Shout it from the rooftops

Many top earners during the high-rate era, such as politicians Dwight Eisenhower and Ronald Reagan, entertainer Jack Benny and librettist Alan Jay Lerner, didn’t pay the top rates. In 1952, for example, when the top rate was 92%, the highest-earning 1% of taxpayers had an average rate of 32%, according to Elliot Brownlee, a tax historian and emeritus professor at the University of California, Santa Barbara.

“When top tax rates were high, there was always a large gap between the stated rates and what the highest earners actually paid as a percentage of their income,” says Joel Slemrod, an economics professor at the University of Michigan.

This one would not work today:

Gen. Dwight Eisenhower also successfully argued that $635,000 he earned from his 1948 memoir, “Crusade in Europe,” should be treated as a capital gain, saving him as much as $400,000 of tax, says Joseph Thorndike, a historian with Tax Notes magazine.

Here is the Laura Saunders WSJ piece.

Comments

So how large is today's gap between the highest marginal rate and the average rate of the top 1%?

Firewalled, but the Tax Foundation link you posted a few days ago pegged the average rate as higher than that - about 42% instead of the current 36.4%. And that masks how much higher they were for the type of people who would be hit by Ocasio-Cortez's proposed tax (the 0.01%, who were paying 55% in average taxation in that era instead of 40% now).

That said, the capital gains rate was definitely much lower back then. It was around 25% for most of the 1950s and 1960s, and that was after excluding 50% of the gains.

"That said, the capital gains rate was definitely much lower back then. It was around 25% for most of the 1950s and 1960s, and that was after excluding 50% of the gains."

Not true.

Capital gains resulted in the lowest rate for assets held 5 years or more.

Capital gains on assets held less than a year was 100%, or maybe 80%, of the gain, taxed as earned income. And prorated for years in between.

No one flipped houses back then. No one speculated in stocks and bonds for capital gains.

Lots of limited partnerships to convert earned income into capitaal gains, but they all lasted at least 5 years. Long enough to depreciate built assets to 20-30% of costs, providing tax shelter to earned income, but no where near end of useful life.

I would expect any reader of this blog to understand the difference between marginal and average tax rate. That said, I suspect far more high-earners nowadays benefit from aggressive tax optimization, that "industry" was far less developed back then. Many actors now earn their income in royalties, equity in production or complex product placement and merchandise license fees. I suspect even if we went back to an Eisenhower-era tax code, the top earners would pay much less today that they would have in the 50s.

Hrrm. Most people can't even seem to understand the concept of "effective" rates

You are wrong.

For example, US oil production increased every year until 1970 with the price at $3 a barrel nominal thanks to lots of tax dodges shelter earnned income with drill baby drill partnerships. The US paid far to many workers to drill 10 to 100 times too many wells because it cut taxes on high earners.

Lots of ways to convert money paid to workers building assets into tax losses for depreciation or immediate write off, then into capital gains five or more years later. Lots of tax and contract lawyers earned good incomes then because everyone in the top 10% could profit from paying workers to build capital held for at least five years.

It seemed like half Milton Friedman's colums were diatribes on the "waste" of tax dodges that worked only because of high individual marginal rates.

And a big part of the waste was the too much capital driving reyurns on capital too low, ie, no economic profit. The only profit came from not paying taxes, not from capital.

"This one would not work today"

That's because there's no Ike.

Look I know what this site is about but no you can't convince me even if you "shout it from the rooftops." Like Ann Coulter said, we need to Tax the Kochs! Raise taxes high and close all loopholes. If any of them try to cheat, we throw them in jail. America was built by its people not by its elites. Remember that come 2020.

The standard of 1952 was raise taxes high and open a lot of loopholes.

David Koch in irons?

His unctuous sycophants would look on in despair

The horror.

Right, TC?

If we're arresting people we don't like, simply because we don't like them, I've got a little list.

They'll none of them be missed.

If higher top rates are so ineffective, why keep warning against them? About every other day now. I suspect because they are not ineffective... even if they don't raise (much) revenue they show that taxation of the wealthy will not tank the economy.

Per AOC, NYC Mayor DiBlasio, et al, the wrong people have the money and they will take it and give it to people that "deserve" it.

Because the 70% rate is a symptom of the socialists' end game. Americans keep too much of AOC's/DiBlasio's money.

Because the alternative minimum tax was "sold" as a tax on the evil, hateful rich, but evolved into affecting a much broader economic class, including me.

If they get their way, the IRS Form 1040 will have two lines: One, How much did you make? Two, send it in.

The problem isn't insufficient effective, or marginal, tax rates. It's the US elites - the worst political class in the Universe - will spend far more money than taxes bring in.

