Peter Schiff: The Fantasy of a 91% Top Income Tax Rate

Wall Street Journal: Peter Schiff: The Fantasy of a 91% Top Income Tax Rate

I'm not making a case either way about the battle over the tax increases on the wealthy currently being debated. Strategically, I think the Republicans would have been better to compromise on the tax rate increase. That would put the question squarely back on spending and entitlement reform, where the central focus of the discussion should be. As it is, they just hand the President and the Democrats a populist club to beat them with.

Still, this article does a great job of debunking comparisons of tax rates from different eras.

A liberal article of faith that confiscatory taxes fed the postwar boom turns out to be an Edsel of an economic idea.

Democratic Party leaders, President Obama in particular, are forever telling the country that wealthy Americans are taxed at too low a rate and pay too little in taxes. The need to correct this seeming injustice is framed not simply in terms of fairness. Higher tax rates on the wealthy, we're told, would help balance the budget, allow for more "investment" in America's future and foster better economic growth for all. In support of this claim, like-minded liberal pundits point out that in the 1950s, when America's economic might was at its zenith, the rich faced tax rates as high as 91%.

True enough, the top marginal income-tax rate in the 1950s was much higher than today's top rate of 35%—but the share of income paid by the wealthiest Americans has essentially remained flat since then.

In 1958, the top 3% of taxpayers earned 14.7% of all adjusted gross income and paid 29.2% of all federal income taxes. In 2010, the top 3% earned 27.2% of adjusted gross income and their share of all federal taxes rose proportionally, to 51%.

So if the top marginal tax rate has fallen to 35% from 91%, how in the world has the tax burden on the wealthy remained roughly the same? Two factors are responsible. Lower- and middle-income workers now bear a significantly lighter burden than in the past. And the confiscatory top marginal rates of the 1950s were essentially symbolic—very few actually paid them. In reality the vast majority of top earners faced lower effective rates than they do today. …

… It's hard to determine how much otherwise taxable income disappeared through tax shelters in the 1950s. As a result, direct comparisons between the 1950s and now are difficult. However, it is worth noting that from 1958 to 2010, the taxes paid by the top 3% of earners, as a percentage of total personal income (which can't be reduced by shelters), increased to 3.96% from 2.72%, while the percentage paid by the bottom two-thirds of filers fell to 0.51% in 2010 from 2.7%. This starker division of relative tax burdens can be explained by the inability of upper-income groups to shelter income.

It is a testament to the shallow nature of the national economic conversation that higher tax rates can be justified by reference to a fantasy—a 91% marginal rate that hardly any top earners paid. …