Thursday, January 3, 2013

The Truth About the 'High Taxes' in the 1950s

By Amity Shlaes

Of course, 2013 will be fine, because the 1950s sure were. That’s the premise for the coming year, especially in regard to the agreement in Washington to raise U.S. tax rates on the well-off.

In the 1950s, after all, tax rates were far higher than what the House and Senate have agreed on, a top rate in the high 30 percent range. Back then, they were even higher than what President Barack Obama might have proposed, if left to his own counsel. Republicans in that era went along with the idea that high rates took something away from the rich and thereby stabilized society.

Republican President Dwight Eisenhower’s idea of a significant marginal rate cut was to push the top rate down to 91 percent from 92 percent. Corporate taxes hit 50 percent. Jobs proliferated, wages rose, and the economy prospered. Lately, several documentaries have tried to capture the period, including “Something Ventured,” about how the technology boom got its start.

The implications of this 1950s narrative are clear. High tax rates and the redistribution they might yield can stabilize us now, giving the economy “good directional stability,” to use an industry phrase for a 1950s car, the Nash Metropolitan. High rates can accelerate growth.

Even the staunchest fan of low taxes draws comfort from the 1950s storyline. The official tax rates to which the U.S. now reverts, such as the top income rate of 39.6 percent, still look so much lower than 1950s ones. So maybe the U.S. can thrive and innovate.
Effective Rates

Unfortunately, the tax situation wasn’t what it seemed. The illusion commences with that famous 1950s top rate of 91 percent. Official rates matter, but so do effective rates, the percent of income that people actually pay in tax. The Internal Revenue Service reckoned that the effective rate of tax in 1954 for top earners was actually 70 percent.
Or lower. Marc Linder, a law professor at the University of Iowa, has shown that a more comprehensive interpretation of income that includes capital gains suggests the real effective tax rate for millionaires was 49 percent in 1953. The effective rate dropped throughout the decade, reaching 31 percent by 1960. That 31 percent is just slightly higher than the 29 percent level a Congressional Budget Office report figures the average effective tax for the top quintile will be in 2014. And that number for 2014 doesn’t include taxes in Obama’s health-care law.

A second fantasy about the 1950s is that government soaked the rich. Joseph Thorndike and Martin Sullivan in Tax Notes magazine took a look at the tax distribution of the decade. They found that those earning more than $100,000 paid less than 5 percent of the taxes collected in the U.S., a far smaller share than the wealthiest shoulder today.

Read the rest here.

Amity Shlaes is a senior fellow and director of the Four Percent Project at the George W. Bush Institute. She is the author of the best-sellers "The Forgotten Man: A New History of the Great Depression" and "The Greedy Hand: Why Taxes Drive Americans Crazy." She is also the author of a forthcoming biography, "Coolidge."

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