Why 50% (or even 90%) tax rates aren’t so scary
Some have started to look at Bernie Sanders proposed tax plan and said, “There’s no way I’m going to pay 52% of my income in taxes.” And you wouldn’t be. While Sanders is proposing a rather large (in comparison to the current tax structure) increase to tax rates, it’s rather small when you consider both the history and the impact of paying taxes.
First of all, income taxes in the United States are progressive meaning that only the marginal tax rate increases as your income increases,so only the additional level of income would be taxed at higher rates. (A breakdown and analysis of his tax plan can be found at the Tax Foundation, though I disagree with quite a few assumptions they make.)
A brief history of income tax in the U.S.
Taxing income began in 1913, and by 1917 the country had its first massive increase to the progressive tax structure. The top marginal tax rate in 1917 was 67%, much higher than the year before when the top marginal tax rate was 15%. In 1925, the top marginal tax rate fell to 25% and stayed there until 1933, when a very refined progressive tax structure had 55(!) different marginal tax rates (though this was simplified to only 30 in the subsequent years). Compare that to today, with only 7 marginal tax rates.
Interestingly, in 1982 (after the top tax rate had fallen from 70 to 50% under President Reagan), the 50% tax rate applied at the equivalent of roughly $144,000 (2013 dollars). Can you imagine the furor that would erupt if every dollar over $150,000 was taxed at 50%?
Historically, very high marginal tax rates were the norm, but that’s not the point. The point is what it did for the U.S. economy. From 1948 to 1963 the top marginal tax rates were between 90–94% on income levels roughly around $2 million dollars. So how was the U.S. economy between 1948 to 1963? Average economic growth for the period was 3.9% (median was 4.1%). For the entire 15 year period, total growth was 83.35%.
Compare that against 1987-present, where top marginal tax rates were generally in the 31–39% range. Average economic growth for the period was 2.56% (median was 2.63%). To use a comparable growth period of 15 years, consider 1987–2002 when growth was 56.33% (if you focused on 2000–2015, total growth was 29.78% due to the financial crisis of 2007–2009). Another way to view it is that while we saw 83.35% economic growth in 15 years from 1947–1963, it took 25 years from 1987–2011 to see 83.11% worth of economic growth.
What accounts for these differences in economic growth?
Investment in infrastructure. The Interstate Highway system that we have today was completed in 1956 under the direction of President Eisenhower. If you’re asking to yourself how do roads add to economic growth — think about how much food would be on your table if you could only eat what was grown within 20 miles of your home? Roads, bridges, airports, seaports, etc. are the unrecognized champions of economic growth.
Investment in education. The price of a college tuition has well outpaced inflation since the 1950’s. Take for example the cost of attending the University of Pennsylvania as an undergrad (their tuition data is available here). In 1956, tuition at UPenn was $800 (including all other fees that were not tuition would bring the grand total to $1820). The current equivalent of which is nearly $7000 (the grand total would cost $15,850). However, the current cost of tuition at UPenn for the 2014–2015 school year was listed at $42,176 (grand total with books, fees, etc. of $60,632). Why is the cost of education 6 times greater than inflation? Simple, we have stopped funding education at the levels that we previously did. Universities are expanded rather than new ones being built. The demand for a Bachelor’s degree is very high, while the supply of college (or slots available) has stayed relatively stagnant.
These are just 2 examples of places where we used to invest in our economy’s long-term health, but these investments cost money. Taxes are the price that we pay for living in a modern society, but while at one point in our history paying your taxes was seen as deeply patriotic, the pendulum has swung and now U.S. corporations are moving (on paper) to other countries with lower tax rates. These companies are ignoring the fact that it is the legal and political structure that allowed them to earn those exorbitant profits in the first place (I’m looking at you, Pfizer). But this isn’t about corporate income taxes, this is about personal income taxes, but the feeling towards taxes stays the same — avoid them at all costs and don’t dare begin to think that raising taxes is a good idea.
The question I have is: Was it the fact that America was great that we were willing to pay our taxes, or was it that we were willing to pay our taxes that made America great?