Tax Reform: History Lessons for the Middle Class

On the 70th anniversary of the Pearl Harbor attack, CBS News’ "MoneyWatch" ran “How would you feel about a 94% tax rate?” William T. Zumwalt reported:

In April 1942, just a few short months after the attack, President Roosevelt proposed a 100% top rate. At a time of “grave national danger,” he argued, “no American citizen ought to have a net income, after he has paid his taxes, of more than $25,000 a year.” (That's roughly $300,000 in today's dollars).

Roosevelt never got his 100% rate. However, the Revenue Act of 1942 raised top rates to 88% on incomes over $200,000. By 1944, the bottom rate had more than doubled to 23%, and the top rate reached an all-time high of 94%.

There’s your progressive for you, they know exactly how much income a citizen “ought to have,” and beyond that they want only 100 percent. But WWII was a crisis, you see, and “you never want a serious crisis go to waste” (short video). However, for 20 years after the crisis of WWII, the top marginal tax rate remained in the 90s. This, during the midcentury Pax Americana, when we no longer needed fascistic tax rates to fight fascism in Europe.

The focus on tax rates misses the whole picture, though. One also has to take into account where tax rates kick in. FDR’s 94 percent rate kicked in at incomes of $2,609,023 in inflation-adjusted dollars, which is more than 6.2 times higher than where today’s top rate kicks in for single filers: $418,000. FDR’s 23 percent bottom rate covered incomes from $0 to $26,090 when adjusted for inflation.

The Tax Foundation provided those inflation-adjusted figures on page 38 of the second table; just enter 38 in the place at the bottom of the box and you’ll be positioned at 1944. You’ll also see that there were 24 brackets/rates back in 1944, and they applied to all filing statuses; no breaks for one’s marriage status.

If taxes back in 1944 interest you, then read the 1040 form for 1944. The form’s Tax Table is for incomes of less than $5,000. If one’s income was above $5K, then one had to refer to the 1944 1040 instructions, which were 4 pages in length. For contrast, check out the 1040 instructions for 1954 10 years later, which had grown to 16 pages. On page 14 of the 1954 instructions, one sees that the top rate required one to pay “$235,480, plus 91% of excess over $300,000.” One finds that same levy on page 9 of the instructions for 1963, the last year of the 90+ percent rates.

During a crisis like WWII it’s understandable, but for a 90+ percent tax rate to persist for twenty years after the crisis is not. On August 4, the Tax Foundation ran “Taxes on the Rich Were Not That Much Higher in the 1950s” by Scott Greenberg, who writes: “When we look at income taxes specifically, the top 1 percent of taxpayers paid an average effective rate of only 16.9 percent in income taxes during the 1950s.”

The most salient of the reasons with which Greenberg explains those low effective tax rates is tax avoidance. Government’s tracking of money transfers surely wasn’t as reliable in the days before computers, so it must have been far easier to not report all of one’s income. Progressives who would sniff at Greenberg’s data should note that he was citing a study by Thomas Piketty, the socialist.

Other socialists, like Bernie Sanders, Paul Krugman, Robert Reich, and Hillary Clinton, who cite the 1950s as justification for taxing the evil One Percent more, should tell us why we shouldn’t also tax the working and middle classes more too, because in the 1950s they were paying more. Look at that 1040 form for 1944, and you’ll see that an unmarried person with an income of $5,000 could have an income tax liability of $954 -- an effective rate of 19 percent.

So back in 1944, those not hit by the top rate were still paying a lot in income taxes. 1944’s bottom statutory rate of 23 percent is higher than the effective rate for all federal taxes for some in the top 10 percent in 2016. On Jan. 3, 2013, Bloomberg ran “1950s Tax Fantasy Is a Republican Nightmare,” a nifty little article by economic historian Amity Schlaes:

Official rates matter, but so do effective rates, the percent of income that people actually pay in tax. […] 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. […] 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.

With the rate cuts of Kennedy, Reagan, and Bush-43, more and more Americans have fallen off the personal income tax rolls. The top 1 percent of income earners has been providing 10 to 13 times the revenue as the bottom 50 percent. Even so, whenever Republicans talk about cutting tax rates, Democrats start wailing about unfairness, and try to stoke resentment among those who don’t pay.

Supply-side economics was terrific for the times when the top marginal rates were 70 percent (1981) and 91 percent (1963). But it’s time for Republicans to retire supply-side tax rate cuts, as statutory and effective tax rates are much closer today than in the 1950s. Now is not the time to cut revenue from the personal income tax. Now is the time for caution.

Allowing income earners to pay less in personal income taxes is risky for several reasons. There’s the risk that the business cycle will kick in right after rate cuts; Dems would then blame the ensuing recession on tax cuts for the rich. There’s the political risk presented by the old class warfare tripe from the likes of a Sherrod Brown (short video). Also, a revved-up economy, which is what the rate cuts are supposedly for, is not without inflationary dangers. But the main risk may come from servicing the debt we’ve already run up, the new rollover regime.

One could be all for cuts in personal income tax rates if they were totally offset with cuts in “tax expenditures,” and exceptions (deductions, exemptions, etc.). But the rate cuts aren’t being totally offset in the legislation under consideration. So the deficit will rise. We might also take note that in the era of 90+ percent tax rates, from 1944 through 1963, Congress ran seven balanced budget surpluses.

Merely cutting rates isn’t tax reform.

Jon N. Hall of Ultracon Opinion is a programmer/analyst from Kansas City. 

