Think Obama's Tax Hikes Are Low Compared With Rates Of The 1950s? Think Again


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Think Obama’s Tax Hikes Are Low Compared With Rates Of The 1950s? Think Again
By Amity Shlaes
Posted 01/04/2013 06:10 PM ET
Investors.com

Of course, 2013 will be fine, because the 1950s sure were. That’s the premise for the coming year, especially in regard to the agreement in Washington to raise tax rates on the well-off.

In the 1950s, after all, tax rates were far higher than what the House and Senate have agreed on, a top rate in the high-30% range. Back then, they were even higher than what President Barack Obama might have proposed, if left to his own counsel.

Unfortunately, the tax situation wasn’t what it seemed. The illusion commences with that famous 1950s top rate of 91%. Official rates matter, but so do effective rates, the percent of income that people actually pay in tax. The Internal Revenue Service reckoned the effective rate of tax in 1954 for top earners was actually 70%.

Or lower. Marc Linder, a law professor at the University of Iowa, has shown that a more comprehensive interpretation of income that includes capital gains suggests the real effective tax rate for millionaires was 49% in 1953. The effective rate dropped throughout the decade, reaching 31% by 1960.

A second fantasy about the 1950s is that government soaked the rich. Joseph Thorndike and Martin Sullivan in Tax Notes magazine took a look at the tax distribution of the decade. They found that those earning more than $100,000 paid less than 5% of the taxes collected in the U.S., a far smaller share than the wealthiest shoulder today.

A third aspect of the 1950s, and one that differs from today, was that taxes then were headed downward — there was “directional stability.” Everyone understood that taxes were dropping, at first, modestly or unofficially, through loopholes, then officially in the rate cuts of the early 1960s under Democratic Presidents John F. Kennedy and Lyndon Johnson.

A final reason that the 1950s were different from today was American primacy. In those years the U.S. might set its taxes, nominal or real, at whatever level it liked.

The only competition it confronted, after all, was from Europe, still recovering from World War II, or Britain, whose tax regime was even more confiscatory than our own. Now, however, the U.S. must compete. And this is where the U.S., with some of the world’s highest corporate taxes, flunks.

An excellent summary of why simply looking at 1950s and 2013’s tax rate numbers will lead to a very wrong conclusion. It’s important to realize that Shlaes’ four “reasons” each had individual effect and were mutually reinforcing.