Outside the Beltway

History of American Income Tax Rates

The top marginal rate was radically higher in recent memory.

James Joyner
17

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With so much discussion about soaking the rich, class warfare, and the like spawned by President Obama’s millionaires tax, it’s useful to remind readers of the history of US tax rates. Here’s a summary table from the Tax Policy Center of the Urban Institute and Brookings Institution:

Recall that the income tax only goes back to 1913 and the passage of the 16th Amendment. It was originally quite small and levied only on the very highest earners. It skyrocketed for both world wars and has been as high as 92 percent. John Kennedy’s tax cut took it down only into the 70s. Even Ronald Reagan’s first set of cuts only took it down to 50 percent. Finally, late in Reagan’s second term, we saw it get into the 30s and–for two glorious years–the upper twenties. It’s been in the range of 31 percent to 39.6 percent for more than two decades now.

Now, the chart comes with some caveats, most notably “it ignores the large increase in percentage of returns that were subject to this top rate.” In the days when the top rate were much higher, a much smaller percentage of Americans were subject to that rate.

As I explain in great detail a couple years back in a post titled “Class Warfare: Framing the Debate,” it’s pretty silly to argue that letting the Bush tax cuts expire and have the top marginal rate rise from 35 percent to 38.6 percent is some sort of unprecedented assault on the rich. Especially since the Republicans have seemingly won this debate: there’s no serious talk of going back up to even the 50 percent rates of the early Reagan years.

My problem isn’t with progressive taxation per se, which I believe is necessary for moral and practical reasons, but with rhetoric designed to pit the highest earners against the rest of society. As I noted in that post, “It’s dangerous for a republic to operate on the basis of the lower classes voting themselves a larger share of the earnings of the upper classes.  It’s one thing to appeal to a sense of noblesse oblige and quite another to treat others’ wealth as a piggy bank to be raided at will.”

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17 responses to “History of American Income Tax Rates”

  1. john personna Avatar
    john personna

    The Economist has an article, Who wants to tax a millionaire?, which is pretty critical of the proposal, but which ends:

    Still, Mr Obama will have accomplished his goal. Over the summer, he put his neck on the line by trying, without success, to strike some kind of grand bargain with Republicans to both raise taxes and cut entitlements. He got nothing to show for it except an angry and disillusioned base threatening to desert him at next fall’s general election. Even if the plan offered today goes nowhere, it is a document he can carry proudly into the election to portray Republicans as unrepentant friends of the rich, a message that, judging from recent polls, resonates with the public. Still, reading the politics right isn’t the same thing as advancing the cause of America’s economy or its long-term finances.

    I guess the only defense for Mr. Obama is that, given the GOP block on any plan, he might as well do a political one.

    The GOP are playing their own “do nothing real” strategy in parallel, after all.

  2. Vast Variety Avatar
    Vast Variety

    The only way to fix the mess we are in is a combination of spending cuts and tax increases. Do you really expect the middle class to shoulder the entire burden of our bad economy?

  3. Alex Knapp Avatar
    Alex Knapp

    My problem isn’t with progressive taxation per se, which I believe is necessary for moral and practical reasons, but with rhetoric designed to pit the highest earners against the rest of society. As I noted in that post, “It’s dangerous for a republic to operate on the basis of the lower classes voting themselves a larger share of the earnings of the upper classes. It’s one thing to appeal to a sense of noblesse oblige and quite another to treat others’ wealth as a piggy bank to be raided at will.”

    What do you honestly expect after 30 years of rhetoric promising that cutting taxes on the wealthy would trickle down wealth to the rest of society, when the reality is that everybody’s stagnating except the rich? What do you expect after people get rich by gaming the financial system, get bailed out by government, then complain that cutting their bonuses is an assault on capitalism? What do you expect when big corporations pay millions in golden parachutes to CEOs who run their companies into the ground, then turn around and complain about the high labor costs of their workers? What do you expect when at a time where there are 5 applicants for every job opening, the rhetoric from the right calls people on unemployment “lazy parasites” – even as those same people have jobs they got through family connections working for money-losing non-profit think tanks?