High rates are ineffective at raising revenue, but they are useful in controlling people's behavior. All those tax loopholes shape the way people spend their money, or not to bother earning it in the same place.

Labor and capital need to be on equal footing. All capital gains taxwise should be treated the same as income. Then even the likes of Ike can't dodge that one.

I suppose gains on real estate such as personal residence would be a place to start. Perhaps Pelosi could push a bill through.

Tax payers in the ten million dollar plus income bracket tend to get the majority of their income from capital gains.

You're forgetting inflation and risk.

Thank you for agreeing with me and making my point. Labor also faces inflation and risk just like capital. Thus taxation for labor and capital should be equal.

No, actually it doesn't. Most economists agree that capital gains should not be taxed. If you're serious, you need to address their points not waive your hands.

Economists have been wrong about everything that's why the world is now rebelling against the liberal world order and their self-appointed experts who know nothing except how to please their billionaire masters. Maybe we should change the tax rules to favor working people again. It is the only way to national greatness. #maga2020

Question for Tyler: how much does your view on tax/redistribution depend on the link between it and economic growth?

Eg. If it were good for growth, would you support it or see it as violating rights? Or what if it's neutral?

These hypothetical questions are important to understand the extent to which you're an objective voice on these matters.

'Shout it from the rooftops'

That the rich will always pay as little in taxes as they can get away with? Isn't that something that every public choice economist is intimately familiar with?

And the poor don't do that? They don't work jobs off the books, or "purchase" goods through in-kind transfers of services thereby avoiding taxes? I'll agree that the poor are unlikely to be hiring someone else to help them figure out how to best avoid paying taxes, but your comment is incomplete.

Instead of "That the rich ..." if we make that statement "That people ..." then I'd think it would be more complete. No one I know likes paying taxes, whether rich, poor, or anywhere in between.

'And the poor don't do that?'

Pretty hard to escape a sales tax when poor.

'They don't work jobs off the books'

Ever wonder who is paying them? Other poor people?

'I'll agree that the poor are unlikely to be hiring someone else to help them figure out how to best avoid paying taxes'

Or spending significant amounts of money attempting to influence policy debates.

"That people ..."

Again, many forms of taxes are quite hard to avoid or evade - strangely enough, they seem to equally apply the same to rich and poor in similar fashion that laws saying that no one is allowed to sleep under a bridge do.

Or do you honestly think the people currently mobilizing against a higher tax rate are the poor to whom it would not apply?

Further, this debate is about high earners, not everyone.

"do you honestly think the people currently mobilizing against a higher tax rate are the poor to whom it would not apply?"

Actually, yes. That's part of the genius of the Republican party.

Ah, I was thinking more along the lines of Romney's 47% being 'the poor.' And Romney was apparently convinced that such people would never vote Republican.

But sure, the Republican Party has a talent for convincing people of things that will never actually apply to them that they need to be opposed to it anyways - such as the death tax.

Taxing people for dying is wrong -- and it will never happen to me.

I oppose it because it's morally wrong. But hey, I'm not a selfish lefty, only concerned about my own affairs, and eager to financially punish the people I disagree with.

Technically, they are taxing the children for having dead parents who left them a pile of money for free.

Of course it'll never happen to you, when you die your estate will be approximately the value of 4 boxes of MAGA hats and a life size Melania sex doll. Don't worry, the estate tax kicks in well above $700.

"Again, many forms of taxes are quite hard to avoid or evade - strangely enough, they seem to equally apply the same to rich and poor ..."

Car title taxes would seem to fall into that category, but an investigation into a longtime fraud ring at the county tax office revealed that people who frequented used-car lots in certain precincts were able to greatly lower their vehicle transaction taxes. The scheme was totally unfamiliar to those of us in other precincts. I would expect more "democratization," not less, in that way in future, as communities strengthen.

Of course the big, unlimited government has been so beneficial. Give it even more money and power!

It could be aired on pay-per-view: a national mud wrestling match between the "Taxes Are Theft" people and the "Eat the Rich" jackasses.

Why do you comment on almost every post? Do you think you have worthwhile contributions to share? Seriously, what's your deal? Are you one person with too much time on his hands, or some sort of group of people with too much time on their hands?

Well, apart from all the ones I don't comment on.

Admittedly, Brexit is like catnip, as is any post that assumes that the rich getting richer is the highest goal of society. Which is not a trivial number of posts here, admittedly.

But then, maybe you just happened to skip all the posts I didn't comment on too. After all, who really cares about affirmative action in India, another Conversation, Friday's Links, carbon taxes, or Sikkim, to name five of the last nine posts.

Congratulations on being above average when it comes to MR comment section accuracy.

He's a longtime troll. He prepares Wikipedia info-dumps on various issues so he can muddy up a discussion with several paragraphs on a vaguely tangential topic. Tyler and Alex tolerate his hijacking, presumably because his efforts boost their traffic numbers.

