Economics, Taxes and Spending

Why we can’t go back to sky-high, 1950s tax rates

It seems so simple. The 1950s was a decade of high economic growth and high tax rates. So why not go back to those tax rates and also return to an economic Golden Age? Higher taxes would, theoretically, generate more tax revenue to reduce budget deficits or finance new social programs to reduce income inequality. And as the 1950s example shows, the economy can do just fine if rich folks pay a lot more to Uncle Sam—even a whole lot more.

Sounds good to David Levine, former chief economist at Sanford C. Bernstein and a fellow, according to The Washington Post, who wants to put tax policy in a souped-up DeLorean and go back to the future! “I was a kid in the 1950s,” says Levine, “and the whole time, the top marginal tax rate was 87 percent.” Levine is a supporter of Responsible Wealth, which is, according to the group’s web site, “a network of over 700 business leaders and wealthy individuals in the top five percent of income and/or wealth in the U.S. … Their message is simple, and surprising to some: we can afford to pay more; we don’t need any more tax breaks.”

The top marginal tax rate was 91% during the 1950s. Here’s why we can’t go back:

1. The 1950s was no Golden Age. The U.S. economy grew by an average of 3.4% a year between 1948 and 2007. How did the 1950s do in comparison? If you measure the 1950s from 1950 to 1959, it did a bit better than average, growing at an annual rate of 3.6%. If you measure the decade from 1951 to 1960, it grew at a below average 3.0% rate. The period also saw three recessions, July 1953-May 1954, August 1957-April 1958, and April 1960-February 1961. Now, overall, it was a strong period for the economy, especially for folks with still-fresh memories of the Great Depression. But recall that John F. Kennedy’s 1960 presidential campaign said he would “get this country moving again.” That’s a slogan a politician uses after a decade of stagnation, not hypergrowth. (Of course, JFK sharply cut taxes and the economy boomed.)

2. Real tax rates were a lot lower. Even Levine concedes that “not many people paid that much. Only three baseball players — Ted Williams, Joe DiMaggio and Willie Mays — got there.” Indeed, the top effective tax rate was probably somewhere between 50-60% because of a tax code full of loopholes. Now, that’s still higher than today’s top effective tax rate of around 30%. But those 1950s tax rates actually generated less tax revenue than subsequent periods of lower rates. From 1950 to 1963, income tax revenue averaged 7.5 percent of GDP; that’s less than in the Reagan years when rates were being slashed. This could suggest that rates are right around the Laffer Curve equilibrium point in the current economy. Indeed, the following chart from the WSJ makes this calculation over a variety of time periods:

3.  The post-war U.S. economy was in an incredibly strong international position. Did the the “91% or Bust” crowd forget about World War Two? A National Bureau of Economic Research study described the situation this way: “At the end of World War II, the United States was the dominant industrial producer in the world. With industrial capacity destroyed in Europe—except for Scandinavia—and in Japan and crippled in the United Kingdom, the United States produced approximately 60 percent of the world output of manufactures in 1950, and its GNP was 61 percent of the total of the present (1979) OECD countries. This was obviously a transitory situation.”

When you’re as dominant as the U.S. was, it papers over a lot of bad economic policy coming from Washington. Today, of course, America competes with a slew of strong, technologically advanced economies including the EU, China, and Japan.

4. Even economists who argue for higher tax rates don’t want to go back to the 1950s. The New York Times just ran a profile of economists Thomas Piketty and Emmanuel Saez, who are very influential on the left and with the Obama White House. The piece summed up their views: “As much as Mr. Piketty’s and Mr. Saez’s work has informed the national debate over earnings and fairness, their proposed corrective remains far outside the bounds of polite political conversation: much, much higher top marginal tax rates on the rich, up to 50 percent, or 70 percent or even 90 percent, from the current top rate of 35 percent.”

So 91% or bust? Not so fast. Here is Piketty in another interview:

Does the fact that the United States did it in the past necessarily imply that we should immediately return to 80-90 percent top marginal rates? Of course not. … It could be that the right level is 70 or 60 percent. … Most importantly, I said very explicitly that I was talking about very, very high incomes, and that at least 99.5 percent of the population would be unaffected by this new top rate. … I firmly believe that imposing a 70 or 80 percent marginal rate on large segments of the population (say, 25 percent of the population, or even 10 percent, or even a few percentage points) would lead to an economic disaster. And I made very clear that the reason I propose to focus on the very top end because this is where the labour market and the pay determination process are not working properly—or, more accurately, have completely gotten out of hand.

And, of course, an ultrahigh tax rate on an initially small slice of the population, like Obama’s Buffett rule imposes, would neither raise very much revenue nor do anything to create jobs. And look at what just happened in Great Britain. Their Independent Fiscal Oversight Commission—which reviews all of the budgetary assumptions—just ruled that cutting the top rate of tax from 50 to 45 was revenue neutral, implying the revenue maximizing rate is in that range. The Brits don’t have state income taxes, which implies by extension that our revenue maximizing federal rate is lower than theirs—a whole lot lower than 70, 80, or 90%.

Back to the 1950s? Forget it. We need pro-growth tax reform that will get this country moving again.

17 thoughts on “Why we can’t go back to sky-high, 1950s tax rates

  1. It is important to remember that this was the time of Bretton Woods where the dollar was stable. This was a period of low inflation. And with the removal of exchange rate risk businesses were able to establish long term contracts.