    After 30 years of that, I’m not going to cry too much if the bevy of rent seekers, gamblers whose losses get socialized, and trust fund babies that make up a far too high portion of the American wealthy cry that their feefees are hurt by the bad men who want them to pay a little more in taxes than they do now, which is still less than they paid 10 years ago. I’m sorry, James, but you’re not going to convince me that this is an issue.

  4. Hey Norm Avatar
    Hey Norm

    Thanks for the chart…I wish I had time to graph it out.
    The missing information though is effective rates, and rate of capture. How many folks in that bracket are really paying 35%…which of course is the point of the infamous Buffet quote.
    I think if you look you will find that while the Clinton marginal rates were a couple percentage points higher, the effective rate was nearly 20% higher. In spite of that I don’t remember taxes in the Clinton era as being oppressive. And I remember something about the budget balancing out.
    If you aren’t willing to discuss revenue increases then you aren’t serious about debt reduction.

  5. Rob in CT Avatar
    Rob in CT

    What Alex said. Exactly that.

    All this worrying about the poor voting themselves money from the rich is pretty silly given the trends over the past several decades.

    I might have been understanding of that worry, James, if we were sitting here in the 1970s or something. But here in 2011? Come on. You’re jumping at shadows.

  6. OzarkHillbilly Avatar
    OzarkHillbilly

    @Alex Knapp:

    That.

  7. john personna Avatar
    john personna

    I think Alex misses a dynamic. That is that many people oppose “class warfare” because they visualize themselves as rich, someday, somehow.

    Remember Joe the Plumber? He started talking about taxes on his business, but then we learned he didn’t have one, and only dreamed of it, in the future.

    Probably the way to re-ground it is with some other points of reference. Say that we should all pay our fair share, and the guy making a million every year can pay more than your grandmother. A lot more.

  8. James Joyner Avatar
    James Joyner

    @Vast Variety: High earners already shoulder a much higher burden, both absolutely and proportionately, than the middle class.

    @Alex Knapp: The vast preponderance of high earners are neither trust fund babies nor bailout recipients nor in cushy jobs gained mostly through nepotism. It’s simply not reality.

    Further, we’ve had, in my adult lifetime, an almost unprecedented period of near-full employment combined with very low inflation and interest rates. People live in bigger houses, drive nicer cars, eat out more, go on better vacations, and otherwise live on the main better than they have in human history.

    We’re now in the midst of a global economic crisis–one caused at least in part by speculative investors. As you recall, I opposed bailing them out.

  9. john personna Avatar
    john personna

    @James Joyner:

    High earners already shoulder a much higher burden, both absolutely and proportionately, than the middle class.

    Taking refuge in averages does not disprove Buffetts example.

  10. Brett Avatar
    Brett

    @James Joyner

    Now, the chart comes with some caveats, most notably “it ignores the large increase in percentage of returns that were subject to this top rate.” In the days when the top rate were much higher, a much smaller percentage of Americans were subject to that rate.

    That’s what I’ve read as well. The top 91% bracket that was in place for most of the 1950s only hit people earning the modern equivalent of ~$5 million/year or more, if I recall correctly.

    That was one of the perversities of Reagan Era Tax Reform. They lumped the upper middle class, rich, and super-rich all into a single tax bracket, probably with the hope that it would make raising the top rate much more politically difficult farther on.

    Of course, this is just federal income tax. Most of the states have their own income tax brackets as well.

  11. James Joyner Avatar
    James Joyner

    @john personna: I’m not taking refuge in averages nor claiming that Buffett’s example isn’t representative of a problem. Indeed, in my posting “Fact Checking Obama’s Buffett Rule Claims,” I specifically state “Warren Buffett actually does pay less as a percentage of his income than his secretary, so he’s not lying.”

    Nor do I argue that we can’t close this loophole because it disproportionately impacts high earners. Indeed, I argue that opposite: We should close the loophole.

