High 1950s taxes?

[SadisticMonkey]

Democratic Party leaders, President Obama in particular, are forever telling the country that wealthy Americans are taxed at too low a rate and pay too little in taxes. The need to correct this seeming injustice is framed not simply in terms of fairness. Higher tax rates on the wealthy, we're told, would help balance the budget, allow for more "investment" in America's future and foster better economic growth for all. In support of this claim, like-minded liberal pundits point out that in the 1950s, when America's economic might was at its zenith, the rich faced tax rates as high as 91%.

True enough, the top marginal income-tax rate in the 1950s was much higher than today's top rate of 35%-but the share of income paid by the wealthiest Americans has essentially remained flat since then.

In 1958, the top 3% of taxpayers earned 14.7% of all adjusted gross income and paid 29.2% of all federal income taxes. In 2010, the top 3% earned 27.2% of adjusted gross income and their share of all federal taxes rose proportionally, to 51%.

So if the top marginal tax rate has fallen to 35% from 91%, how in the world has the tax burden on the wealthy remained roughly the same? Two factors are responsible. Lower- and middle-income workers now bear a significantly lighter burden than in the past. And the confiscatory top marginal rates of the 1950s were essentially symbolic-very few actually paid them. In reality the vast majority of top earners faced lower effective rates than they do today.

In 1958, an 81% marginal tax rate applied to incomes above $1.08 million, and the 91% rate kicked in at $3.08 million. These figures are in unadjusted 1958 dollars and correspond today to nominal income levels that are at least 10 times higher. That year, according to Internal Revenue Service records, just 236 of the nation's 45.6 million tax filers had any income that was taxed at 81% or higher. (The published IRS data do not reveal how many of these were subject to the 91% rate.)

In 1958, approximately 28,600 filers (0.06% of all taxpayers) earned the $93,168 or more needed to face marginal rates as high as 30%. These Americans-genuinely wealthy by the standards of the day-paid 5.9% of all income taxes. And now? In 2010, 3.9 million taxpayers (2.75% of all taxpayers) were subjected to rates that were 33% or higher. These Americans-many of whom would hardly call themselves wealthy-reported an adjusted gross income of $209,000 or higher, and they paid 49.7% of all income taxes.

In contrast, the share of taxes paid by the bottom two-thirds of taxpayers has fallen dramatically over the same period. In 1958, these Americans accounted for 41.3% of adjusted gross income and paid 29% of all federal taxes. By 2010, their share of adjusted gross income had fallen to 22.5%. But their share of taxes paid fell far more dramatically-to 6.7%. The 77% decline represents the single biggest difference in the way the tax burden is shared in this country since the late 1950s.

The changes came about not so much by movements in rates but by the addition of tax credits for the poor and the elimination of exemptions for the wealthy. In 1958, even the lowest-tier filers, which included everyone making up to $5,000 annually, were subjected to an effective 20% rate. Today, almost half of all tax filers have no income-tax liability whatsoever, and many "taxpayers" actually get a net refund from the government. Those nostalgic for 1950s-era "tax fairness" should bear this in mind.

The tax code of the 1950s allowed upper-income Americans to take exemptions and deductions that are unheard of today. Tax shelters were widespread, and not just for the superrich. The working wealthy-including doctors, lawyers, business owners and executives-were versed in the art of creating losses to lower their tax exposure.

For instance, a doctor who earned $50,000 through his medical practice could reduce his taxable income to zero with $50,000 in paper losses or depreciation from property he owned through a real-estate investment partnership. Huge numbers of professionals signed up for all kinds of money-losing schemes. Today, a corresponding doctor earning $500,000 can deduct a maximum of $3,000 from his taxable income, no matter how large the loss.

Those 1950s gambits lowered tax liabilities but dissuaded individuals from engaging in the more beneficial activities of increasing their incomes and expanding their businesses. As a result, they were a net drag on the economy. When Ronald Reagan finally lowered rates in the 1980s, he did so in exchange for scrapping uneconomical deductions. When business owners stopped trying to figure out how to lose money, the economy boomed.

It's hard to determine how much otherwise taxable income disappeared through tax shelters in the 1950s. As a result, direct comparisons between the 1950s and now are difficult. However, it is worth noting that from 1958 to 2010, the taxes paid by the top 3% of earners, as a percentage of total personal income (which can't be reduced by shelters), increased to 3.96% from 2.72%, while the percentage paid by the bottom two-thirds of filers fell to 0.51% in 2010 from 2.7%. This starker division of relative tax burdens can be explained by the inability of upper-income groups to shelter income.

