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Upside of Inequality Oxford Unintended Consequences

AI Summary. Despite top marginal tax rates of 70–91% in the 1960s, the superrich paid an average federal tax rate under 30%, and the all-inclusive rate on the top 1% today is only about 6 points lower than in the post-war decades. Little is known about how higher rates affect long-term taxpayer behavior.

James Pethokoukis American Enterprise Institute
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Taxes on the rich were not much higher in the 1950s. Despite top tax rates ranging from 91% to 70%, the superrich paid an average federal tax rate of less than 30%. @JamesPethokoukis

Did high top tax rates actually make the rich pay much more?

Core argument: Despite top statutory tax rates of 70–91% in the 1960s, the superrich paid an average federal tax rate of less than 30%, and the all-inclusive rate for the top 1% today is only about 6 points lower than in the post-war decades.

In the 1960s, despite top tax rates ranging from 91% to 70%, the superrich paid an average federal tax rate of less than 30%. The all-inclusive tax rate for the top 1% today is only about 6 points lower than in the post-war decades. The US economy then was bolstered by factors beyond tax rates, such as post-war economic dominance, productivity advances from the 1920s and 1930s, and strong labor force growth. Concerns about the economic impact of higher tax rates remain, as little is known about their long-term effects on taxpayer behavior and economic dynamics. Reducing the potential for wealth accumulation through high taxes could influence risk-taking and career choices, which are crucial for economic growth.

Takeaways by Macro Roundup® AI

  1. Despite top statutory tax rates of 70–91% in the 1960s, the superrich paid an average federal tax rate of less than 30%, and the all-inclusive rate for the top 1% today is only about 6 points lower than in the post-war decades.
  2. The post-war US economy was bolstered by factors beyond tax rates, including post-war economic dominance, productivity advances carried over from the 1920s and 1930s, and strong labor force growth.
  3. Little is known about the long-term effects of higher tax rates on taxpayer behavior and economic dynamics, and reducing the potential for wealth accumulation through high taxes could influence risk-taking and career choices that matter for economic growth.

James Pethokoukis, "Before we consider cranking up tax rates, let’s have a smart debate," American Enterprise Institute, January 7, 2019, https://www.aei.org/economics/before-we-consider-cranking-up-tax-rates-lets-have-a-smart-debate/

Before we consider cranking up tax rates, let’s have a smart debate

It now seems there’s going to be a national conversation about whether top federal tax rates should be dramatically higher. And for that you can partially credit first-term House member Alexandria Ocasio-Cortez — as well as the extreme media attention given to her every policy utterance. But only partial credit here. At a time of a) high national debt that’s heading even higher, and b) increased inequality — including the creation of some truly massive personal fortunes — it’s a discussion that was probably inevitable.

Before we consider cranking up tax rates, lets have a smart debate: Extended Excerpt Image 1


And here’s hoping that discussion is informed and substantive. Unfortunately, early signs give reason for doubt. For instance: Pointing to past periods in American economic history that experienced both high individual marginal tax rates and strong economic growth is hardly dispositive. Not many people paid those high marginal rates or anything close. During the 1960s — a period when the top tax rate varied between 91 percent and 70 percent — the superrich paid an average federal tax rate of less than 30 percent. More broadly, notes the Tax Foundation, the all-inclusive tax rate (federal, state, local) is only about a half dozen points lower today for the top 1 percent of taxpayers than in those immediate post-war decades.

And there was a lot more happening back then with the American economy and growth than just the impact of tax rates, whether good or bad. Spared the ravages of war, the US was the planet’s economic colossus. It also benefited from a wave of productivity advances in the 1920s and 1930s that didn’t fully play out until after the war. Finally, unlike today, economic growth during those decades was greatly helped along by demographics in the form of strong labor force growth.

Also worrisome: the frantic hand-waving away of concerns about the possible unwanted economic impact from much higher taxes rates. Little is understood about the long-term impact of very high tax rates on taxpayer behavior and the economy. Those are as important as they are hard to measure. America, in particular, benefits greatly from people who take risks and make career choices influenced to some degree by hopes of striking it rich. “Significantly reducing that possibility by hitting those individuals with extremely high income taxes is of first-order importance in determining the optimal top tax rate,” my AEI colleagues Aparna Mathur, Sita Slavov, and Michael Strain argue in their 2012 research note “Should the Top Marginal Income Tax Rate Be 73 Percent?”

But it’s early, and as this debate continues perhaps the quality will improve.

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