Tax the Rich More (Like We Used To)

It’s taken for granted that taxes are too high. We forget that by historical standards, taxes on the rich are low – very low.

It’s common to hear that taxes are too high. Nobody enjoys parting with their money, so it’s no surprise that we almost never hear people asking to pay more to the government. Even when politicians suggest tax increases, they use euphemisms and circuitous language, arguing for fair taxation or and end to subsidies for the rich.

The premise of the current narrative is simple: the rich (job creators) must not be taxed too much, otherwise, they will not hire people and make the investments necessary for economic growth. Neither the Democrats nor Republicans are proposing an increase in taxes for the lower and middle classes, so for this election cycle, a fundamental question is, how much should the rich pay in taxes?

The US federal government operates under a marginal income taxation system. This means that, assuming you are single, for the first $8,700 of income, everyone pays 10%. Everything in between $8,700 and $35,350 is taxed at 15%. The highest tax rate of 35% does not even kick in until you are making more than $388,351. There are currently six tax brackets and corresponding rates, as shown below.

Let’s take a look at the historical data as provided by the non-partisan Tax Policy Center. A top marginal tax rate of 35% is about as low as it has ever been. The only other time (since the Great Depression) that the rate dipped below our current levels, it was clear that the rate did not generate enough revenue and had to be increased. In hindsight, the relatively successful presidency of George H. W. Bush was cut short because he, in order to have a more balanced budget, reneged on the promise not to raise taxes. The following graph is a bit of a wake-up call to all the fear mongers that equate a return the a 39.6% top marginal tax rate with socialism.

If a 39.6% top marginal tax rate is socialism, then the Greatest Generation were a bunch of left wing radicals (what with their 91% top marginal income tax rate and all) and the post WW2 economic boom was an accident. Our country’s Golden Age was exemplified by a federal government that was active in the redistribution of wealth and the promotion of economic growth. And there was tremendous economic growth, in spite of high taxes.

I am not arguing for a return to 91%, but we must stop pretending that increasing the top marginal rate by a few percentage points is going to be the end of the world. Even 39.6% is low by historical standards. Any realistic conversation about deficit reduction must be accompanied by plans for tax increases.

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