USA tax fact of the day

Between 1950 and 1959, he notes, the highest earning 1 percent of Americans paid an effective [average] tax rate of 42 percent. By 2014, it was only down to 36.4 percent—a substantial but by no means astronomical decline.

Here is more from Jordan Weissmann, via C.

Comments

Interesting how much more can be funded, in absolute terms, by lower tax incidence in a richer society.

You didn't show that, with math, and I would kind of doubt it, given that "deficits don't matter" reigns again.

I realize that you're just trolling, but to be successful at that, you either have to stick close to reality while sowing confusion or just veer off on an unrelated info-dump like prior does. Trying to argue that "maybe the government does fewer things now than it did in the 1950s" fails because it's just laughable on its face.

Well, that is a fail.

You neither provided numbers for any of your claims nor acknowledged that tax rate is indeed disconnected from what "can be funded."

Holey Moley, now it is "just trolling" to touch bases with fiscal (a) accounting or (b) responsibility.

I think the following chart estimating the total direct revenue of all levels of US government since FY 1900 (both in absolute terms and as a percent of GDP) might be relevant here:

https://www.usgovernmentrevenue.com/revenue_chart_1900_2020USp_XXs1li011tcn_F0t

I think I want revenue and spending, that "can be funded" from Tom on the same chart, as here:

https://budgetbook.heritage.org/eight-charts-show-growth-government/

Respond

Add Comment

Fresher data here:

https://www.pgpf.org/chart-archive/0173_revenues_spending

I suspect you are being deliberately obtuse. Your chart only refers to federal revenues and spending. The Piketty et al study is an attempt to estimate the level of all US taxes at all levels of government and effective rates resulting therefrom. Even if you isolate the federal government, real revenues are currently at record levels. Exactly as Tom T. suggests, this is a result of a larger economy even though it is not enough to satisfy the insatiable appetite for increased spending.

I don't think your counter argument held together at all.

The top article was indeed about effective tax rates. Tom went from there to government's ability to pay, in "funding."

Did you do anything to show that more could be funded in a rich society with lower tax rates?

And that's where my chart with its funding gap comes in. We clearly are not covering the bills with tax at these levels.

Respond

Add Comment

It's like you're up to your chin in deficit and you still want to talk to me about Laffer curves or something.

How does the Laffer curve still not work? I agree with you about the debt, but as I've said before, and all the above charts show, we do not have a revenue problem. We have a spending problem.

Two points:
1 Tax rates were higher but not necessarily taxes paid.
2 Back then most states had much lower income taxes and lower property taxes. AND many states had no sales taxes and those that did have sales taxes the rate was considerably less than todays sales taxes are. you have to look at taxes in their entirety.

Respond

Add Comment

IMHO a 50% total tax rate is the upper limit of fairness. After that it is oppressive. No one should have to pay more than 50% of their income in all taxes; federal, state and local. Also zero tax is not consistent with a Democracy. If you vote and if you live and breath you should pay taxes. Perhaps a minimum federal tax of 10% would be fair.

Respond

Add Comment

Respond

Add Comment

Respond

Add Comment

Respond

Add Comment

Respond

Add Comment

Respond

Add Comment

Respond

Add Comment

Respond

Add Comment

Respond

Add Comment

What would those numbers be if capital gains were consistently either counted or not counted as income?

In the U.S., realized capital gains have always been treated as income, and reported on individual tax returns, although the applicable rate has varied. If Piketty et al. are doing their work properly, their figures include capital gains for all periods.

Yes and no. For most of the history of US capital gains taxation (until the TRA of 1986), there was an exclusion of capital gains (according to holding periods) rather than a differential tax rate. The exclusion at one point could be as high as 70 percent. The excluded gain would not appear in AGI or even in GI. I don't think the IRS maintained sufficient records to adequately account for this. Besides, Piketty et al work from "national income" and from there the trail is very hard to follow. None of the very rough estimates flowing from these studies should be taken as "facts".

Excellent! The devil is in the details. Changing Piketty's Gini by changing the accounting with no change in the reality of the social pecking order is just meaningless nonsense.

Respond

Add Comment

I think it was a deduction, not an exclusion, albeit above the line. (Not that that made much of a difference back then, since most taxpayers with capital deductions would not be taking the standard deduction.) In any case, my point is that you would add back the deduction to include the full capital gain in income if you are doing the analysis properly. If the IRS does not supply such data, then Piketty's analysis is meaningless.

It was an exclusion from gross income.

Looking through my Code, the preferential treatment of capital gains was neither accomplished by means of an exclusion under Sections 101 to 140, nor a deduction under Sections 161 through 199A, but a special tax computation formula under Section 1201(b). I don't have a pre-1969 Form 1040 to see exactly how the instructions phrased the matter.

