50 |
1986 | 769.155 | 990.382 | −221.227 | 4526.3 | 11 | 50 |
1987 | 854.287 | 1004.017 | −149.730 | 4767.7 | 11 | 38.5 |
1988 | 909.238 | 1064.416 | −155.178 | 5138.6 | 15 | 28 |
1989 | 991.104 | 1143.743 | −152.639 | 5554.7 | 15 | 28 |
1990 | 1031.958 | 1252.993 | −221.036 | 5898.8 | 15 | 28 |
1991 | 1054.988 | 1324.226 | −269.238 | 6093.2 | 15 | 31 |
1992 | 1091.208 | 1381.529 | −290.321 | 6416.3 | 15 | 31 |
1993 | 1154.334 | 1409.386 | −255.051 | 6775.3 | 15 | 39.6 |
1994 | 1258.566 | 1461.752 | −203.186 | 7176.9 | 15 | 39.6 |
1995 | 1351.790 | 1515.742 | −163.952 | 7560.4 | 15 | 39.6 |
1996 | 1453.053 | 1560.484 | −107.431 | 7951.3 | 15 | 39.6 |
1997 | 1579.232 | 1601.116 | −21.884 | 8451.0 | 15 | 39.6 |
1998 | 1721.728 | 1652.458 | 69.270 | 8930.8 | 15 | 39.6 |
1999 | 1827.452 | 1701.842 | 125.610 | 9497.6 | 15 | 39.6 |
2000 | 2025.191 | 1788.950 | 236.241 | 10117.1 | 15 | 39.6 |
2001 | 1991.082 | 1862.846 | 128.236 | 10525.7 | 10 | 39.1 |
2002 | 1853.136 | 2010.894 | −157.758 | 10828.9 | 10 | 38.6 |
2003 | 1782.314 | 2159.899 | −377.585 | 11278.8 | 10 | 35 |
2004 | 1880.114 | 2292.841 | −412.727 | 12028.4 | 10 | 35 |
2005 | 2153.611 | 2471.957 | −318.346 | 12840.0 | 10 | 35 |
2006 | 2406.869 | 2655.050 | −248.181 | 13636.8 | 10 | 35 |
2007 | 2567.985 | 2728.686 | −160.701 | 14305.4 | 10 | 35 |
2008 | 2523.991 | 2982.544 | −458.553 | 14796.6 | 10 | 35 |
2009 | 2104.989 | 3517.677 | −1412.688 | 14467.3 | 10 | 35 |
2010 | 2162.706 | 3457.079 | −1294.373 | 14884.4 | 10 | 35 |
2011 | 2303.466 | 3603.065 | −1299.599 | 15466.5 | 10 | 35 |
2012 | 2449.990 | 3526.563 | −1076.573 | 16109.4 | 10 | 35 |
2013 | 2775.106 | 3454.881 | −679.775 | 16665.1 | 10 | 39.6 |
2014 | 3021.491 | 3506.284 | −484.793 | 17370.8 | 10 | 39.6 |
2015 | 3249.890 | 3691.850 | −441.960 | 18086.1 | 10 | 39.6 |
2016 | 3267.965 | 3852.615 | −584.650 | 18536.1 | 10 | 39.6 |
2017 | 3316.184 | 3981.634 | −665.450 | 19245.7 | 10 | 39.6 |
2018 | 3329.907 | 4109.047 | −779.140 | 20302.0 | 10 | 37 |
2019 | 3463.364 | 4446.960 | −983.596 | 21159.2 | 10 | 37 |
2020 | 3421.164 | 6553.621 | −3132.457 | 21060.9 | 10 | 37 |
2021 | 4047.111 | 6822.470 | −2775.359 | 22654.0 | 10 | 37 |
2022 | 4897.399 | 6273.324 | −1375.925 | 25000.4 | 10 | 37 |
2023 | 4802.483 | 6371.827 | −1569.344 | 26335.7 | 10 | 37 |
Examining the first 12 years of the twentieth century, before the income tax was introduced, we see that the economy was growing at a healthy 4.77% (seen below highlighted in yellow), while U.S. government spending was increasing only roughly half as fast. Over the twelve years, the cumulative surplus was a mere $80 million dollars or just 1.1% of total spending (seen highlighted in orange). Spread across the 15 million U.S. households, this amounts to about 44 cents per year, the cost of a dozen eggs or a gallon of milk.