He was fired for cause by GMU nearly a generation ago and is still butt-hurt about it.

"The top 1 percent paid a greater share of individual income taxes (37.3 percent) than the bottom 90 percent combined (30.5 percent)."

They're doing a pretty bad job of avoiding the taxes.

"Gen. Dwight Eisenhower also successfully argued ----- as a capital gain."
Probably he was foreseeing the time when he would have a Capitol Gain.

Surprising that a site called marginal revolution has so little use for the concept of marginal utility.

In 1952, there were 24 tax brackets; today, there are only 7. As a result of so few brackets, the marginal tax rate paid by the wealthiest taxpayer is the same or about the same as the rate paid by someone in the upper middle class. Thus, the penultimate rate, 35%, applies to income above $200,000; the top rate, 37%, applies to income above $500,000. Should someone earning $200,000 pay the same marginal rate as someone earning $500,000? Should someone earning $50 million pay a marginal rate only 2% above the rate applied to someone earning $200,000? Indeed, because someone earning $200,000 is subject to both income tax and payroll tax on most of her income (the payroll tax wage base is about $130,000), she pays a much higher effective tax rate than the person earning $50 million. The reduction in the top marginal rates required the compression of the marginal rates, something defenders of low top marginal rates fail to mention. Shout it from the rooftops.

Here's another anomaly: two earner married couples get slammed. Of course, in the 1950s two earner married couples were rare; and even rarer were two earner married couples with roughly the same incomes. Today, two earner married couples with roughly the same incomes describes the millennial generation. If that describes you and your spouse, I feel your (tax) pain. Shout it from the rooftops.

Of course, in the 1950s two earner married couples were rare;

Fully 1/3 of the working population in 1957 was female, at a time when most women were married before their 21st birthday. Two-earner couples were 'rare' only in your addled head.

>Fully 1/3

Don't ever write that again.

Putting "fully" in front of a fraction makes you look very stupid, and does not make your fraction appear any bigger than it is.

Some things never change.

Real tax issue is not marginal rates. It is complexity. It is rules designed to help special interests. e.g. carried interest loophole. It is rules and lack of enforcement that enables individuals and corporations to hide money overseas, etc.

Current tax code is insane. And apparently no one is interested in fixing it.

Well, no. Politicians use the tax code to build patron-client relationships. The Democratic Party doesn't function any other way and most of the Republican caucus are prat boys either for industries in their district or for the Chamber-of-Commerce lobbyist. A generation ago, you had a scatter of Democratic wonks like Bill Bradley and some principled Republicans who managed with the President's help to shame the Congress into making partial repairs. (Which George Bush the Elder worked to undo by promoting preferential rates for capital gains and which Bilge Clinton worked to undo with 'targeted tax cuts', natch).

'And apparently no one is interested in fixing it.'

For some people, the tax system is completely fine. Those who can declare their income as capital gains, for example.

Ask Senator Romney how that works, if you wish (just don't ask about offshoring - that is a bit of a sore subject after that IRS action a few years ago).

I hope, if we really are to hear much more from Mitt Romney, that more will be made of his being directly on the scene - indeed, next to the blast furnace, it having amused the glassworkers to stop him there in his tour, to give his remarks - when Wall Street began dismantling the American glass industry, per Brian Alexander's terrific book (just skip the first chapter or two).

But I suppose we'll just hear about his golden shorts and his chairing a big sports competition. Sure, they'll mention "Bain Capital," but it probably won't interest the NY Times in quite the way Trump's business dealings did.

During most of the 1950s, when the U.S. economy dominated the world, the top rate was 91%. It kicked in at $400,000 of taxable income, or roughly $3.7 million in today’s dollars.

The tax rate isn't the remarkable feature of that statement, its the degree of inflation deliberately engineered to destroy personal savings and encourage "velocity". Historians of the future will shake their heads at the policies that created this situation when similar national disasters of previous generations were well known.

Annual rate of change in the Personal Consumption Expenditure Index was as follows:

1929-1933: -6.7%
1933-1940: +1.3%
1940-1946: +7.4%
1946-1952: +4.1%
1952-1966: +1.6%
1966-1982: +6.3%
1982-2008: +2.7%
2008-2017: +1.1%

The ultimate marginal rate was jacked up to 63% in 1932, then to 79% in 1936, then varied between 81% and 94% during the period running from 1940 to 1946, then between 86% and 92% during the period running from 1946 to 1952, then was pegged at 91-92% during the period running from 1952 to 1963, from 1964 to 1981 it bounced around 70% (with temporary rates peaking somewhat higher in 3 of those 18 years). It stood at 50% from 1982 to 1986. It stood between 28% and 31% during the period running from 1988 through 1992. For every other year after 1986 it was somewhere between 35% and 40%.