    What I do argue is that Obama is making this about “millionaires and billionaires” and stoking class resentments when what we have instead is a specific loophole that should be addressed. I point to the averages to refute the notion that, on the main, “millionaires and billionaires” are paying a lower rate than those below them on the economic food chain.

    In short, it’s a problem that Warren Buffett pays less as a percentage of his income than his secretary. But most executives pay more as a percentage of their incomes than their secretaries do.

  12. john personna Avatar
    john personna

    @James Joyner:

    Nor do I argue that we can’t close this loophole because it disproportionately impacts high earners. Indeed, I argue that opposite: We should close the loophole.

    Be aware of the meme machine. Buffett talked about this loophole, specifically, and the blogosphere exploded about “class warfare.”

    You were part of that.

  13. James Joyner Avatar
    James Joyner

    @john personna: It’s just not true. My “class warfare” comments were in response to Obama’s millionaires tax, not Buffett’s op-ed.

    You can read what I wrote about Buffett’s op-ed here:

    The rationale behind these provisions in the tax code is actually defensible. We want people to save money and invest in stocks, since it keeps the flow of capital to the economy flowing and provides a nice retirement cushion under normal circumstances. It would be strange, indeed, to treat money earned by deferring gratification or taking risk over time in the same way as wage income; it would be better just to invest in bonds or spend the money. But that rationale doesn’t hold for people who make their primary living buying and selling stocks. For them, those earnings are essentially wages.

    There’s no doubt that many of the inequities Buffett rails about in the column are a result of plain old rent-seeking. The “mega-rich” are in a better position to influence government and get special treatment in the tax code. But that’s an argument about the political manipulation of the tax code more than it is about the “coddling of the super-rich.”

    Still, as Tim Worstall notes, Buffett is engaging in some sleight-of-hand here. He’s considering personal income taxes and leaving aside corporate taxes, which super-rich people like himself tend to pay.

    […]

    Taxing income is a tricky thing, indeed, and people at the top of the chain have all manner of ways in which to “hide” income by tricky accounting maneuvers. Doing so is not cheap–Buffett’s tax preparation cost is probably higher than the average American’s income–but the system is so complicated that it’s essentially a game.

    It’s presumably possible to close off some of the loopholes in the system to collect more money. And it’s almost certainly the case that many of them actually ought be closed out of fairness; whether doing so is possible under our current political standoff is another question entirely. But any system where taxation of income is the primary means of collecting money for the Treasury and also the primary means of incentivizing certain types of economic conduct while penalizing others is going to be ripe for manipulation. And those with the most money for lobbyists, lawyers, and accountants are likely to come out on top.

    No class warfare talk there. Hell, I at least partly agree with Buffett (note the bold text).

  14. john personna Avatar
    john personna

    Details are scarce, but when I heard it (I thought, a week ago) that the proposal would be a “catch up” rule to make up for “carried interest” and similar.

    Have you actually seen anything that says Obama’s new millionaire rule would move rates past their current limit?

    I thought he was saying that million-earners should pay at least the rate that the middle class does.

    That is a very conservative request. It doesn’t even make the “catch up” progressive. It is just a safety rule to make sure that no one is skating.

  15. James Joyner Avatar
    James Joyner

    @john personna: My decided preference is for radical simplification, which would result in significant revenue gains from high earners losing loopholes. Eliminate or amend the carried interest rule. Raise the payroll tax ceiling–or eliminate the payroll tax entirely and factor it into the income tax, which would also be quite progressive.

    I am, however, decidedly against an AMT-style catch-all that punishes people for playing by the rules and doing too well.

  16. john personna Avatar
    john personna

    @James Joyner:

    I’m afraid that might really represent a contradiction. If loopholes are bad, then correcting them, one way or the other, is better than nothing.

    Currently the meme machine is pushing “do nothing” as the fairness route. They certainly are not pushing an end to loopholes, and for some reason loopholes for the rich are most important to preserve.

  17. michael reynolds Avatar
    michael reynolds

    @Alex Knapp: Hear, hear!

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