Let’s Get Back to the Good Old Days…By Raising Taxes?

I was blown away yesterday morning after skimming through a column by the NY Times’ Paul Krugman.  In the middle of the piece, he announced that the top marginal income tax rate in the 1950s was 91%.  91%!!!  I had a very hard time believing this, so I did as any red-blooded American would do and “googled” it.

It turns out Krugman was right.

According to fascinating data compiled by the Tax Foundation, if you filed jointly as married in the 1950s the top marginal tax rate looks to have been around 91%.  91%!!!  After the early 1930s, rates don’t seem to have dipped to 50% or below until the middle of the Reagan administration.  Take a look at the chart below (by way of Visualizing Economics):

What is most interesting is that the top marginal tax rates were astronomically high during the very same time period (1950s-1960s) when many consider America to have been doing its best, economically speaking.  Corporate rates were pretty high then as well.

This definitely gives me pause to consider during our current national debate about tax rates and the “fiscal cliff.”

There are, however, a few caveats to my findings.  First, a healthy reminder that the “top marginal rate” is only paid on income that is earned over a certain amount.  So, for instance, in 1955 the 91% rate was paid only on income earned over $400,000.  Adjusted for inflation this is $3,348,950.  A relatively limited pool of people would have earned this much and the only portion of their income taxed at 91% would be that which was earned above the bracket’s threshold.  Others with more normal incomes would pay a much lower percentage.   In addition, I’m certain that–just like today–there were numerous loopholes/deductions that allowed some very rich people to earn a lot of money without paying the rate in question.  This is the way, I suspect, it has always worked.

Yet the fact remains that there was a 91% tax rate in the first place.  Throughout a significant portion of time, the tax rate brackets did not cap out at around 35%, like they do today, but kept increasing in percentage as income increased.  This, apparently, in the “good old days.”  Take a look at the bracketing in 1955 (inflation adjusted) and 2011:

The data is compelling, and may suggest that the Republican argument (which makes sense in theory) that higher taxes inhibits growth may not be true.  Yet because I’m not an economist, I’m certain there are numerous issues involved of which I am not aware.  I look forward to input and discussion on this topic as we look at the numbers together.

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5 comments on “Let’s Get Back to the Good Old Days…By Raising Taxes?

  1. […] Let’s Get Back to the Good Old Days…By Raising Taxes?. […]

  2. Kathy S says:

    There is no clear evidence that cutting taxes inevitably leads to growth. If that were true, for instance, the Bush tax cuts would have prevented the collapse of 2008-9. Germany (and the nordic countries) has a very high tax rate, yet their economy is doing great.

  3. crb1701 says:

    Ah, the magic of numbers; you can make them say anything you want, good or bad, right or wrong. The real problem in America is the dying work ethic, but let’s just focus on those flexible numbers…

    • I’m not saying the number necessarily prove anything…just that they are intriguing.

      Work ethic, if it has changed, could explain the differences between the 1950s and 1960s. What would you say contributes to the decline you see?

      • KathyS says:

        Memories of the high unemployment during the Depression? What I find also interesting talking about work ethic is that immigrants (both legal AND illegal) have extremely high work ethics, and start small businesses at a higher rate than native-born Americans

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