Marginal Tax Rates: Singing Taxman to My Class By David Henderson

UPDATE BELOW:

Often, when I teach my classes about marginal tax rates, I give them a little history about such rates. They’re shocked when I tell them that the top U.S. federal marginal tax rate on individual income in the 1950s and early 1960s was 91 percent. Then I tell that that Great Britain was even more extreme. Before Maggie Thatcher became Prime Minister, the top rate on “earned” income was 83% and the top rate on “unearned income” (dividends and interest) was 98%. (Tim Worstall informs me that the top rate on capital gains was 30% and so a lot of people figured out how to convert other income into capital gains income.) A few years earlier, the top rate on “unearned income” had been 95%.

Then I sing part of a song that even many of my 30-something students have heard:

Let me tell you how it will be

There’s one for you, nineteen for me

‘Cause I’m the taxman, yeah, I’m the taxman Should five per cent appear too small

Be thankful I don’t take it all

‘Cause I’m the taxman, yeah I’m the taxman

I tell my students that that song is “The Taxman,” by the Beatles.

“Who wrote that song?” I ask. Few know, so I tell them that George Harrison wrote it. “When did he write it?” I ask. No one knows this, so I tell them “1965 or 1966.” “Why is that date significant?” I ask. No one in class knows and so I tell them. “If the taxman takes 19, leaving one,” I ask, “what is the marginal tax rate?” That they get: someone says 95%. “Bingo,” I say.

Then I say:

Think about the Beatles’ earnings. Late 1963 was when they first started making real money. Then in 1964, they hit it big. Presumably they didn’t spend it all but started investing, figuring that they would get interest and dividends on their investments. They probably did. But those returns would be taxed at the 95% rate. When would they start noticing this? Probably some time in 1965. Thus the 1966 song. George Harrison was pissed off at “the taxman.”

This was all speculation on my part. What wasn’t speculation was the information about marginal tax rates, about who wrote the song, and about approximately when he wrote the song.

I never bothered checking the web. This morning, while writing this post, I did check. And I was right. See here. One new thing I learned was this:

The backing vocals’ references to “Mr Wilson” and “Mr Heath,” suggested by Lennon, refer to Harold Wilson and Edward Heath, respectively; the former was the leader of the Labour Party and the latter was the leader of the Conservative Party, the two largest parties in British politics.

Of course, I knew who Wilson and Heath were, but I had never noticed the backing vocals saying their names.

UPDATE

Tim Worstall wrote me the following:

One way out was something not available to US citizens: to leave the country for some portion of the year. In the UK you must be resident in order to pay UK taxes. So, if you were to, say, go and live on an ashram in India for 6 months then you would not be resident in the UK in that tax year and would pay no tax in the UK. Puts a slightly different light on all that sitar playing by Harrison.

Or, if you were a member of the Stones, you could spend some time recording in the south of France and thus, with a bit of touring in the US perhaps, not be resident in the UK.

People did catch on to this pretty quickly. Indeed, the Stones are quite famous for organising themselves efficiently in this manner. It’s also a reasonable explanation for the existence of Apple Records. The Beatles money went into that and then profit was taxed at corporation tax rates. But then it could indeed be invested. Only the actual amount taken out would be taxed at that 83 or 98%. Accumulation was much more lightly taxed by having an intervening corporation.