Year | Revenue (Billions) |
Spending (Billions) |
Surplus (Billions) |
GDP (Billions) |
Surplus as % Spending |
---|---|---|---|---|---|
1901 | 0.588 | 0.525 | 0.063 | 22.4 | 12.0% |
1902 | 0.562 | 0.485 | 0.077 | 24.2 | 15.9% |
1903 | 0.562 | 0.517 | 0.045 | 26.1 | 8.7% |
1904 | 0.541 | 0.584 | −0.043 | 25.8 | −7.4% |
1905 | 0.544 | 0.567 | −0.023 | 28.9 | −4.1% |
1906 | 0.595 | 0.570 | 0.025 | 30.9 | 4.4% |
1907 | 0.666 | 0.579 | 0.087 | 34.0 | 15.0% |
1908 | 0.602 | 0.659 | −0.057 | 30.3 | −8.65% |
1909 | 0.604 | 0.694 | −0.089 | 32.2 | −13.0% |
1910 | 0.676 | 0.694 | −0.018 | 33.4 | −2.6% |
1911 | 0.702 | 0.691 | 0.011 | 34.3 | 1.60% |
1912 | 0.693 | 0.690 | 0.003 | 37.4 | 0.44% |
Total | 7.335 | 7.255 | 0.080 | 359.9 | 1.10% |
Annual Growth |
1.50% | 2.52% | 4.77% |
The U.S. introduced the income tax the following year in 1913 after adopting the Sixteenth Amendment to the Constitution. They didn't know the math behind the functioning of the economy, so they took a guess and established seven tax brackets starting at 1% for the lowest earners and rising to 7% for the wealthiest.
The math is not difficult; the income tax rate coupled with government
spending determines the GDP of the economy. The ratio of GDP divided by
spending gives us the multiplier (the Currency Availability Multiplier,
or CAM), and the inverse of the multiplier tells you what the maximum
income tax rate can be to support the economy.
(If you aren't familiar with the CAM, please see the discussion of
Tax Flow Diagrams and the
Currency Availability Multiplier.)
1912_CAM | = | 1912_GDP ÷ 1912_Spending |
= | 37.4 ÷ 0.690 | |
= | 54.2 | |
MaxTaxRate | = | 1 ÷ 1912_CAM |
= | 1 ÷ 54.2 | |
= | 0.01845 | |
= | 1.85% |
The government should have set up a single income tax bracket of no more than 1.85% and eliminated all other taxes and revenue-generating programs. Taxing at a rate higher than this would pull too much money out of the economy too quickly, making it impossible for the people to transact all of their business without spending some of their savings, or even going into debt.
Clearly the highest initial income tax bracket of 7% was almost four times what it should have been, but this did not prevent Congress from rapidly increasing tax rates, reaching into the 70% range within four years, ten times worse than the original rates. Of course this had consequences which led to...
The 1920's (The Roaring 20's) were very different from the first decade of the twentieth century; GDP growth stalled, rising just 3.2% over the decade, or about 0.31% annually (seen below highlighted in yellow) as the government cut spending at an average of 6.3% per year. The most significant data point is the cumulative surplus collected by the U.S. government during this decade (highlighted in orange), a total of $8.4 billion dollars or 21.5% of government spending, a nearly 2,000% increase over the period before the income tax. The surplus is enough to buy a Model T Ford ($260) and 100 gallons of gas (at 20 cents per gallon) for each of the 29.9 million U.S. households in 1930!!
Year | Revenue (Billions) |
Spending (Billions) |
Surplus (Billions) |
GDP (Billions) |
Surplus as % Spending |
---|---|---|---|---|---|
1920 | 6.649 | 6.358 | 0.291 | 88.4 | 4.58% |
1921 | 5.571 | 5.062 | 0.509 | 73.6 | 10.06% |
1922 | 4.026 | 3.289 | 0.736 | 73.4 | 22.4% |
1923 | 3.853 | 3.140 | 0.713 | 85.4 | 22.7% |
1924 | 3.871 | 2.908 | 0.963 | 87.0 | 33.1% |
1925 | 3.641 | 2.924 | 0.717 | 90.6 | 24.5% |
1926 | 3.795 | 2.930 | 0.865 | 97.0 | 29.5% |
1927 | 4.013 | 2.857 | 1.155 | 95.5 | 40.5% |
1928 | 3.900 | 2.961 | 0.939 | 97.4 | 31.7% |
1929 | 3.862 | 3.127 | 0.734 | 103.6 | 23.5% |
1930 | 4.058 | 3.320 | 0.738 | 91.2 | 22.2% |
Total | 47.24 | 38.88 | 8.363 | 983.1 | 21.5% |
Annual Growth |
-4.82% | -6.29% | 0.31% |
It's impossible to know now, but it's a curiosity whether the economists and politicians realized that the $8.4 Billions of dollars of budget surpluses during the 1920's were being taken from U.S. citizens' savings, and even causing many of them to take on debt.