It is a testament to the shallow nature of the national economic conversation that higher tax rates can be justified by reference to a fantasy-a 91% marginal rate that hardly any top earners paid.

In reality, tax policies that diminish the incentives and capacities of innovators, business owners and investors will not spur economic improvement. Such policies will, however, satisfy the instincts of those who want to "stick it to the rich." Never mind that the rich have already been stuck fairly well.

http://online.wsj.com/article/SB1000142412788732470510457815 1601554982808.html?mod=googlenews_wsj#articleTabs%3Darticle

[Camarohusky]

At 12/7/12 02:48 AM, SadisticMonkey wrote: In reality, tax policies that diminish the incentives and capacities of innovators, business owners and investors will not spur economic improvement.

Prove it. You can talk big all you want, but until someone (anyone? Bueller?) actually correlates high taxes with less economic growth, I will see it for the bullshit the claim is. There was a massive tax cut in the early 2000s, what happened there? There was a tax hike in the early 1990s, and what happened in that decade? Tax cuts in the 1980s, and look at that decade. There is no correlation between high taxes and bad economy. If anything the correlation leans the other direction.

[Warforger]

At 12/7/12 02:48 AM, SadisticMonkey wrote: Those 1950s gambits lowered tax liabilities but dissuaded individuals from engaging in the more beneficial activities of increasing their incomes and expanding their businesses. As a result, they were a net drag on the economy. When Ronald Reagan finally lowered rates in the 1980s, he did so in exchange for scrapping uneconomical deductions. When business owners stopped trying to figure out how to lose money, the economy boomed.

"Booming" meaning barely able to say it's stable. I actually find this hilarious because Obama and Reagan are actually very comparable, both came into office on a platform of change and when both were running for re-election they talked as though things were not good but were better than when they took office. For example, the unemployment rate when Obama was going for re-election was 7.8%, for Reagan it was 7.2%. Now that's certainly better, but that's not an economic boom just stabilization.

It is a testament to the shallow nature of the national economic conversation that higher tax rates can be justified by reference to a fantasy-a 91% marginal rate that hardly any top earners paid.

In reality, tax policies that diminish the incentives and capacities of innovators, business owners and investors will not spur economic improvement. Such policies will, however, satisfy the instincts of those who want to "stick it to the rich." Never mind that the rich have already been stuck fairly well.

Blah blah blah further speculation to no actual correlation. First off how do innovators lose incentive with high tax rates? That doesn't make any sense. Secondly the argument Obama and the like make is not that the Rich should pay more taxes than everyone else, but that they should pay the same rate as everyone else. Otherwise the rich have been doing fine right now, of all the groups that got hit their's was the only which grew in income.

http://online.wsj.com/article/SB1000142412788732470510457815 1601554982808.html?mod=googlenews_wsj#articleTabs%3Darticle

[Iron-Hampster]

At 12/7/12 12:06 PM, Camarohusky wrote:

At 12/7/12 02:48 AM, SadisticMonkey wrote: In reality, tax policies that diminish the incentives and capacities of innovators, business owners and investors will not spur economic improvement.

Prove it. You can talk big all you want, but until someone (anyone? Bueller?) actually correlates high taxes with less economic growth, I will see it for the bullshit the claim is. There was a massive tax cut in the early 2000s, what happened there? There was a tax hike in the early 1990s, and what happened in that decade? Tax cuts in the 1980s, and look at that decade. There is no correlation between high taxes and bad economy. If anything the correlation leans the other direction.

I'll give you an example of lower taxes and deregulation causing economic improvement. If you say correlation does not mean causation, then right back at ya on that one.

http://www.garyjohnson2012.com/record

so now we have Clinton, an example of tax and spend causing job growth and budget surplus, and Garry Johnson, an example of fiscal conservatism causing job growth and a budget surplus. Now we can argue over which way is the best way to get shit done.

[SmilezRoyale]

At 12/7/12 02:48 AM, SadisticMonkey wrote: Stuff

It's strange because Schiff's data contradicts [at least it seems that way] what had been said earlier about tax distributions.

My impression of the US Tax System was that a much greater percentage of Americans pay the top marginal rate than before, and the effective tax rate, while having gone down slightly, did not really compensate for that.