This subject has been explored by others and proven to be a myth but let us dispense with a few numbers just to arrive at some truth in this matter.
First, the lowest tax rate in 1950 was $4,000 or $38,421 in today’s dollars. In 2011 lowest tax bracket is $17,000. A $21,421 difference in those eligible to be taxed. This is more than 20% of the population eligible to be taxed today that were not subject to federal taxes in 1950. In 2009 the lowest fifth of American households made $20,453 and the next fifth made $38,555. To put it bluntly the government is taking resources from millions more people in the poorest 40% of wage earners.
Second, in 1950 the top tax rate was $400,000 or $3,842,000 in today’s dollars. The top 5% today made $180,001 in 2009. The top 1% earned $380,354.
I guess there is someone out there who makes $3.8 million a year but they certainly are a rare species. The point being the top tax rate was 84% in 1950.
Does anyone think someone, anyone, paid 84% of their marginal income to the IRS back then?
Do we have any records of this occurring?
Maybe a handful of Hollywood stars?
Most likely if anyone was close to that tax bracket they would take generous vacation, medical, real estate, business travel, and other deductions to get in a lower bracket. One assumes the select few who had that type of earning ability in the 1950s were talented enough to avoid the tax man.
Third, if you take Obama’s definition of “rich” to be $250,000 in today’s dollars that would translate to about $26,027 1950 dollars. The tax rate in 1950 for $24,000 to $28,000 was 39.13% with zero deductions. The average total deduction reported as a percentage of adjusted gross income in 1950 was 12.2%. This would move the income taxed to $22,852 or a tax rate of 34.58%. Today someone making $250,000 would pay 33% or $82,500.
In 1950 the household would pay $7,902 or $75,899 in today’s dollars. Assuming the same deductions the taxpayer today would pay $72,435. Some economist like Peter Schiff of Euro Pacific Capital have researched this more extensively and have stated that the deductions from 1950 were far more generous than today. Still the similarity in tax rates from 61 years ago to today is amazing.
Fourth, the percent of consumption by the federal government of the GDP, according to the White House budgets own numbers, was 15.6% compared to 25% today. State, and local consumption of the GDP was 3.7% and 5.8% respectively compared to today’s numbers of 9.7% and 10.82%. Our government, at all levels, spends over $6.4 trillion or 45.5% of the GDP and compared to 25.1% back in 1950.
Fifth, Social Security consumed 1.6% of the GDP in 1950 and 6% today. That figure is scheduled to grow significantly as baby boomers born between 1946 and 1964 retire and draw benefits.
Finally it is important to understand the relationship between the size of government and economic growth. Robert Reich, former Clinton labor secretary and University of California professor, even admitted that annual economic growth between 1950 and 1981 averaged 3.7% and growth between 1986 and today has averaged 3.0%. Reich falsely attributed it to the “low” tax rates we have today. He choose 1986 for his comparison because that was the year Reagan lowered the top rate from 70% to 50% and finally 28% in 1988. He confused tax rates and percentages with actual taxes collected as a percentage of the GDP.
For a better explanation of the slow growth Andreas Bergh and Magnus Henrekson of Lund University, researched this phenomenon. The research cited tells us that annual growth is -0.5 percentage points to -1.0 percentage point lower if government share of the GDP rises by 10 percentage points. From 1950 to today it is clear the burden of government has increased from 25% of the GDP to 45%. That would certainly explain the reduced economic growth. Accounting for technology gains in productivity that offset the true negative effect the additional government consumption has had on the economy, the loss of economic growth attributable to the growth in the government share of the GDP is plain to see for any rational person.
Further expanding on Robert Reich’s misdirection, in the 1950s to the 1970, it was not uncommon for the economy to grow at 4.5% rate. From 1970 to 2000 the growth rate slowed to 3.6%, and finally in the 2000s under Bush and Obama growth is averaging a sluggish 2%. The lesson is clear; government destroys economic growth, prosperity, and tax collections by government, as measured by GDP consumption of resources, are at historic highs.