The high income tax rates siphoned money out of the economy so fast that everyone had to learn to do with less, or if they were fortunate to have some savings, they could spend some of it to try to maintain their lifestyle. Going into debt was another option, and many did by buying items on credit that they couldn't afford outright.
Speculating on the stock market also became popular as a way to earn extra cash, and many took advantage of buying shares of stock on margin, which means they borrowed some of the purchase price, as much as two-thirds of the value.
But savings were being depleted and debts were rising, so without tax relief there would eventually be a time when the people could no longer maintain their spending and the whole economy would collapse. Meet the Wall Street Crash of 1929, also known as...
There were a lot of Black days at the end of October 1929, starting with Black Thursday, October 24, 1929 where the Dow Jones Industrial Average (DJIA) fell 11% at the opening bell and nearly 13 million shares traded. Efforts to calm fears on Friday were somewhat successful with less panic selling, only about half as many shares traded. The downward slide continued on Black Monday, October 28, 1929 with more than 9 million shares traded and a loss of 13% of the DJIA. The official start of the Great Depression is awarded to the next day, Black Tuesday, October 29, 1929 which saw more than 16 million shares trade hands leading to a DJIA loss of an additional 12%.
Blaming the stock market crash as the cause of the Great Depression is a bit like saying the Titanic sank because the ship split in half. It did split in half, but only after the front of the boat filled with water. It filled with water because there was a giant hole in the hull. The hole was caused by a collision with an iceberg. The collision happened because the Titanic was traveling too fast for the conditions, low visibility and calm seas, which made icebergs hard to spot. The ship was being driven too fast because the captain was trying to make the Atlantic crossing in record time. So the real reason for the sinking of the Titanic is human error.
The Great Depression started when the stock market crashed on October 29, 1929, the culmination of the DJIA dropping about 30% over four days. But prices of stocks fell because there were many more people trying to sell their shares than there were buyers. The surplus of sellers came about because lots of shareholders needed cash to fund their lifestyle. The sellers didn't have enough cash because the government was levying 24% or more tax on the wealthiest Americans when the tax rate should have been a low 1.85% or less for everyone, even the wealthy.
The government failed to set appropriate tax rates because nobody knew the math behind the functioning of the economy, and they chose poorly. The 24% tax rate is thirteen times too much! So the real cause of the Great Depression is also human error.
The reason we don't recognize high income tax rates as the cause of the Great Depression is because too much time went by before the consequences of excessive tax rates were felt. Also economists and politicians believe that having a budget surplus is the holy grail of governance, an accomplishment to be proud of, fiscal responsibility, not spending above your means. It's unthinkable to believe that something so great could be the cause of such misery, so they're not even looking there.
The following quote from Gavin Newsom, Governor of California, illustrates the flawed understanding of the economy by economists and politicians:
The economy is not immutable; it's not about natural laws.
It's about rules, and we make the rules.
― Gavin Newsom
Brainy Media Inc. 2024 BrainyQuote.com
But the economy is a mathematical construct. It works according to the Tax Flow Diagram and the Currency Availability Multiplier. Gov. Newsom may be unaware of the underlying mathematical nature of the economy, but that doesn't mean you can do whatever you want with setting tax rates and expect the economy to just work. We saw that the income tax rate should have been set to 1.85% or less way back in 1913, but the rates we've gotten from Congress have been in the double digits, often very high double digits.
Particularly troubling is how much the government is willing to confiscate from The Rich, up to 94% of income, fifty times too much! It's no surprise that people hid their wealth overseas. They're wrongly being treated as the criminal, when it's the Congress who are the thieves. If a mugger stole your wallet with $1,000 cash in it, then gave you back three twenty dollar bills, you would still properly feel wronged.
