The Top Tax Rate is 27% Below US Historical Average

The average top tax rate in the United States since 1917 is 61.4%. Currently the highest rate of income tax the rich have to pay is 34.5%, which is 26.9% below the average.

The Bush tax cuts are set to expire on December 31st, 2010. The Democratic plan under President Obama was initially to renew the tax cuts for anyone with an income under $250,000 per year, and letting them expire for the rich.

Following the Republicans seizing the US House of Representatives in the midterm elections, Obama seems to be considering capitulating to their demands that tax cuts for the rich are extended, a move that will not only balloon the debt by $3.4 trillion in the next 10 years, but set off a fierce backlash among progressives if it happens.

Following World War II, the top tax rates were as high as 94%, a considerable larger share of the wealth created by American workers was allowed to be kept, and as a result, the inequity between the rich and poor was leveled significantly. However, when fiscal conservatism became the dominant economic paradigm with the election of Ronald Reagan, tax cuts for the rich and an unapologetic culture of greed reversed this egalitarian trend, creating an increasing redistribution of wealth from the poor and middle class to the rich, widening chasm between the rich and poor, and a skyrocketing gini-coefficient.

Ezra Klein sums this situation up succinctly: It’s also worth saying that government is far more effective as a check on inequality than as an accelerant. Various trends, some pernicious (corporate greed, union decline), some not (technology, globalization, single mother families), contribute to inequality. What government can do is tax and redistribute in such a way that growth is shared equally across society. During conservative moments, it doesn’t even make an effort to do that, and society is the worse for it.

Allowing the Bush tax cuts for the rich to expire will not be the end the America as we know it. Much to the contrary, it might actually restore some semblance of economic sanity to our economic policy, and would still be 22% below the historical average.