Distributional National Accounts:

Taxes on the Rich Were Not That Much Higher in the 1950s August 4, 2017 Scott Greenberg There is a common misconception that high-income Americans are not paying much in taxes compared to what they used to. Proponents of this view often point to the 1950s, when the top federal income tax rate was 91 percent for most of the decade. However, despite these high marginal rates, the top 1 percent of taxpayers in the 1950s only paid about 42 percent of their income in taxes. As a result, the tax burden on high-income households today is only slightly lower than what these households faced in the 1950s.

Tax Rate Income Range Taxed 10% $0 – $8,500 $8,500 15% $8,501 – $34,500 $25,999 25% $34,501 – $83,600 $49,099 28% $83,601 – $174,400 $90,799 33% $174,401 – $379,150 $204,749 35% Over $379,150 N/A

The marginal and effective U.S. Tax rates mentioned in this 2011 post have been supported by research conducted by Thomas Piketty (Paris School of Economics), Emmanuel Saez (UC Berkeley and NBER), and Gabriel Zucman (UC Berkeley and NBER). These economic researchers are well-respected by progressives. Data are data, though we differ on interpretations. "Income" vs. "Wealth" presents much of the challenge, as wealth accumulates but is not taxed in the United States.published July 6, 2017, includes the following table:As the table shows, the effective tax rate for the top 1 percent peaked at 45 percent of income in 1944-45. Unfortunately, the overall revenue intake of the United States kept growing and the burden has been falling most on the bottom 50 percent. Tax increases on the middle and lower classes reduce potential economic growth since these individuals spend more of their income.This column is on the misunderstanding of higher federal tax rates, which are marginal and not effective rates. There is a theory, and one that seems to hold in European nations as well as in the United States, that the high-income taxpayers will pay no more than 50 percent of their income to taxes, in various forms. Higher than 50 percent, people find ways to avoid taxes.There is a "myth" that the economy of the United States chugged along at least in part due to higher taxes on the wealthy in the past. First, this myth, like so many about creating prosperity, ignores that U.S. growth came after two world wars wiped out most of our competitors. Second, the implication is that "the rich" were actually paying 90 percent taxes at some point in history. That's never been the case.The U.S. tax system uses an "" model. The EMTR is applied on ranges of earned. Each taxpayer pays roughly the same amount on his or her income within these ranges. According to the IRS, the EMTR schedule for 2011 is:Everyone paying income taxes pays the same 10% on his or her first $8,500. So, to calculate a person's "Composite Real Rate" you must average (in a manner of speaking) what he or she pays in overall taxes on earned taxable income. For example, if you earn $80,000 inin 2011, your taxes are $16,125.10. That's a Real Rate of. Yes, the marginal rate is 25%, but the Real Rate of tax is weighted towards the 15% bracket.An income of $150,000 a year? The Real Rate is. And that's not the "real rate" as most of us would think of a "real" tax rate. Why is that? Because taxable income is not even close to what most people actual earn. Earned income and taxable income are two different things in government speak.So, let's get more complicated. When there was a 94% top rate in 1944-45, there were so many deductions and exclusions that the taxable income was not comparable to someone's entire income. First, the top rate started at $200,000, which today is equal to $2,413,059.90 — so the maximum EMTR would apply only to incomes of $2.5 million. But, that's still taxable income, not earned income.In 1944, you could deduct business meals, all business travel, all forms of interest payments, and much more. You could even deduct spousal travel expenses on a business trip! (Why travel alone?) Companies could also "loan" or "provide" almost anything to an employee, from an apartment to standard benefits. It was possible to shelter tens of thousands of dollars from taxable income. Three-martini lunches and expense accounts were important realities, skewing tax calculations.As a result of deductions and exclusions, even the theoretical maximum Real Rate of taxation at 60% in 1944. The reality? On earned income, the richest U.S. taxpayers paid close toof their earned incomes in taxes in 1944.Allow me to introduce you to. Published in 1993 by William Kurt Hauser, a San Francisco investment economist, Hauser's Law suggests, "No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP." This theory was published in, March 25, 1993. For a variety of reasons, we seem to balance tax collections within a narrow range.Since 1945, U.S. federal tax receipts have been fairly constant in terms of Gross Domestic Product (GDP), with taxes ranging from 15 to 20 percent of GDP. The graph is as follows:When people demand higher taxes on the rich, usually phrased as paying a "fair share," they are ignoring how our tax system has functioned historically. We could create more brackets, to tax the top 1% at a higher rate once again, but the net increase in tax revenues wouldn't be dramatic. Why not? Because government spending is near historical highs: we are spending at near-WWII levels. It would be nearly impossible to tax enough to pay the federal bills, and doing so would likely crush the economy.So, how could we address income inequality if not through increasing taxes? That's really what people are asking when they demand fairness. The real complaint is the gap between rich and poor. I'll address that issue in an upcoming blog entry.