Authored by: Matt Palumbo
There’s one regard in which some fiscal liberals want us to return to the “good ol’ days” – insanely high tax rates, especially on the wealthy.
While the top tax rate is 37% today (previously 39.6%), debating raising or lowering the rate a few percentage points is pale in comparison to the rates of 70-90% we had in the past, we’re told.
- “When radical, socialist Dwight D. Eisenhower was president, I think the highest marginal tax rate was something like 90 percent” Bernie Sanders informed us, speaking tongue in cheek in regards to that “socialist” quip.
- “That 90% top rate in the 60s wasn’t as crazy as modern context might make it seem. And remember, the economy thrived” tweeted New York Times columnist Paul Krugman, who somehow has a Nobel Prize in economics.
- “The income tax rate, through the early 60s… is I think 91% on incomes over $200,000.” said author Malcolm Gladwell. “The thing is, if you bring this up now, people don’t even believe you that was in place 50 years ago.”
Gladwell is famous for stating that it takes 10,000 hours of practice to master a skill, but it doesn’t take more than 10 minutes of research into historical tax rates to prove the above arguments wrong.
As everyone that has filed taxes knows, the marginal tax bracket they fall into isn’t the effective tax rate you pay, because of deductions, and other factors. In the past, the tax code was ridden with loopholes.
When the Revenue Act of 1935 was passed, raising the top income tax bracket to 75%, literally only one person paid it; John D. Rockefeller.
It is true that we did use to have massively high marginal tax rates, but it was never the case that we had high effective marginal tax rates. Nor are the top rates comparable of the past comparable in the levels of income they affect. The new top income tax rate for households of 37 percent kicks in at $315,001 of income. The 91% rate in 1955 kicked in at an inflation adjusted $3.5 million in todays income.
As you can see in this chart from the Congressional Research Service, the top effective income tax rate in America has never exceeded 30 percent.
If we isolate just the much-maligned top 1% of income earners, their tax rate is less than 6 percentage points lower today than what it averaged in the 1950s. A decline for sure, but hardly the 60-or-so percentage point decline claimed.
Nor has the government been starved of revenue in light of the decline of marginal tax rates – because it’s the effective rate that matters.
Krugman and company are right in that tax rates on the rich used to be much higher.
But the tax rates that the rich actually paid? Not so much.