Respond

Add Comment

Actually, IRS forms do refer to a "capital gains deduction." https://books.google.com/books?id=KQYOtuw59BkC&pg=PA24&dq=%22capital+gains+deduction%22&hl=en&sa=X&ved=0ahUKEwi7i721-tvfAhVRIqwKHbN4AXAQ6AEITjAI#v=onepage&q=%22capital%20gains%20deduction%22&f=false

It was an exclusion which is a tax term of art. The excluded income was not part of gross income (that's what makes it an exclusion), nor was it an "adjustment" from gross income to arrive at adjusted gross income, nor was it a "deduction" from AGI to arrive at taxable income. The calculation was performed before an entry was made to gross income. I know--I was there.

Respond

Add Comment

Respond

Add Comment

Respond

Add Comment

Respond

Add Comment

Respond

Add Comment

Respond

Add Comment

Respond

Add Comment

Respond

Add Comment

I always wonder about gross income vs. adjusted gross income in these studies. Oh, that.

Adjusted gross income is often treated as equivalent as "pre-tax income."

There is also the thriving business in offshoring income.

I wonder if the income tax is well past its prime, far too complicated and not collectable (to put it mildly).

Why not property taxes, pollution taxes, import tariffs instead?

Respond

Add Comment

Need to look at top 0.1% to see inequality effects. That’s where 1950s taxes really bit. Back then, those folks held less than 4% of the nation’s income, but now they pull more than 10%. Looking at the top 1% mixes lower-upper class with upper-upper, and muddies the conclusions.

Nonsense! Back then the profits were buried in the accounting with all the loopholes. Accounting changes with the loophole elimination of the '80s put the cost of the yachts on the 1040s instead of C corporation books.

Unless the accounting and tax systems stay constant, comparisons over half a century are just political propaganda.

Respond

Add Comment

Respond

Add Comment

I'd be interested in seeing a tax attorney or accountant comment on who was hit hard and who was not by high nominal tax rates in the Olde Days. I've heard it said that Ronald Reagan, as a salaried actor, was one of the few to get really soaked by high tax rates, but I don't know enough to say if that is true.

He might have before the Studio System broke up, although after that rich actors/entertainers could do the whole "set up a company that ostensibly leases my services, so I can then use a bunch of tax stuff to reduce my tax liability".

Respond

Add Comment

I used to practice tax law full-time. There's a reason why corporations used to have executive dining rooms, corporate hunting lodges, large expense accounts, company cars, scholarships for employees' children (which were of course mostly won by executives' children), generous pension plans (which were of course most generous to senior management) etc. There were lots of ways to funnel tax-free money to high earners. (Note that these are not tax deductions; they simply don't show up at all in an executive's gross income.) Many of them still exist, of course, but lower rates make them less worth the trouble.

Respond

Add Comment

Respond

Add Comment

It's a higher rate on the Top 0.1% and Top 0.01%, per the Tax Foundation article that the article links to:

It is worth noting that, per the Piketty, Saez, and Zucman data, the tax rates of the top 0.1 and 0.01 percent of taxpayers have dropped substantially since the 1950s. The average tax rate on the 0.1 percent highest-income Americans was 50.6 percent in the 1950s, compared to 39.8 percent today. The average tax rate on the top 0.01 percent was 55.3 percent in the 1950s, compared to 40.8 percent today.

I think this did have a real impact on the number of wealthy people, and how wealthy they were (there's a great article from Fortune from 1955 - at the highest 91% rate year - talking about how the CEOs of the day live more like what we would call upper-middle class folks than the luxurious rich folks they were 2-3 decades earlier). Of course, it had a higher impact on those who weren't already wealthy and could shift a big chunk of their income into municipal bonds and real estate tax shelters, or who weren't business owners who could take advantage of the considerably lower capital gains taxes of the era.

Respond

Add Comment

The downside was a disparity between C-level executives both in skill and labor and the common employees, often understanding themselves as executives. Blind spots between front end and back engineers, cannibalization between publisher and agency models, bonus schemes, semantic nightmares.

Respond

Add Comment

Hit the sensitive spot of the Socialists. They are enraged.

Respond

Add Comment

Between 1950 and 1959, the federal government budget was approximately in balance. Those were the days!

https://fred.stlouisfed.org/series/FYFSGDA188S

Respond

Add Comment

Mitt Romney famously had to aggregate 10 years of tax returns to show an effective federal income tax rate of about 10%. He had to pass on legal deductions (Rafalca!) to get the most recent year to even approach 10%.

