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Notes From the Fieldby Martin Weil

November 17, 2012

Debt & Taxes

Federal income tax rates were last this low during the 1920s. Then came the Great Depression, WWII and a debt-to-GDP ratio that rose from 30% to 120% in a decade. Sounds familiar. It took marginal  income tax rates rising to 90% before the back was broken on our national debt.

Since the early 1980s, US income tax rates have been in a long steady decline. And Federal debt has once again risen to a level that demands the attention of the nation.

Winston Churchill famously quipped “You can always count on Americans to do the right thing… after they have tried everything else.” Irrespective of any potential budget cuts, investors should plan for Federal tax rates to begin a steady rise. Given the historical record, this will not be a temporary change of direction, but a significant shift in trend that could last decades, until we have once again overcome 30 years of increasing indebtedness.

Chart courtesy of dShort.

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