Fact: The average top marginal tax rate in the US since the institution of the Federal Income Tax in 1913 through 2011 is 59.4%.
Fact: The average top marginal tax rate from 1913 through 1989 was 66%.
Fact: The average top marginal tax rate from 1990 though 2011 is 36.3%.1
Already we can start to see a problem. Let’s look closer at these numbers though. (The income tax did not, as many believe, actually start in 1913 with the passage of the 16th Amendment. The first personal income tax in the US was in 1861.)
Yeah, President Abraham Lincoln paid $1,296 in income taxes in 1864. That’s a copy of the record. 5th line down.
I don’t really care to get into a full history of the personal income tax in America though. The bottom line is that if we want government services, such as roads, protections, Social Security, Medicare, Veterans services, etc then they have to be paid for. We long ago left the world where those services can be paid for by tariffs. A sales tax is a regressive tax that disproportionately impacts the lower income side of the economy. It cannot be used as the sole funding mechanism for the services that we demand from our shared society. It could be considered as part of a total taxation system, but even that is not a progressive or fair system.
The income tax rate has varied through the years. As it should. When the needs have been higher, the rate has gone up. With one noticeable exception. The last 30 years or so, beginning with Reagan, though it really kicked into high gear with Bush the Elder.
From 1913 to 1915, the top rate was 7% then it doubled to 15% in 1916, then jumped up to 67% in 1917 and peaked at 77% in 1918-19. hmmm … Oh, yeah. World War I.
It started to come down, slowly as we continued to deal with the debt we had over the next few years until it was back down to 25% in 1925. Wall Street Crashed in 1929 and eventually, in order to rebuild the economy, the Revenue Act of 1932 raised the top rate to 63%. With the New Deal, it was raised to 79% to fund the recovery.
Along comes World War II, and the top rate peaks at 94% in 1945! The Korean war during the 1950s kept it hovering around 91-92%.
It was lowered under Johnson to 77% and then to 70% from 1964 on. In 1982, the top rate was lowered to 50% where it stayed until ’87. A brief dip down to 28% from 1988 to 1990 back up to 39.6% under Clinton. Oh, yeah. That was when we were projected to have budget surpluses, if you’ll recall.
Now, here’s where the real stupidity hits. 9/11, two wars, and the top marginal tax rate drops!! It drops to 35%. Which doesn’t seem like much until you consider that no one is actually paying this top rate. Mitt Romney, for example, made $21.7 million in 2010 and paid just 13.9% in taxes. Warren Buffet, in 2010, made $62,855,038 and paid just 17.4% in taxes. This is largely due to two factors that are not available to most of us. One, the deductions which are available for charitable giving and so forth make a huge impact. Two, investment income is taxed at a much lower rate than labor income.
Correlation is not causation, of course, but the economy has tended to do the best when taxes on unearned income were high. Economic growth was great during the 1950s, when dividends were taxed at very high levels and capital gains rates were 25 percent, much higher than they are now. Since 2003, tax rates on unearned income have been at their lowest levels ever, and economic growth has been sluggish.
I am not advocating war here. I abhor war. I wish I lived in a world with out it. I don’t live in that world. The point though is that in the past we paid for the wars that we were in. When we needed to rebuild the economy, we paid for it. We raised taxes. We didn’t build up the massive and devastating debt that we have now. We didn’t pretend that higher taxes were devastating to the economy. Clearly they aren’t. Look at how we grew through these times. We didn’t shy away from having the wealthy paying their fair share. Those who benefited the most from our shared society, our shared growth, have the most to return to our shared recovery, and, in return, will get the most from the shared recovery. That is how the society works.
So, while there is certainly bloat in the system and efficiency to be found, we need to return to a more reasonable tax rate on the upper end of the income spectrum. Neither the Democrat nor the Republican wing of the One twoo party is truly arguing for this. Given our current debt and the bail outs for the wealthy that we recently made, that rate is probably in the neighborhood of 75%. We need to remove most if not all of the loopholes that have been implemented in the system that allow for the avoidance of taxes by the uberwealthy. It was the existence of these very loopholes which led to the creation of the Alternative Minimum tax, which was a good idea, but fails to achieve its purpose because it, like so many things, was not updated.
We need to also look at the capital gains rates and other unearned income tax rates. We’ll tackle that soon. Suffice it to say for now, that the same holds true. The periods of most solid growth and lowest debt in our country’s history have not been the periods of lowest taxation. This is a myth that has the veneer of truth only because the conservative marketing machine has been so effective. The facts speak for themselves.
1 – Calculations made from raw data. Raw data available from The Tax Foundation.