I think other commenters are correct. Separate out the .1% from the .9%. The .9% includes too many W2 earners.

From the WP:Mitt Romney paid $1.9 million in taxes on $13.69 million in income in 2011, most of it from his investments, for an effective rate of 14.1 percent, according to hundreds of pages he released Friday in a move to quiet political controversy over his personal finances.:

This includes that he gave 30% of his income to charity.

Respond

Add Comment

Respond

Add Comment

Over at the NYT, Paul Krugman has some rather different numbers.

"The controversy of the moment involves [Alexandria Ocasio-Cortez's] advocacy of a tax rate of 70-80 percent on very high incomes, which is obviously crazy, right? .... [I]t’s a policy nobody has every implemented, aside from … the United States, for 35 years after World War II — including the most successful period of economic growth in our history."

Thus spake the self-described evidence-based economist.

"Over at the NYT, Paul Krugman has some rather different numbers."

One would assume that AOC (and Krugman) are talking about marginal tax rates of 70-80 percent, whereas Weissmann's numbers are for effective tax rates. Apples and oranges. (Not that I'm defending 70-80 marginal rates -- I think that's as crazy as Krugman used to).

"One would assume that AOC (and Krugman) are talking about marginal tax rates of 70-80 percent..."

That may be true (though Krugman doesn't say so), but at the level of the top one percent (and a fortiori the top 0.1%), under reasonable assumptions (i.e., that the top marginal rate actually bites), that becomes a distinction without a difference.

Of course, if AOC simply wanted to get attention, she might advocate a top marginal rate of 99.25% tax (like UK in WW2). If she proposed to levy it only on incomes over $1 billion, she would probably raise as much revenue from it as from a top rate of 0%.

My takeaway is that the top marginal rate is largely meaningless.

Respond

Add Comment

Respond

Add Comment

I did a very quick Google search and only see Krugman's tweet storm. Would appreciate a link. My guess is that the genes of Krugman's discussion relates to AOC's proposal to raise the tax rate to 70%?

AOC makes a very simpleton argument of:

1. Tax rates were higher historically on top earners.
2. Nothing bad happened.
3. Therefore, we can raise tax rates back to those rates without anything bad happening.

But of course, if tax rates were the sole material element in a taxing system, then the IRC would be significantly smaller compared to what in fact it is. Instead, there are two critical elements to determining tax: the rate and the base. The multiplication of the two results in the tax.

This is the flaw in AOC's argument. There is an unstated premise -- that the tax base has not changed from when the tax rates were really high. But one of the whole points about the 1984 and 86 acts were lowering rates while increasing the base. Thus, AOC's argument is not logically valid (though I leave it to you as to whether you agree with her conclusion). Just to show the argument for what it should be:

1. Historically, we had tax rates of X with base y.
2. Nothing bad happened.
3. Therefore, tax rates of X with base Y + N would not lead to bad things happening.

Now, it makes sense to me that AOC would miss this. She is young and from her public statements she is not exactly insightful or good with nuance.

Krugman on the other hand SHOULD know better (and my guess is does in fact know better). Does he discuss this in his NYT article?

Respond

Add Comment

Respond

Add Comment

I recommend that one read the Piketty et al paper regarding all of the numerous estimates and assumptions they use to derive the distribution of income, transfers and taxes and ultimately the so-called "effective tax rate". In particular, the paper starts with *national income* as reported in the national accounts and not IRS tax data. What results is not only a wild estimate of "income" distribuiton, but also an even more wild estimate of "effective tax rates" that is based on a conflation of "income" and "wealth" as we have heretofore commonly understood those terms.

It is disconcerting that, after the incredible amount of estimating and guess-timating Piketty et al admit to, the whole exercise is boiled down in media reports and commentary to, for example:

"Between 1950 and 1959, he notes, the highest earning 1 percent of Americans paid an effective [average] tax rate of 42 percent. By 2014, it was only down to 36.4 percent..."

That rather sounds like it is a statement of fact. Only by reading the paper does one realize what a great distance there is between academic "studies" (and, in particular this one) and the media reporting of "reality".

I forgot to mention the title to this blog entry!!

"USA tax fact of the day"

This is Tyler's show where estimates are called facts. I call Tyler's facts jokes because when I read the sources they make me laugh.

Respond

Add Comment

Respond

Add Comment

Respond

Add Comment

In the 1950s, the top 1% had much greater incentive to invest in the future: the the more they invested, the lower the effective tax rate. That's a big deal when the highest marginal tax rate is 90%. Could it be that lowering the top marginal tax rate created a disincentive to investing in the future? Could it be that cutting taxes without cutting spending and greatly increasing debt devalued the future relative to the present? Does this explain why investment in productive capital has lagged well below the level of investment in the 1950s?

