Why Nobody should Compare Current and Historical Tax Laws
Think Piece/Open Discussion
Throughout the 1940s and into the 1970s, the top tax rate was nearly 90% during a period of great economic growth for the United States. Only reaching our modern rate of about 35-40% in the 1980s. Many have pondered the question: Should the United States have a much higher tax rate for top earners than we have had in the last forty years or so?
One of the more neglected rules (for what I think at least) is that with tax laws, details matter the most. Before the late 1960s, capital gains were taxed at 25%. Remember, this is the type of income that represents most of the taxable income from the very rich from the 1800s to even today. Only salary and a few other types of income were taxed at 91% and there were far more deductions as well.
The average tax that was paid by the top earners in the 1950s is barely higher than that paid by the top earners today. The whole point of the 1986 tax reform act was to eliminate the massive amounts of deductions, move the tax rate on salary income and capital gain closer to each other, simplify the taxation calculations, and lower marginal rates. The logic is that taxable income would increase due to eliminating the various deductions — as mentioned, at the time there were endless amounts of them — so that marginal tax rates would decrease while producing essentially the same revenues for the government.
Whenever Republicans have been in control, since that time, they’ve reduced capital gain tax rates and reduced deductions of greater value to residents of the blue states. In 1955, the 91% rate applied to married filing jointly with a salary income in excess of $400,000. The only information found shows that 1.4% of the United States households had an income over $15,000 in 1955. Exploration suggests that fewer than 0.005% of households would have been subjected to that top marginal rate.
Given that such a household would certainly have much more income from things such as capital gains, any household with nearly $500,000 in salary income and maybe $1,500,000 in capital gains, add deductions, the taxes would have been around $250,000 on salary and $375,000 on capital gains. On $2,000,000 income, this would be $625,000 in taxes or 31.25% average.
And this is exactly why people shouldn’t try to compare current and historical tax laws…