PLANK SEPTEMBER 27, 2012
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Taxes on rich people are, by historical standards, very, very low. The top marginal income-tax rate was 70 percent—that’s twice the current top rate--when Ronald Reagan came into office in 1981, and from 1950 through 1963 the top marginal rate never fell below 91 percent. The top capital-gains rate was 25 percent during the 1950s and 1960s, and 35 percent during the 1970s. (Today it’s 15 percent.) Yet the country prospered.
Whenever I write this—and yes, I’ve written it a lot—someone invariably points out that marginal rates aren’t the same as effective rates, i.e., what people actually pay as a percentage of their total income after all the deductions and exemptions are figured in. And in my book The Great Divergence I go out of my way to absolve tax policy of blame for creating the income-inequality boom of the past 33 years. For one thing, the inequality is observable—and more dramatic—before you even factor in taxes and benefits. And for another, when you factor in those taxes and benefits, effective taxes on the top one percent, though they’ve certainly dropped since 1979, haven’t dropped nearly as much as you might suppose.
But when we talk about the really, really rich—the top 0.1 percent or 0.01 percent, or tax filers today earning in excess of $1.7 million and $9.1 million, respectively—it’s an entirely different story. Their effective taxes have come crashing down. A new report by the Congressional Research Service’s Thomas Hungerford has a chart illustrating this point that I’d like to share with you.
There is some mythology abroad that when tax rates were very, very high, the super-rich paid about the same in taxes that they pay today because they exploited lots and lots of loopholes. I’m sure they did exploit lots of loopholes, but it wasn’t enough to keep their effective tax rates from being a lot higher then than they are today. In general, total deductions, as a share of adjusted gross income, were considerably lower in the high-tax “bad old days” of the 1950s and 1960s than they are today. Remember that next time somebody tells you that we need to lower rates further in order to get rid of tax loopholes.
3 comments
I say, get rid of the capital gains preference; raise the top rate back up to 39.6%; wait for the economy to revive, and then work on entitlements. When Regan got rid of the cap gains preference, job creation went up and when Clinton reinstated it, job creation went down. That's because the cap gain preference discourages investment in small business where there is both more risk and a higher tax on profits. When top rates are cut, only a small percentage of the investor tax savings end up in the checkbooks of businesses, in contrast with direct spending on jobs here or unemployment comp or, even, welfare.
- Nusholtz
September 27, 2012 at 2:29pm
Of course, the precipitous drop in effective tax rates occurred in the Reagan years and then again in the Bush II years. No surprise there. What is surprising is that income taxes, as a percentage of total federal taxes, have remained almost constant since 1950 (40%-42%), whereas payroll taxes, as a percentage of total federal taxes, have exploded (15%-40%), most of the increase occurring as the result of the increase in payroll taxes adopted when Reagan was president (and phased in over a period of years). Today, the income tax and payroll taxes bring in about the same amount of government revenues. Most payroll taxes are collected from low to middle income taxpayers (the social security wage base is about $110,000); and as we now know thanks to Romney, most income taxes are collected from upper income taxpayers. The enormous shift in total total federal taxes to payroll taxes means that the overall tax burden has been shifted downward. [The statistics are from the Tax Policy Center, The Tax Policy Briefing Book. Not surprisingly, during the same period (since 1950) corporate income taxes dropped to less than 10% of total federal taxes from about 25% of total federal taxes.] I've commented many times that Republicans are addicted to payroll taxes. For supporters of the Bowles-Simpson tax reform, I suggest they read between the lines, for it is only half the sponsors' "reform", the other, unstated half is another big increase in payroll taxes. I also suggest that the conservatives' fondness for both payroll taxes and Bowles-Simpson was tempered somewhat when ACA added an increase in payroll tax but only for upper income taxpayers. Having two tax systems, one for low to middle income folks (the payroll tax) and the other for upper income folks (the income tax) makes for very confusing tax policy. I wonder who might benefit from the confusion?
- rayward
September 28, 2012 at 6:45am
Great post, ray.
- Vogelfam
September 30, 2012 at 4:13pm