Krugman: https://www.nytimes.com/2019/01/05/opinion/alexandria-ocasio-cortez-tax-policy-dance.html

If it wasn't clear before hand, now we know that we don't need to take Krugman seriously at all. In a piece discussing historic marginal tax rates as support for raising the current marginal tax rate, he doesn't address the tax base at all.

The only reason to not say that is because it would undermine the whole point. He could still make the argument (i.e., because of diminishing marginal returns to utility, progressive tax makes sense) but he can't rely on the historic argument because it compares apples to oranges.

He clearly knows this, and thus it is highly disingenuous for him not to bring it up. His failure to do so further depicts him as a hack not worthy of being taken seriously.

Respond

Add Comment

Respond

Add Comment

Respond

Add Comment

In 1950, tax shelters were more widespread and 1099s didn’t exist, so much less income was declared on returns. That make the effective difference of those returns even smaller.

Respond

Add Comment

Any discussion of tax rate is meaningless without the inclusion brackets. Yes tax rates were once higher, but the amount of income that fell in those brackets was very small. This would not be surprising or even news worthy if certain demegoguing politicians did not deliberately obscure this fact.

Respond

Add Comment

Being old enough to remember the 50's, the top 1%, like today, were often involved in and owned businesses (we didn't have jock millionaires with paychecks). By putting much of their real wealth in C corporations and paying at that much lower tax rate, their income was hidden from the 90% income tax. By putting their yachts in the company name along with their houses, they lived a good life for the times (they didn't have flat screen TV or the internet or jet travel or i-phones or the diversity/quality of goods available). Setting up trusts was another game which kept income and wealth out of their 1040's.

The big tradeoff of the 80's tax reform was eliminating many of these loopholes for the rich in exchange for lower maximum rates and setting up passthrough corporations (sub-chapter S, etc.) which had a major accounting shift to 1040 income.

When you change the accounting of where the profits show up, you change all the calculations about income distribution without any change in the economic reality. The yacht owner now pays his own bills.

In other words, these comparisons over half a century are pure political nonsense.

Respond

Add Comment

By the way, I just stumbled across a painful little tax policy factoid:

In a 2013 YouGov survey, only half of all Americans understood how marginal tax rates even work. Democrats (63%) were much more likely to get it right than Republicans (38%).

https://today.yougov.com/topics/politics/articles-reports/2013/01/08/understanding-how-marginal-taxes-work-its-all-part

Sad, and will sad political implications. One-party is arguing essentially from not knowing what's going on.

Sorry, that should be "with" sad implications.

Respond

Add Comment

Respond

Add Comment

Another point not mentioned so far is that the 1950s were a time of low economic dynamism. If you look at the founding dates of the Dow Jones Industrial companies, or the S&P top 50, you will see that there periods of dramatic economic change in the United States, and periods of stagnation, which leave their mark in the formation of major corporations. (And of course, each of those major corporations typically gives rise to several dynastic-scale fortunes.) The period from 1950 through 1980 did not result in any such corporations or fortunes.

Actually the 1970s was when a lot of tech companies got started including Apple, Oracle, and Microsoft. Intel started in 1968.

Apple and Microsoft were very small companies in 1980. Apple made computers for hobbyists. DOS was introduced in 1981. Neither Bill Gates nor Steve Jobs was a wealthy man in 1980.

Respond

Add Comment

Respond

Add Comment

Respond

Add Comment

the super rich pay less than 20% today

https://www.nytimes.com/2011/08/15/opinion/stop-coddling-the-super-rich.html?_r=0

and lets not forget, that extra income has diminishing marginal utility, making very high taxes on very high income hurdles additive to economic activity

https://www.nytimes.com/2019/01/05/opinion/alexandria-ocasio-cortez-tax-policy-dance.html

What are you talking about? do you think Mark Zuckerberg or Jeff Bezos take morning swims in their money vaults like scrooge McDuck?

They are not just sitting on piles of cash, their enormous net worth is held in equities and other investment vehicles.

Lets just perform a thought experiment: Lets say you massed the 100 million from some innovation you came up with and developed over 30 years. What will you do with it? (and what do you think is the smartest thing to do with it?) What are the tax implications?

I'm sure paying more taxes on it is not going to be very high up on your list.

No one suggested, not even AOC, that appreciated assets should be taxed. Looking forward to when you're "woke."

Respond

Add Comment

Respond

Add Comment

Respond

Add Comment

So in 1959 what percent of the total tax revenues came from the top 1%?
And in 2017?

Respond

Add Comment

Respond

Add Comment