Markg requested a query which I had thought of up to now, had it answered by another person, moved on to one thing totally different, and rapidly forgot the reply most likely as a result of it suited me. So, I went a seeking to see what I may discover because it pursuits me once more additionally. And sure, Ken is appropriate. Even so, the query is worthy of a response.
David Henderson at Econlib had a solution to this which I’ll copy right here at Offended Bear.
“How Did We Get Good Growth in the 1950s Despite High Marginal Tax Rates?”
In my newest OLLI speak, “Economic Growth: Crucial but Uncertain,” which I posted and talked about on Substack, I didn’t talk about one query that one of many individuals requested. I didn’t suppose to take action as a result of John, the A/V man, made sure cuts and, for some purpose, that query and my reply aren’t on the video.
I took the viewers on a fast tour of the highest marginal charges by means of the twentieth century: from 7% when the primary revenue tax was carried out; to 77% underneath Woodrow Wilson; all the way down to 25% underneath Treasury Secretary Mellon (working his manner down within the Harding after which Coolidge administrations; as much as 63% underneath Herbert Hoover then 79% throughout peacetime FDR and as much as 94% over the past a part of the conflict underneath FDR; then all the way down to 91% for a lot of the Fifties and early Nineteen Sixties; then all the way down to 70% underneath LBJ (as a part of the Kennedy tax minimize); then all the way down to 50% early within the Reagan administration and 28% late within the Reagan administration; then as much as 31% underneath George H.W. Bush; and so on.
In fact I gave a extra abstract assertion than the above, however the viewers received the purpose.
One of many viewers members, a man named Ed, mentioned, “Don’t the high marginal tax rates in the 1950s mean that high tax rates don’t matter that much for economic growth since growth was pretty good in the 1950s?”
I answered that the best marginal tax charges kicked in at a really excessive revenue stage and that one wanted to regulate for inflation to see how irrelevant they have been for over 90% (and doubtless over 95%) of revenue earners. (I’m utilizing “earner” within the broad sense; if I personal inventory that gave me a good-looking dividend revenue, I rely that revenue as earned.)
I may have given a greater reply if I had had the information useful, and I’m about to do this. However I utterly ignored one other reply: the financial system was a lot much less regulated within the Fifties than now. It was a lot simpler to get a allow to construct a home, a bridge, a pipeline, an workplace constructing. Additionally the legal responsibility revolution that Walter Olson has written about so nicely had not but occurred, in order that producers didn’t should waste a variety of effort on idiot-proofing their merchandise. And so on. All these positives can simply upset the negatives of excessive marginal tax charges for a small share of the inhabitants. (One caveat: we didn’t have deregulation of airways, trucking, or railroads and that did harm considerably.)
Now to the information on taxes. The Tax Basis offers the information on tax brackets and tax charges from 1862 to 2021 right here.
Take a look at the marginal tax charges for 1954. For married {couples} submitting joint, in case you had $400,000 or extra in taxable revenue, your marginal tax fee was 91%; for singles, it kicked in at $200,000. That fee with the identical revenue brackets was the identical from 1954 to 1963.
However $400,000 in 1954 was $4.66 million. Furthermore, the entire actual revenue distribution is increased now, most likely not less than twice as excessive. So that might be like imposing a 91% marginal tax on a married couple with $9.32 million in taxable revenue.
To make sure, marginal tax charges have been nicely above in the present day’s charges even for a lot decrease incomes. Contemplate 1954 once more. For a married couple with taxable revenue of $24,000, the marginal tax fee was a whopping 43%. In in the present day’s {dollars}, $24,000 can be $280,000. So my level will not be as robust as I initially thought. Alternatively there have been no Medicare taxes and Social Safety tax charges have been a lot decrease. In 1954, the mixed SS tax on employer and worker was 4%, versus 12.4% now. Furthermore, it was zero after an revenue of $2,400, which is $28,000 in in the present day’s {dollars}.
Right here’s my hypothesis, though I don’t have time to do the maths and test a variety of knowledge. Up by means of 1963, for over 80% of U.S. taxpayers within the prime half of the revenue distribution, marginal tax charges, together with Social Safety and Medicare, have been decrease than they’re for over 80% of taxpayers within the prime half of the revenue distribution in the present day.
Taxes on the Wealthy Had been Not A lot Greater within the Fifties | Tax Basis