Discernible relationship between the ultimate rate of taxation and the monetary policy which generates the rate of currency erosion is somewhere around nil.

On the basis of the numbers quoted in the article and given above, the average annual inflation rate would be 11%. This has no direct relationship to taxes, per se, but is indicative of inflation as a tax in itself.

On the basis of the numbers quoted in the article and given above, the average annual inflation rate would be 11%. This has no direct relationship to taxes, per se, but is indicative of inflation as a tax in itself.

I see math is hard for you, Barbie.

Ok, and the wealthy today are way richer today than they were then, pretty much any way you slice it. Let's shout that from the rooftops.

Tax them, hard, and in a way that doesn't let them slither off to their favorite loophole nests.

Why should we tax the wealthy that invest in our economy and generate jobs and wage increases for everyone else? Shouldn't we tax conspicuous consumption? That actually takes real resources away from other people.

I found it curious that when Obama was pushing his tax increase plan, he and the other Democrats decided to define $250K as the marker for the "rich" who should pay a higher rate, and be tagged with the "at some point you've made enough money" meme.

It would have been easy to have defined this limit at $1million a year, and even simpler to communicate. It would also have been pretty simple to have introduced a 50% or 70% tax rate for incomes above $1 million, or even $10 million, i.e. a real "millionaires and billionaires" tax. Yet they chose not to do this; I don't remember even any serious discussion of a top bracket like that.

The other thing too is that people who get paid at least $1M get it in capital gains. So an income tax raise at that point is largely symbolic, maybe you get a few athletes and movie stars but we like those millionaires. Its the other millionaires that don't get taxed that we want to tax and that only happens with capital gains taxes.

It's interesting to see how many people think that they are qualified to dictate how much money other people should be allowed to make and how much they should be allowed to keep of their earnings. Apparently everyone is qualified to be mini-dictators running roughshod over the rights of individuals to live their own lives. Citing some sort of utilitarian optimization their brilliance attunes them to?

With the new tax law what the top rate for individuals is irrelevant except for people whose income is from wages. The top rate for LLCs is capped at 25%, and most very high income people can claim their earnings are profits from a LLC or small business. The relaxation of the requirements now allow even some publicity traded firm to be LLCs which makes even corporate tax rate increasing ly irrelevant. The revenue from corporate taxes as a faction of gdp is 1/3 what it was when Esinhower was president.

The SS + Medicare tax rate is also about 5 times what it was when Ike entered office.

AOC, Krugman, et al: "We used to have really high marginal rates and the economy did just fine"

Conservatarians: "But we also used to have all kinds of tax loopholes, so few people actually paid those high marginal rates"

AOC, et al: "Oh, but of course we wouldn't bring back all the loopholes, just the high rates"

Conservatarians: "In that case we have no relevant data for the economy 'doing just fine' do we?"

Those high marginal; rates sometimes seem like the only thing progressives like about the old US of A

Shout it from the rooftops because Tyler knows that AOC and the modern democrats high marginal tax desires will have little effect on the rich.

Shout it from the rooftops because once again the Democrats are going to SCREW over the upper middle class in service to some fake bloodlust to attack the rich.

AOC gets her 70 percent tax rate, the rich shift ever more income to capital, their average tax rate doesn’t change much and the upper middle class get crushed again. They actually make their income through labor and have limited means to just shift their compensation.

That’s the argument.

Shout it from the rooftops that the devil is in the details, and that the tax code in the 1950's was as leaky as a pin pricked balloon.

Economists without an education in tax law, accounting, and the history thereof, have no place in the discussion of tax policy. Tyler should know better, but, alas, he doesn't.

As usual in these discussions there is way too much emphasis on the federal income tax while ignoring other parts of the tax system. in particular, fica social security taxes have gone way up since the 1950s, which are highly regressive. It is true that the rich enjoyed numerous loopholes in the 50s, but the poor were also paying much less in fica taxes. The overall code, including state and local taxes, is much more regressive now than in the 50s, although still slightly progressive overall. However, it is regressive at the top end, with those paying the highest average overall tax rates being in the mid-90s percentile-wise, with those at the very far top end, the 1/10 of 1/100 and so on, paying much lower average taxes, not only because of capital gains and offshoring, but also paying much lower percentages as fica and also sales taxes, the largest source of revenue at the state level, and also regressive.

Needless to say, while I am not jumping up and down with enthusiasm AOC's proposal, targeting those making more than $10 million per year does indeed get at a group that is currently paying much lower average taxes overall than even people at the 98th percentile, as well as those at the 25th percentile.

I once asked an investment counselor if I could pay taxes at the same marginal rate as Mitt Romney. He said no way.

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