It is important to remember that one of the greatest periods of American progress occurred under a top income tax bracket of 70% or more.
Many opponents of income tax view any call to return the top bracket to pre-Reagan era levels as theft or “government greed”. But they also ignore one of their own myths: when taxes go down, tax revenue goes up. If that were 100% true, then wouldn’t “government greed” mean lowering taxes to get the revenues up?
But the truth is that that myth was only true for a specific period – the Reagan tax cuts.
See, when the top bracket was being taxed at 70% almost nobody actually PAID 70% in taxes. If they did, it was probably an accounting mistake and they made sure never to do it again. I mean, who in their right mind would want to make so much money just to have 70% of those top gains taken away?
Quick aside: At no time was 70% of a person’s income taken. That isn’t how income tax works in the US. It’s done in brackets, such that the first X1 dollars is taxed at Y1%, and then the money from X1+$1 to X2 dollars is taxes at Y2%, and so on. So the 70% rate only applied to the money above, say, X5+$1. In 1981, the last time we had a 70% bracket, it applied only to income over $108,000 for an individual ($215,000 for married filing together). In today’s money, that’s equivalent to about $299,000 ($594,000 for married), per year.Here is a document on tax brackets. And here is a calculator to get today’s dollars.
It literally only applied to the highest income earners, and even would today. How many people do you know who make over $299,000 a year? How many families do you know “scraping by” on $594,000 a year?
Now, 70% wasn’t the only high bracket, just the highest. There were other brackets at 50% and other rates, but from here on out we are going to be talking generally about high rates, keeping in mind that today, for 2018, the highest rate is 37% on income over $500,000 for individuals, $600,000 for joint filings (which also means that rich people are more likely to file separately since all the benefits of joint filing – which poorer people and the middle class tend to do – are gone).
So what exactly was the purpose of those higher brackets?
To answer that question, you need to understand what an economy is and what it isn’t. An economy is not money. When the president of the US talks about GDP or GNP or other sums of money as a representation of the health of the economy, he’s wrong. (I mean, Trump is pretty much always wrong, but here he is definitely wrong.) An economy is actually the movement of money. A simple illustration: You having $100 in your hand is not an economy, but you handing $100 of your money over to someone else for a good or service is an economy. It isn’t the money, it’s the exchange of money.
See, you give your $100 to buy… a lawn mower, then you use that mower to mow lawns, for which you are paid money, and then you spend that money to buy gas and food, which keeps you alive and your lawn mower running so you can mow more lawns, and earn more money, and go to the movies, and so on.
An economy is the movement of money… or, more abstractly, value, but we will stick with money.
Back to the brackets. High tax rates create an artificial ceiling to earnings. If you were in 1981 and making $100,000 as a single person, and your boss said “I want to give you a raise to $200,000!” you would be LIVID! And I mean ANGRY! Because your boss was going to give your an extra $100,000 a year, but the government was going to take 70% of it! So instead, your boss, knowing that giving you money wouldn’t work out so well for you, would instead give you access to the company private jet, or the company ski lodge, or the company bungalow in Hawaii, and 2 extra weeks of paid vacation in which to utilize those benefits. Because remember, in 1981 at $100,000 you were probably the CEO or a Vice President of the company. Regular schmoes didn’t make that much in 1981. That’s nearly $300k in 2018 dollars.
Even so, your boss, or the board, or whoever, even after giving you those cool benefits still have all this money they earned because you are an awesome CEO, and they can’t take them as profits either, for the same reason. If they take huge profits, the government is just going to take 70% (or some other rate). And who wants to give government all that “free money”?
So what does the company do with all this cash they don’t want to take as profits? Well, they invest in a pension plan, and healthcare benefits, and a new office building, better wages or bonuses for all the people who aren’t brushing up to that 70% scam tax rate yet. They offer company cars to employees. They start a scholarship program, or donate to build a wing of a local hospital, or back the city orchestra, or a thousand other things. They spend that money back into the economy – and I say spend because even if they choose “donate for a wing at a hospital” that money is going to pay for building supplies and construction workers and keep moving. And the movement of money is the economy.
So what happens without higher tax brackets?
After 1981, the Reagan administration begins scaling back the tax brackets. By 1988 there are just two brackets: 15% and 28% with the dividing line being just under $30,000 (about $69,000 in 2018 dollars). So up to the line you paid 15% and anything over that line you paid 28% on.
The effect that this had on wages is huge. Suddenly, a board wanting to pay their high performing CEO a huge salary isn’t impeded by a high tax rate. You can pay him $500,000 a year. You can pay him $1,000,000 a year. You can pay him $10,000,000 a year. And the government is just going to take their 28%. This brings us back to the myth, that decreasing taxes raises revenue. See, as the tax rates went down, monetary compensation went up, which increase the base from which taxes are drawn. There was no artificial ceiling to wages anymore. So since the wage base grew, tax revenue grew. But here in 2018, when the tax rates are going from 39% to 37%, the US isn’t going to see an increase in tax revenue. It’s probably going to see a 2% drop because compensation isn’t going to increase enough to make back even that lost raw 2%. That ship has sailed. The ceiling is gone.
And with the ceiling gone, it also meant that companies were no longer “encouraged” to spend their potential profits back into the economy. So the pensions went away, and healthcare benefits are slimmer every year, and companies try to cram as many people into as small a space as possible, they pay lower wages, give lower raises, and more, all to maximize profit, which they feel good about taking, because the government isn’t going to get 70% of it. In fact, with a good accountant, most companies will pay the minimum, which is around 20-22%. (Note: lots of rich people are actually “corporations” on paper, so even though the highest tax bracket in 2018 is 39.6%, most wealthy folks pay the 20-22% corporate rates – which is a smaller percentage than most middle class families will pay.)
With more money going to higher compensation for people at the top, it also has a “trickle down” effect of ruining the economy. An economy is the movement of money, and a person who makes 300 times as much as the average worker isn’t also consuming 300 times as much economic value. They don’t eat 300 times as much food (sure, they may eat pricier food, but a $100 steak is not 300 times as much as the $20 steak the average person eats at a restaurant), they don’t buy 300 times as many clothes, or buy 300 times as many cars or own 300 times as many houses. They do consume more individually, but their contribution to the economy as a whole is actually less than if that money were spread out among 300 workers. So a portion of the money they earn is going to leave the economy, to sit in a vault or a bank, or possibly worse, to invest in money markets where money makes money but doesn’t make the same amount of capital investment it could if it were being directly invested into things. I say this is “worse” because it has the effect of allowing the person to feel like they are contributing to the economy without doing so in a real way, so they think they aren’t part of the problem.
Could we return to higher tax brackets?
We probably should. All the math, the research, and the history shows that the economy and the US would likely be better off with higher taxes – not to collect more tax money, but to discourage wealth hoarding. But the political will isn’t there yet.