On the 70th anniversary of the Pearl Harbor attack, CBS News’ "MoneyWatch" ran “How would you feel about a 94% tax rate?” William T. Zumwalt reported:

In April 1942, just a few short months after the attack, President Roosevelt proposed a 100% top rate. At a time of “grave national danger,” he argued, “no American citizen ought to have a net income, after he has paid his taxes, of more than $25,000 a year.” (That's roughly $300,000 in today's dollars).

Roosevelt never got his 100% rate. However, the Revenue Act of 1942 raised top rates to 88% on incomes over $200,000. By 1944, the bottom rate had more than doubled to 23%, and the top rate reached an all-time high of 94%.

There’s your progressive for you, they know exactly how much income a citizen “ought to have,” and beyond that they want only 100 percent. But WWII was a crisis, you see, and “you never want a serious crisis go to waste” (short video). However, for 20 years after the crisis of WWII, the top marginal tax rate remained in the 90s. This, during the midcentury Pax Americana, when we no longer needed fascistic tax rates to fight fascism in Europe.

The focus on tax rates misses the whole picture, though. One also has to take into account where tax rates kick in. FDR’s 94 percent rate kicked in at incomes of $2,609,023 in inflation-adjusted dollars, which is more than 6.2 times higher than where today’s top rate kicks in for single filers: $418,000. FDR’s 23 percent bottom rate covered incomes from $0 to $26,090 when adjusted for inflation.

The Tax Foundation provided those inflation-adjusted figures on page 38 of the second table; just enter 38 in the place at the bottom of the box and you’ll be positioned at 1944. You’ll also see that there were 24 brackets/rates back in 1944, and they applied to all filing statuses; no breaks for one’s marriage status.

If taxes back in 1944 interest you, then read the 1040 form for 1944. The form’s Tax Table is for incomes of less than $5,000. If one’s income was above $5K, then one had to refer to the 1944 1040 instructions, which were 4 pages in length. For contrast, check out the 1040 instructions for 1954 10 years later, which had grown to 16 pages. On page 14 of the 1954 instructions, one sees that the top rate required one to pay “$235,480, plus 91% of excess over $300,000.” One finds that same levy on page 9 of the instructions for 1963, the last year of the 90+ percent rates.

During a crisis like WWII it’s understandable, but for a 90+ percent tax rate to persist for twenty years after the crisis is not. On August 4, the Tax Foundation ran “Taxes on the Rich Were Not That Much Higher in the 1950s” by Scott Greenberg, who writes: “When we look at income taxes specifically, the top 1 percent of taxpayers paid an average effective rate of only 16.9 percent in income taxes during the 1950s.”

The most salient of the reasons with which Greenberg explains those low effective tax rates is tax avoidance. Government’s tracking of money transfers surely wasn’t as reliable in the days before computers, so it must have been far easier to not report all of one’s income. Progressives who would sniff at Greenberg’s data should note that he was citing a study by Thomas Piketty, the socialist.

Other socialists, like Bernie Sanders, Paul Krugman, Robert Reich, and Hillary Clinton, who cite the 1950s as justification for taxing the evil One Percent more, should tell us why we shouldn’t also tax the working and middle classes more too, because in the 1950s they were paying more. Look at that 1040 form for 1944, and you’ll see that an unmarried person with an income of $5,000 could have an income tax liability of $954 -- an effective rate of 19 percent.

So back in 1944, those not hit by the top rate were still paying a lot in income taxes. 1944’s bottom statutory rate of 23 percent is higher than the effective rate for all federal taxes for some in the top 10 percent in 2016. On Jan. 3, 2013, Bloomberg ran “1950s Tax Fantasy Is a Republican Nightmare,” a nifty little article by economic historian Amity Schlaes:

Official rates matter, but so do effective rates, the percent of income that people actually pay in tax. […] 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. […] 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.

With the rate cuts of Kennedy, Reagan, and Bush-43, more and more Americans have fallen off the personal income tax rolls. The top 1 percent of income earners has been providing 10 to 13 times the revenue as the bottom 50 percent. Even so, whenever Republicans talk about cutting tax rates, Democrats start wailing about unfairness, and try to stoke resentment among those who don’t pay.

Supply-side economics was terrific for the times when the top marginal rates were 70 percent (1981) and 91 percent (1963). But it’s time for Republicans to retire supply-side tax rate cuts, as statutory and effective tax rates are much closer today than in the 1950s. Now is not the time to cut revenue from the personal income tax. Now is the time for caution.

Allowing income earners to pay less in personal income taxes is risky for several reasons. There’s the risk that the business cycle will kick in right after rate cuts; Dems would then blame the ensuing recession on tax cuts for the rich. There’s the political risk presented by the old class warfare tripe from the likes of a Sherrod Brown (short video). Also, a revved-up economy, which is what the rate cuts are supposedly for, is not without inflationary dangers. But the main risk may come from servicing the debt we’ve already run up, the new rollover regime.

One could be all for cuts in personal income tax rates if they were totally offset with cuts in “tax expenditures,” and exceptions (deductions, exemptions, etc.). But the rate cuts aren’t being totally offset in the legislation under consideration. So the deficit will rise. We might also take note that in the era of 90+ percent tax rates, from 1944 through 1963, Congress ran seven balanced budget surpluses.

Merely cutting rates isn’t tax reform.

Jon N. Hall of Ultracon Opinion is a programmer/analyst from Kansas City. 

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