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Friday, December 7, 2012

The Fantasy of a 91% Top Income Tax Rate

Wall Street Journal op-ed:  The Fantasy of a 91% Top Income Tax Rate, by Peter Schiff:

Democratic Party leaders, President Obama in particular, are forever telling the country that wealthy Americans are taxed at too low a rate and pay too little in taxes. The need to correct this seeming injustice is framed not simply in terms of fairness. Higher tax rates on the wealthy, we're told, would help balance the budget, allow for more "investment" in America's future and foster better economic growth for all. In support of this claim, like-minded liberal pundits point out that in the 1950s, when America's economic might was at its zenith, the rich faced tax rates as high as 91%.

True enough, the top marginal income-tax rate in the 1950s was much higher than today's top rate of 35%—but the share of income paid by the wealthiest Americans has essentially remained flat since then.

In 1958, the top 3% of taxpayers earned 14.7% of all adjusted gross income and paid 29.2% of all federal income taxes. In 2010, the top 3% earned 27.2% of adjusted gross income and their share of all federal taxes rose proportionally, to 51%.

So if the top marginal tax rate has fallen to 35% from 91%, how in the world has the tax burden on the wealthy remained roughly the same? Two factors are responsible. Lower- and middle-income workers now bear a significantly lighter burden than in the past. And the confiscatory top marginal rates of the 1950s were essentially symbolic—very few actually paid them. In reality the vast majority of top earners faced lower effective rates than they do today. ...

It's hard to determine how much otherwise taxable income disappeared through tax shelters in the 1950s. As a result, direct comparisons between the 1950s and now are difficult. However, it is worth noting that from 1958 to 2010, the taxes paid by the top 3% of earners, as a percentage of total personal income (which can't be reduced by shelters), increased to 3.96% from 2.72%, while the percentage paid by the bottom two-thirds of filers fell to 0.51% in 2010 from 2.7%. This starker division of relative tax burdens can be explained by the inability of upper-income groups to shelter income.

It is a testament to the shallow nature of the national economic conversation that higher tax rates can be justified by reference to a fantasy—a 91% marginal rate that hardly any top earners paid.

In reality, tax policies that diminish the incentives and capacities of innovators, business owners and investors will not spur economic improvement. Such policies will, however, satisfy the instincts of those who want to "stick it to the rich." Never mind that the rich have already been stuck fairly well.

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Comments

I await the sequel: "The Fantasy of a 0% Income Tax Rate" by Irwin Schiff.

The AMT was enacted after someone discovered that 155 high-income (on the top lines) taxpayers had paid zero tax, presumably due to losses carried forward from earlier years as well as non-cash losses such as depreciation deductions.

I wonder if more than 155 people paid the 90% top rate?

Posted by: AMTbuff | Dec 7, 2012 6:17:32 PM

First of all these statistics do not pick up the realty of life. First of all there are many benefits only the high income people or high paid executives can take advantage of. Deferred Income ....any high level executive or manager who is not taking advantage of this deferral of taxes and growing of income hasn't moved into the 21st century .. this income is not captured in tax returns....personal use of cars ...don't tell me its on the return...most of it is overlooked...larger contributions to pension, profit sharing and 401(k) plans...never shows up in the income statistics....estate planning ideas such as Private Placement Insurance...income grows without tax and is never taxed in estate......Lets put everyone on a level playing field and get rid of all thes benefits and tax income...including health benefits and additional income via pensions and 401(k)s...get rid of Private Placement INsurance and the many other legal loopholes of not paying tax on income earned....then we could reduce the rate to for everyone with 3 brackets, of 10, 15 and 20% ....also get rid of the dividend and capital gains rates and keep the 3 brackets as mentioned. In addition we need to get rid of the tax exemption for many and most tax exempts....including the NFL and the NHL....the last time I looked they were businesses....

Posted by: Sid | Dec 7, 2012 8:34:58 PM

"Tax the rich,
Feed the poor,
Til there are
no rich no more"

The entire philosophy of the Democrat party. Unless you happen to be a rich Democrat. Then all bets are off.

Posted by: Darth Chocolate | Dec 8, 2012 8:16:05 AM

"Unless you happen to be a rich democrat."

See e.g., Susan Estrich

http://www.realclearpolitics.com/articles/2012/11/25/the_mandate_to_raise_taxes_on_the_rich_116242.html

Posted by: Broke Law Student | Dec 8, 2012 9:40:12 AM