Us News and World Report – the United States is often presented by the Left as a horrible shift away from the high levels of tax progressivity that characterized the tax system in the mid-20th century. This conventional account points to top marginal tax rates that were over 90% for the wealthiest Americans in the 1950s and remained at 70% until the sweeping tax reforms of the Reagan era, and more recently under the Trump Administration. Many on the left say we should get back to these 90% rates as before.
Let’s take a deep dive into this question and find the reality of the taw situation in the US. Statutory tax rates can be misleading for two reasons. First, they do not tell us the rate that top earners actually pay, which tends to be significantly lower due to a wide array of deductions, exemptions, and other legal loopholes. To illustrate this second point, let’s consider another set of statistics. Since 1979 the Congressional Budget Office has tracked the overall share of federal income tax liability paid by the top earners. These figures include the top 1% and top 10% of all taxpayers and show a marked increase in tax burdens of the rich since the start of the data series.
Today, tax rates at the highest bracket are at 37% (single making more than $510,300 per year). Let’s study the inset chart here. On the top chart, we can see that it is true that the top headline Federal tax rates have fallen from 90% to 37% today. Are the rich getting a break? As stated before, one can not just look at the headline rate. When looking at the actual taxes paid, the burden of tax has historically been shifting significantly toward the high-end earners – see the middle chart. Finally, take a look at the bottom chart. Since WWII Federal taxes as a percent of GDP have been flat (around 20% of GDP), though again, the tax burden has shifted to the wealthy. But on this bottom chart, something else has been happening that should be noted. Local and, more importantly, State taxes have skyrocketed. Since WWII, total Federal, State, and Local taxes have gone from about 25% to about 40% of GDP today. Wow!
So don’t be fooled by leftist Democrats cherry-picking tax numbers, without setting them in proper historical context for political gain. Courtesy of Deteuche Bank, they have put together the inset chart here on proposed top-line rates by each president’s plan. Quite shocking numbers when looking at some of the 2020 presidential candidate’s ideas! Now I get it – who wants to pay taxes? Who doesn’t like to blame the rich for our own problems? Aside from the Robinhood morality of robbing rich to pay the poor – does it make sense in the end? To answer this question, first look at this short video of “A Tale of Three Brothers,” and we will tell the rest of the story that the video does not:
What the “A Tale of Three Brothers” story does say is what actually happens to Harry (the richest of the three brothers). If one raises the tax rates to the degree that many on the far left wish, one of two things will happen. Harry will either (1) quit and join his other two brothers – thereby sucking any productivity out of their economy. Or (2), leave and pull his productive capability from their economy.
Many governments in Europe have already tried this “tax the rich” approach, and it didn’t work – so much that they rescinded the policies. Do we in the US want to give it a try too? Remember the catastrophic economic policies of Alexandria Ocasio-Cortez over Amazon’s canceled HQ2 in New York City?
Here is the bottom line for our leftist Democrat friend’s ideas, as paraphrased from the words of Winston Churchill, “A nation can not tax itself into prosperity – it is one of the crudest delusions which has ever fuddled the human mind.” Got it now?