In modern times, when income tax rates range from 10% for low−income earners to 37% for the wealthy, along with 15% payroll tax, we are a long way from a healthy economy. Twenty-five percent is thirteen times too much for the low−income earners to pay, and 52% is 28 times too much for The Rich. Yet recently there are members of Congress and the President of the U.S. saying that the wealthy need to "Pay their fair share," implying that already overpaying by 28 times isn't enough of a plunder. The 2024 Democratic presidential candidate has also affirmed her desire to raise tax rates on corporations and also The Rich with rates in the range of 70% to 80%!
Taxation is a bit like salting your food − a little goes a long way. A pinch of salt can improve the taste of an otherwise bland dish, but apply too much and it's ruined. The federal government is dumping the entire contents of the salt shaker on our food and expecting us to eat it. Unfortunately, there is only one restaurant to eat at.
Taxation can be thought of as the gear shifter in a high-performance race car. Low gears are associated with high tax rates, and high gears resemble low tax rates. The gas pedal (accelerator) represents government spending and economic activity is analogous to the distance the car travels. You need to know how to operate the car and select the proper gear to get the most performance out of the machine in order to win the race. Insisting on keeping the car in first gear because you like the sound of an over-revved engine is not going to get you into first place. The winner will be the one who shifts gears higher as the speed of the car increases. They will use less fuel overall and will travel much further before needing to fill up the tank.
Returning our attention back to the main table, we see that starting in 1970 there is a string of budget deficits with just one four−year span of surpluses from 1998 to 2001.
Year | Revenue (Billions) |
Spending (Billions) |
Surplus (Billions) |
GDP (Billions) |
Income Tax Low |
Income Tax High |
---|---|---|---|---|---|---|
1998 | 1721.728 | 1652.458 | 69.270 | 8930.8 | 15 | 39.6 |
1999 | 1827.452 | 1701.842 | 125.610 | 9497.6 | 15 | 39.6 |
2000 | 2025.191 | 1788.950 | 236.241 | 10117.1 | 15 | 39.6 |
2001 | 1991.082 | 1862.846 | 128.236 | 10525.7 | 10 | 39.1 |
As recently as July 13, 2024 on the Hannity show on the Fox News Channel, former Republican Speaker of the House Newt Gingrich displayed his pride in having presided over Congress during these four years of surpluses. It's not his fault, he's been repeatedly told that surpluses are the goal. The decade prior to these four years saw an average budget deficit of $184 billion dollars, so the total swing from deficits to surpluses over these four years is roughly $1.295 trillion dollars, or about $12,300 per household, enough to buy each of them a Ford Focus automobile.
But the Congress didn't do anything very differently during these four years than they had been. They increased spending at about the same rate as usual, and kept the tax rates mostly the same, yet they were able to rake in a lot more revenue than previously. The answer is that the Congress had very little to do with the cause of the surplus. They benefitted from the Internet boom, when lots of companies were being formed to provide services built on the fledgling Internet. The U.S. became a net exporter, selling lots of stock in new Internet-based companies to overseas investors looking to cash in on the Internet craze. Also, U.S. investors made a fortune selling their founder shares in Internet companies and had these profits taxed at the capital gains tax rate, which enriched the federal government even more.
Just as the string of surpluses in the 1920's culminated in a stock market crash, so did this string of surpluses at the end of the 20th century, called the dot-com crash. Again, nobody in government was worried about the surpluses because they've been told that surpluses are a good thing. But siphoning $1.3 trillion dollars out of the economy over four years had consequences.... While the dot-com bubble bursting may have been inevitable, the profits taken by the government from the investors certainly sped up the process.
