* Today's income tax rates are strikingly low relative to the rates of the past century, especially for rich people. For most of the century, including some boom times, top-bracket income tax rates were much higher than they are today.
* Contrary to what Republicans would have you believe, super-high tax rates on rich people do not appear to hurt the economy or make people lazy: During the 1950s and early 1960s, the top bracket income tax rate was over 90%--and the economy, middle-class, and stock market boomed.
* Super-low tax rates on rich people also appear to be correlated with unsustainable sugar highs in the economy--brief, enjoyable booms followed by protracted busts. They also appear to be correlated with very high inequality. (For example, see the 1920s and now).
* Periods of very low tax rates have been followed by periods with very high tax rates, and vice versa. So history suggests that tax rates will soon start going up.
Let's begin with a look at the top income tax bracket since the federal income tax was started in 1913. As you can see, relative to history, it's currently VERY low.
And before you protest that INCOME taxes may be low, but the government is now gouging us a thousand new ways, note that total government tax revenue (federal, state, and local) is actually now lower than pretty much any time in the last 40 years. (Not as low as it was in the first half of the last century, though!)
The federal portion of that tax revenue--the blue part in the chart below--is in the same range as it has been in since 1950 (15%-20% of GDP). State (red) and local (green) tax revenues are in a similar long-term range. (State revenue has actually shrunk of late).
And in case you're curious about the composition of that tax revenue... About a third (blue) is income tax. Another third is "value added" tax--property taxes, sales taxes, and tariffs (green). And another third is business tax (yellow) and social taxes (red).
Here's another look at how consistent the federal "take" has been as a percentage of GDP, going all the way back to 1950. Federal revenues have been 15%-20% of GDP, like clockwork (blue line). Of course, spending has usually been higher than this revenue--20%-25% of GDP. We just can't seem to live within our means.
And here's another look at federal spending as a percent of GDP for the past century. It's not way out of whack these days, at least relative to the last 60 years. But, thanks to the stimulus, it's higher than it has been since World War 2. (And the Republicans are probably right--it's too high).
And now for a closer look at those income taxes--the ones everyone loves to fight about. First, a refresher course: Here are the current federal income tax rates. 10%-25% rates for most people, and 35% in the top bracket (over $379,000).
And now, finally, a reminder of where that top bracket (35%) sits in the history of top tax brackets. (It's very low). Let's take a closer look at that history...
Let's start in 1921, before the boom/bubble decade that became known as the "Roaring 20s." The income tax scale in 1921 was very broad, and the top rates were high. The top bracket, for those earning over $1 million (many millions in today's dollars) was 73%.
In 1924, tax rates were cut. The top rate was slashed from 73% to 46%. And the top bracket was reduced to $500,000 of income (again, many millions in today's dollars).
The next year--1925--the tax cuts continued. The top rate was slashed to 25%, down from 73% just two years earlier. The highest wage earners--those who made $100,000 and up--got to keep a vastly larger share of their income than they had only a few years previously.
And what happened to the economy? For a few years, from 1925-1929, the economy and stock market boomed. The decade became known as the "roaring 20s." Inequality--the difference in wealth between the top earners and everyone else--also soared to unprecedented levels. Then the bottom fell out.
By 1932, with the country's economy in a shambles, the tax code changed again. The high rates on top earners were reintroduced. Now, anyone who made over $100,000 was in a 56% bracket (versus 25% in the late 20s). And those earning over $1 million paid 63%.
By 1932, with the country's economy in a shambles, the tax code changed again. The high rates on top earners were reintroduced. Now, anyone who made over $100,000 was in a 56% bracket (versus 25% in the late 20s). And those earning over $1 million paid 63%.
Then, in 1936, with the economy still in horrible shape and the deficit soaring, the country really socked it to rich folks. Anyone making over $100,000 had to pay 62%. Anyone over $1 million, 72%. And the top rate--for incomes over $5 million--soared to 79%. (This would be the equivalent of having a tax bracket for those who made ~$20 million and up today). These tax hikes were later blamed for throwing the economy back into recession.
In 1941, income tax rates went even higher. The top bracket hit 81%.
In 1941, income tax rates went even higher. The top bracket hit 81%.
And then, in 1945, with the country loaded to the gills with war debts, the top bracket hit an all-time high: 94%. This was assessed on anyone making more than $200,000. (Next time you hear *****ing about how unfair it would be to raise our top bracket a few percentage points from 35%, remember that).
The following year, 1946, rates were trimmed a bit. The top rate was reduced to 91%.
And taxes stayed pretty much just that way for the next 15 years, until the early 1960s. Importantly, this was one of the most successful eras in US economic history. The middle class boomed, the economy boomed, and the stock market boomed. And all with the top marginal income tax rate over 90%. This suggests that the Republican mantra about high marginal tax rates killing the economy is, well, a bunch of crap.
Then, in the early 1960s, rates began to drop. Slowly, at first...
Then in bigger increments...
By 1965, the top bracket was down to 70%.
And there rates stayed, right through the early 1980s. The economy of the 1970s, of course, was horrendous--a condition that was later often blamed on high marginal tax rates. Based on the history of the 1950s, however, which had higher marginal tax rates, the cause of the 1970s misery was more likely stagflation.
In any event, in the early 1980s, Ronald Reagan came along. And he started cutting taxes. In 1982, the top marginal rate dropped to 50%.
Five years later, Reagan slashed taxes again, cutting the new top rate to 38.5%. (Note that this rate is still higher than today's.)
And then, in 1988, Reagan finished the job, whacking the top rate to 28%.
But suddenly we had a huge deficit to worry about. So George Bush 1 raised rates a bit. The top marginal rate bumped up to 31%.
Of course, George Bush had broken a campaign promise by raising rates ("Read my lips: No new taxes"), so he was dismissed. And Bill Clinton came in and jacked the top bracket back up to 39.6%. And, lo and behold, the economy boomed! And the deficit shrank! And eventually, we even had a surplus.
But taxes were too high for George Bush 2, so he cut them. Just marginally, at first.
Then more significantly. In 2003, the top bracket dropped to 35%. The deficit reappeared--and then soared. And, interestingly, we saw a repeat of the 1920s: An unsustainable economic boom that ultimately collapsed, followed by a massive recession and huge deficits. And soaring inequality, which still plagues us today.
In 2010, with the economy still struggling, Barack Obama extended the Bush tax cuts for another two years. So here we are today.
So, what does the future hold? Good question! Obviously, no one likes tax increases, but the similarities between the 1920s-1930s and the 2000s-2010s seem hard to ignore. Today, after an era of very low taxes, we have enormous inequality and a huge deficit. Last time that happened, the top tax rate soared (and, it should be noted, the economy boomed--even with the top rate high). And we certainly wouldn't be surprised to see history repeat itself again...
