Federal Income Taxes and Government Spending…why it matters to you

By Bob Peters || October 17, 2024

Historical Tax Rates, Government Expenditures and the size of the Federal Deficit

There are many opinions on the topic of taxes.  This post is not intended to make a case for increasing or decreasing taxes nor is it intended to suggest how our elected officials decide to spend tax receipts.  This post is to highlight historical tax rates, government expenditures and the size of the federal deficit. 

Let’s start by looking at how your Federal Taxes are generally determined.  Forty-three states and the District of Columbia also impose taxes on earned income (aka a State Income tax), but each state is different…to keep it simple we will only refer to Federal Income Tax rates.  

Table 1: 2024 Tax Brackets and Federal Income Tax Rates 

One tax bracket

For example, if you were single in 2024, not deemed to be a “dependent” on another person’s tax return, had taxable income of $15,000 and took the standard deduction of $14,600 your adjusted gross income would be $400.  Since $400 is less than $11,600, you would owe 10% of $400 in Federal Tax or $40.  Here is a link to a Federal Tax calculator prepared by Nerdwallet.org that might be helpful. 

Most typical… multiple tax brackets

Here is an example (most typical) of incurring multiple tax brackets. A married couple filing jointly in 2024, had combined taxable income of $150,000 and used the standard deduction of $29,200 would owe the following: 

Adjusted Gross Income:  $120,800 ($150,000 less $29,200 standard deduction) 

• 23,200 at 10% or $2,320 

• $71,099 ($94,300-$23,201) at 12% or $8,532 

• $26,499 at 22% or $5,830 (This represents the amount of income above the $94,301 of the $120,800 Adjusted Gross Income amount) 

When you add all three buckets of tax per Table 1…10%, 12% and 22% you get a total of $16,682 in total tax liability which equates to an effective tax rate of 11.12% ($16,682/$150,000) and a marginal tax rate of 22%. Marginal tax rates are based on the highest tax bracket that the last dollar of income is taxed.  

Tax Rates…Progressive 

In summary, the taxes we pay as a percentage of our income increases as your income increases.  This is referred to as a progressive tax system. It’s never fun to pay taxes but are our taxes too high or too low? There is no one answer to this question but history gives us context. Let’s look at the top tax rate since 1918 to give a perspective of how our current tax rates compare with the past 106 years. 

Congress has the power to pass, modify and repeal laws, including the taxes you pay and how the tax receipts are spent.  As you can see below, Congress has increased and decreased tax rates over time. 

Table 2:  Historical Top Federal Income Tax Rates since 1918, Married Filing Jointly 

Are lower tax rates in your best interest?

If Congress does not make a change in the tax rates, effective January 1, 2026, the top marginal income tax rate will revert to 39.6%.  While the current top tax rate is higher than it was in 1929 and 1988, it is currently much lower than it was for most of the twentieth century.

Are lower tax rates in your best interest?  Is your best interest solely what you pay or is it a combination of what you pay, what you get and how society functions?  Today’s tax rates are low compared to those going back to 1918. 

Income tax brackets, the rate of tax and the standard deduction

Before moving on to the Federal Debt I’ll mention that the amount of income that is taxed at any particular rate (see Table 1 above) changes every year as current law provides for an inflation adjustment to both tax brackets and the standard deduction.  In summary, there are three variables that can change from year-to-year; income tax brackets, the rate of tax for each income bracket and the size of the standard deduction.

Your total Taxable Income and Adjusted Gross Income is also impacted by many deductions, adjustments, credits, potentially additional taxes, family size, homeownership, charitable contributions, health status, savings and many more factors.

Plugging our Excess Spending

Plugging our excess spending (spending more than we earn) is done by selling assets or borrowing.  If you earn $50,000/year and spend $55,000 you will either reduce your assets by $5,000 (reserve fund, cash, selling investments) or you will increase your debt by borrowing on a credit card or some other form of borrowing like a home equity or personal line of credit.

If we keep this up over time, we will eliminate available assets and/or run out of capacity to borrow which would lead to financial insecurity.  Lenders will eventually say …” sorry, we won’t lend you more because you are running out of the ability to repay these loans”.  Keep this example in mind because we will revisit it when we look at the Federal Debt and Federal Deficits. 

