Saturday, December 1, 2012

What the Top 1% Really Paid When the Top Tax Bracket Was 91%

There is a great myth spread by government interventionists that the economy did just fine when the top tax bracket was 91%. It did, but what is left out by these taxaholics is that no one paid 91% of their income in taxes.

When the rate was that high there were many, many loopholes. As Ludwig von Mises pointed out, It is tax loopholes which allow way capitalism to breathe.

Christopher Balding tells us (my highlight):
The data itself tells an entirely different story from the idealized 91% tax rate.  According to Internal Revenue Service data, presented below on a graph, from 1966 to 1970 the effective tax rate of an average tax payer in the top 1% was 30.85%.  Throughout the time period in question, the effective tax rate of the average top 1% never exceeded 35%.

Not surprising, Paul Krugman is among those spreading the myth of a much higher tax rate. Balding again:
It has become a Don Quixote like quest for certain economists to romanticize the higher tax rates on the wealthy.  No less than Nobel Prize winners Paul Krugman has written that: 
The best estimates suggest that circa 1960 the top 0.01 percent of American paid an effective federal tax rate of more than 70 percent, twice what they pay today. 
The assertion that the top tax rate  paid an effective tax rate of more than 70% seems more than bit odd owing solely to the fact that the top nominal rate was 91% from 1960-1963 and then 70-77% the rest of the decade.  In other words, Nobel Prize winning economist Paul Krugman is claiming that the average top tax payer was paying an effective tax rate that in some years was higher than the nominal rate.
During next week's Robert Wenzel Show (It's already in the can), you will hear Peter Kuznick, co-author with Oliver Stone, of The Untold History of the United States, spit out this Krugman myth.

(Via Tyler Cowen)

17 comments:

  1. the top nominal rate on hat graph never goes above 80%...

    so why all the talk of 91%?

    this is simply something any liberal will declare, the chart doesnt tell us anything.

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    1. Because the 91% rate was lowered in 1964

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    2. Because the 91% tax rate was lowered to 70% in 1964

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    3. Because the 91% rate was lowered in 1964

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  2. The 91% rate was reduced by Kennedy...to spur growth. LOL What the chart also does not show is that massive amount of tax fraud that took place in those good old days. And as far as Krugman goes, its clear he has no understanding of income taxation to state the "effective rate" was 70%. Sadly, he has lots of company with other left wing economists that are similarly clueless about knowing the difference between marginal and effective tax rates.

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  3. The 91% rate stopped in the late 1950's. In 1958 only 236 people faced a marginal rate above 81%. From the IRS tables you can't decipher how many of those individuals faced the 91% rate, but it was certainly a subset of those 236 people. 236 divided by the some 40 million filers is where Bernanke gets his .01% number which is an enormous round up. Which is why a former New York Times Editor once said, "Krugman has the disturbing habit of shaping, slicing and selectively citing numbers in a fashion that pleases his acolytes...".

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  4. "If deficit spending doesn't matter in the short term, why isn't Paul Krugman advocating for lowering tax rates on everybody in the short term?"

    I need to know the answer, Paul Krugman. Do we suddenly need austerity in the US? Why do you want to raise taxes, Professor Krugman?

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    1. Deficit spending doesn't matter in the short term. The point is to transfer money from the very wealthy, who aren't spending *or investing* that money in this economy, to much less well off people who will spend the money. This increases the number of jobs, in increases the size of the economy, it increases the incomes of both the rich and the poor. This removes the hardships of the poor without adding hardships to the rich. So everyone is better off, rich and poor, when the rich pay their fair share of taxes. Alternatively, the rich can give raises to the people that did the hard work that made the rich rich.

      The point is not to impoverish the rich nor punish the rich. The point is to make the rich richer faster by growing the economy faster. The economy grows faster when incomes are a bit more equal than they are now.

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  5. i guess it depends on how much the costs are in escaping that extra 4%, at 250k it may not be worth the time and effort but at a million plus, the question may be quite different. i suspect the Government will underestimate how far people will go to escape it but thats why theres a payroll tax isn't it?

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  6. This isn't very helpful. Krugman didn't say that the effective tax rate was 70% in the decade of the 1960s as you assert in your criticism. He stated it was more than 70% in the year 1960, singular.

    His statement is also about the top grossing .01% not the top 1%. That's a significant difference that you're leading people to believe is the same by juxtaposing Krugman's comment with that graph that doesn't even have 1960 on it. There are plenty of ways to knock Paul Krugman and plenty of ways to poke holes in the myth that high taxes brought prosperity. This is not one of them.

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  7. But, what is the "effective" Tax Rate of the Top 1% today?.... It's about 33.3% less then it was back then.... That's a big difference... 33.3%

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  8. Redistribution of wealth can be done voluntarily, through charity. It's just not done.

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  9. Replies
    1. On those years that he paid taxes...

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  10. 1: effective rate = (∑(Nominal rate_i x % of income distribution_i)/n.
    simplististic verstion: effective rate = nominal rates x income distribution.

    when the effective rates stay relatively stable, and the nominal rates drop, the income distribution must move towards the top to compensate for the decrease in rates. And for those who might try to argue that income distribution hasn't changed, realize that the avg CEO-to-worker pay ratio was 20:1 in 1950, 42:1 in 1980, 120:1 in 2000, and 204:1 currently. so yeah, that argument wouldn't be accurate even if it didn't defy basic algebra anyway. And it is amusing that the effective tax rate hasnt changed significantly, yet people feel they are paying too much in taxes because they don't have the disposable income that they used to.

    So, let's review the facts: 1. nominal tax rates have decreased drastically. 2. corporate and executive pay has increased drastically. 3. real median wages/hr haven't changed in 40 years. 4. Income inequality is inversely proportional to nominal tax rates by a factor equal to the effective tax rate, which is essentially constant for all intents and purposes. 5. people feel the taxes are too high because they don't have the disposable income they used to.

    Let's theorize what might be the underlying cause here.

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  11. The purpose of the 91% tax rate wasn't to actually have people pay that amount. They didn't want people in the higher brackets in the first place and, to that end, the tax rates were effective and subsequently kept income inequality in check.

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  12. And what's the effective tax rate now? 30%? I don't think so somehow.

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