  2. “At the end of World War II, the United States was the dominant industrial producer in the world. With industrial capacity destroyed in Europe—except for Scandinavia—and in Japan and crippled in the United Kingdom, the United States produced approximately 60 percent of the world output of manufactures in 1950, and its GNP was 61 percent of the total of the present (1979) OECD countries. This was obviously a transitory situation.”

    Other nations weren’t growing then largely to the political constraints imposed by Bretton Woods, as well as the lack of Keynesian economic policy.

    The US wasn’t the only economic power soaring; West Germany, Sweden, New Zealand, Japan, Great Britain, France, and Canada were all booming during the post-war era. All of these countries had at the time strong unionization, high tax rates, strong public investments, and the basic bargain linking pay to productivity.

  3. This post is nuts. Everyone knows that in the 40s and 50s people didn’t pay even half of the % of tax required because shelters were all the rage. Im tired of people who pay NO taxes telling me I should pay more taxes… Oh and that I should pay more for my health care if I make more money?!?!? What the hell is wrong with people?

    • You are absolutely right. My own grandfather, who was pretty well-to-do, invested in order to acquire not profits but losses – through things like energy limited partnerships. He also built a farm as a as a tax-shelter.
      High taxes create a perverse mindset of generating business expenses for their own sake because – what the hell, the government gets pretty much all the money if you don’t.

  4. Ofcourse over simplified answers are never good although the big picture may be illustrated with the game “monopoly”. We seem to be at the stage of the game where it is clear who are the winners and losers and the end of the game is soon. The question should be how can we keep the game going and if the winners take all, can they sleep at night?

    • “We seem to be at the stage of the game where it is clear who are the winners and losers and the end of the game is soon. The question should be how can we keep the game going…”

      My question is, when you can see how one-sided it is, how tilted it is in the direction of the already-overprivileged, why on earth would you WANT to keep the game going? It’s a rigged game that benefits a tiny percentage of the population. Unless you’re part of that uppermost 1% to 5% you’re working against your own interests to keep the game going. A better question is “What can we replace this horrific wage slavery economic model with that will benefit the vast majority of the population rather than a tiny slice of it?”

      The answer to that is direct worker ownership of the businesses, where every worker is a part-owner of his workplace, getting a share of the profits and able to elect his managers. Where finally workers have an incentive to work harder because they’re finally getting something out of their extra effort besides just more fatigue rather than working their guts out to make someone else richer.

  5. The problem is we aren’t asking for 1950′s tax rates dipsh*t. We are asking for Bill Clinton like rates. Just shut up! Please! Your killing us.

  6. I’ve been hearing this catchphrase from liberal friends the last few weeks about 91% tax rates during “prosperity”. I simply respond that I’m fine with returning to 1950′s tax laws if we also return to 1950′s spending (especially entitlement spending) levels as well.

  7. The universal, democratic prosperity that Americans now look back to with such nostalgia was achieved only by a colossal reigning in of markets, by the gargantuan effort of mass, popular organizations like labor unions and of the people themselves, working through a series of democratically elected governments not daunted by the myths of the market.

    We may have democracy, or we may have wealth concentrated in the hands of a few, but we can’t have both.

  8. Eisenhower would be a progressive in today’s Republican Party.He set the stage for growth & efficiency through infrastructure spending.The expansion of the US highway system was a brilliant project for interstate commerce & trade expansion.

  9. Great article. The other point is, if taxes were raised on the rich with Obama in office, the revenue wouldn’t go for deficit reduction, it would just mean more spending.

  10. After reading the article and the numerous posts, it puzzles me why noone cited what these supposedly economic crushing taxes were used to initiate for all americans, especially those in business. The interstate highway system. This massive undertaking created jobs all over this country, it provided wealth to those in business on a number of levels; expaning markets, creating new opportunities for business, as well as giving rise to increased tourism. Its hard to argue that taxes paved the way for for increasing economic growth. Its not the taxes, its how they are used.

  11. The highest tax rate needs to be raised to about 50%, but also the loopholes need to be eliminated and the minimum wage needs to be raised to $15 per hour at least so that more people can participate in economic process.

    • Larger corporations with high profit margins could be targeted with a $15 per hour minimum wage but across the board…. That would kill the smaller guys and increase prices for consumers. Before any of this can be implemented, the trade imbalance needs to be fixed; corporations manufacturing in other countries should sell to those countries and not be allowed to import those products back home where they closed their plants. NAFTA, as we thought in the beginning, isn’t working for us at home. Other nations only benefit from us in too much of a big way while our markets collapse. We must begin to produce what we consume and you will see jobs like chickens in a Tyson barn yard.

  12. The problem is that our ultra-wealthy are paying 11% average Fed rate, while the 1%-0.1% are paying >30%. Supply side didn’t work. It was a sham created by the 0.01% for the 0.01%. Trickle down has sucked massive amounts of wealth out of middle-class households and into the pockets of the 0.1%. All the wealth has trickled UP. Tax code is the primary way (among others) to re-balance our socioeconomic emergency, but (as Piketty says) we can’t do it unilaterally. It’s called “tax competition” — many countries followed America’s lead in drastically lowering marginal rates for the aristocratic class. Now we’re effectively screwed. If one country goes back to 40-50% on the highest earners, they will leave that country for another low-tax haven. We’re screwed, class-wealth continues to become massively imbalanced (it hasn’t been this our of whack since 1929), and there is effectively nothing we can do to stop it. Frankly, the western free-market is headed for a socioeconomic train wreck the likes of which we have never seen.

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