Debt to Income…there is a level where lenders are not willing to lend more money 

In an earlier blog post, Wealth is Equal to Net Worth but not all Net Worth is Equal, we saw that Jane and Marie had debt obligations of 47% and 30% of their total incomes, respectively.  The percentage of your income that goes towards paying your debt obligations is a primary metric to determine borrowing capacity.  For example, generally speaking, a mortgage lender is not going to feel comfortable extending a loan to purchase a home if your total debt-to-income is greater than 36%.  The purpose of this example is to illustrate one point: There is a level where lenders are not willing to lend more money.  This concept applies to you, me and the Federal Government.   

Here is another concept to keep in mind: If your future earnings potential increases then your future debt-to-income ratio goes down, assuming that debt stays the same.  Should your income decline in the future your debt-income ratio would increase, assuming that the debt remained unchanged. Lastly, if your debt increases at a faster rate than your income your debt-to-income ratio will increase and, if left unchecked, you will run out of borrowing capacity. 

Gross Federal Debt to Gross Domestic Product 

Gross Domestic Product (GDP) is the value of all goods and services that an economy produces.  To keep it simple it is analogous to your total earned income.  You can think of the Federal Debt similarly to your own debt.  Although economists would chaff at this example I believe there is merit to conceptualize Federal Debt to GDP for the country akin to the debt to income ratio that a mortgage lender would scrutinize.

• As of 1/1/2023 the US Debt-to-GDP ratio was 119%. Take a look at the Federal Reserve of St. Louis chart to get a more vivid historical context.

• The low Debt-to-GDP ratio since 1939 was 31% in 1989 

• In the blog post, “Improving your decision-making process can lead to a more financially secure life” we highlighted how the US Government’s borrowing costs declined from 1981 until July 2020 yet during the same period total Debt-to-GDP increased substantially.  

• As borrowing costs have increased from an all-time low in July 2020, the US Government has had to issue debt at a higher rate which will mean that the percentage of US tax receipts going toward interest payments on the US federal debt will increase. 

• A reasonable conclusion is that our country cannot continue to spend materially more than we collect if this excess spending exceeds the rate of growth of the GDP. 

Questions to ask

Our elected officials use their authority to change policy by enacting, eliminating and changing laws, including tax rates and how your taxes are spent.  Each person is entitled to their own views.  Here are a few questions to ask as you think though taxes and spending: 

• Do you believe taxes should be increased or decreased? 
• Do you believe government spending should be increased or decreased? 
• If taxes are increased, who should pay more?  (See who pays now) 
• At what point will our country not be able to incur deficits to fund the gap between taxes and spending?
• How have our elected officials chosen to spend tax revenues…i.e. the federal budget? 
• You and I use a budget where we first prioritize “Basic Needs”, second “Investing Wisely” for future goals and, third “Wants” which are discretionary.  The Government has two categories of spending; Mandatory (73%, including interest on our national debt) and Discretionary (27%). How might you support reducing or increasing these expenses?  What segment of our citizenary will be impacted the most?

Access to data is important to form policy

Ultimately we look to elected officials to achieve a consensus on a broad range of policy matters ranging from; law enforcement, immigration, economics, health care, defense, foreign policy, etc. In order to debate the many facets of public policy, and arrive at a consensus, elected officials need to have access to a data. As such, the Federal Government collects data subject to the constraints of laws such as the Privacy Act of 1974, the E-Government Act of 2002 and the US Constitution.

Improving your literacy… Just the facts

A friend of mine has a family member who works with the Ballmer Foundation and mentioned the work of an affiliated non-profit, USA Facts.org, started by the Foundation.  Their mission was to make available US government data in a manner that would be accessible to all citizens. All of the data is collected by the US Government and is publicly available.  Your views on many topics may change over time, I know mine have.  Improving your literacy of how our government raises money through taxes and spends that money through the Federal Budgeting process will make you a better-informed citizen.  Good luck! 

PS. I’ve put links to some USAfact.org videos on topics of potential interest.  To find more you can visit the website and/or YouTube Channel:

Just the Facts about the Federal Budget 

Just the Facts about the US Economy 

Just the Facts about US Healthcare and the Health of Americans 

Disclaimer

Calculating taxes is very specific to each person’s situation.  There are tax credits and deductions available based on certain status and income levels.  I’m not a tax advisor so don’t rely on this information for your tax preparation…seek out tax professionals for your specific advice. This post is educational only.