Going back to the main table, we see that there are 12 years of data prior to the establishment of the income tax in 1913, followed by 110 years of experience with the income tax. Let's compare the performance of the economy before the income tax to the performance after enacting the income tax:
Year | Revenue (Billions) |
Spending (Billions) |
GDP (Billions) |
CAM | Tax Rate |
|
---|---|---|---|---|---|---|
Before Income Tax |
1901 | 0.588 | 0.525 | 22.4 | 42.7 | 2.34% |
1912 | 0.693 | 0.690 | 37.4 | 54.2 | 1.84% | |
Growth | 18% | 31% | 67% | 27% | ||
Annual | 1.5% | 2.5% | 4.8% | 2.2% | ||
After Income Tax |
1913 | 0.714 | 0.715 | 39.1 | 54.7 | 1.83% |
2023 | 4,802 | 6,372 | 26,336 | 4.13 | 24.2% | |
Growth | 672,500% | 891,200% | 67,400% | −92.5% | ||
Annual | 8.3% | 8.6% | 6.1% | −2.3% |
Before the Income Tax, from 1901 to 1912 the federal government increased spending 31% or 2.5% per year. However, the GDP grew faster, a total of 67% or 4.8% per year. Looking at the Currency Availability Multiplier (CAM) for this time period, it went from 42.7 in 1901 to 54.2 in 1912, a rise of 27% or 2.2% annually:
1901_CAM | = | 22.4 ÷ 0.525 |
= | 42.7 | |
1912_CAM | = | 37.4 ÷ 0.690 |
= | 54.2 |
The CAM multiplier tells you how much the GDP increases for each extra dollar of spending by the government. So in 1901, every dollar spent by the US government resulted in $43 of economic activity. By 1912, every dollar spent led to $54 of GDP, a healthy increase. An increasing CAM signifies an expanding economy since the GDP is outpacing government spending. You can think of the CAM multiplier as a measure of freedom; a small CAM indicates a larger government, and a large CAM signifies a larger economy.
Contrasting this with the century after the Income Tax was enacted, we see that government spending rose from $715 million dollars in 1913 to $6.372 trillion dollars in 2023, a staggering 891,200% (eight hundred ninety-one thousand percent!!) increase. This is equivalent to an annual increase of 8.6% for 110 years:
AnnualSpendingIncrease | = | 110√8912 − 1 |
= | 0.0862 | |
= | 8.6% |
Looking at the GDP over the same period, we see that it increased from $39.1 billion dollars in 1913 to $26.3 trillion dollars in 2023. This is an increase of 67,400% or 6.1% annually for 110 years:
AnnualGDPIncrease | = | 110√674 − 1 |
= | 0.0610 | |
= | 6.1% |
Putting these together, we see that the CAM is shrinking:
AnnualCAMIncrease | = | (1 + 0.0610) ÷ (1 + 0.0862) − 1 |
= | 0.9768 − 1 | |
= | −0.0232 | |
= | −2.32% |
After shrinking 2.32% each year for 110 years, the CAM multiplier is a tiny:
2023_CAM | = | 1913_CAM × 0.9768110 |
= | 54.7 × 0.0756 | |
= | 4.135 |
Comparing the CAM multipliers from 1913 to 2023, from 54.7 down to 4.13, we see that there was a drop of 92.5%, a factor of 13 less freedom. In 1913 every dollar spent by the U.S. government led to an increase to the GDP of $54.70, but then 110 years later the same dollar spent increased the GDP by a mere four dollars and change.
If U.S. government spending continues to increase 8.62% annually, we'll see the growth since 1913 reach 1,000,000% in 2025. This means for every dollar spent by the government in 1913 the government now spends $10,000.00! This is astounding, almost incomprehensible.
If this was solely due to inflation, a penny in 1913 would be equivalent to a $100 bill in 2025. This is why our coins are worthless today. In the early 1900's when McDonalds was first formed, you could buy a hamburger and fries for a quarter and get change back! Growing up in the 1970's if you had a pocketful of change you were a wealthy kid, but in the 2020's we throw all our change in the tip jar to avoid carrying it around.
So what is the cause of this enormous increase in government spending? It is some combination of the following reasons and probably others:
Economists and politicians declare whether the economy is successful simply by checking if tax revenue matches or exceeds government spending, i.e. surpluses are good and deficits are bad. But we've just seen that surpluses are in fact not good for the economy. They're the result of people spending their savings or going into debt, so we're striving for something we shouldn't, and there are much better indicators which tell the real story.
When we look at the Tax Flow Diagram, we see that deficits are not as bad as we're led to believe. The money doesn't just disappear, it flows out of the reach of federal government taxation, such as when we purchase lots of imported goods. These funds end up in other countries because they don't buy as many goods from us as we purchase from them.
Whenever there is a shortfall (a deficit) somebody gets blamed for not paying enough taxes, usually corporations or the wealthy. Often tax rates are increased despite the fact that everyone is already massively overpaying.
More to come........