Marginal Argument

You may have noticed that I haven’t posted on the brouhaha about claims about tax rates in the 1960s which has drawn in not just newly-elected Congressional representatives but Paul Krugman. I have the utmost of respect for Paul Krugman as an economist but much less in his political judgments and, let’s face it, politically he’s a weathervane. Whether he supports or opposes something depends on what the prevailing wisdom among the Democratic leadership is at any given time.

The reason I haven’t posted on it is that there are so many things being said that are untrue or half-truths it’s hard to know where to begin. The top marginal tax rate in 1960 wasn’t 70% it was 91%. Only a handful of families paid it—something like the top .002% IIRC. Those paying a rate of 70% weren’t a lot more numerous. Something like the the top .01% of income earners.

And—a key point—the effective tax rates being paid were about the same as today. What Americans have been willing to pay in taxes has been tremendously persistent over time, not just the last ten or twenty years but for at least the last 80 years or even longer.

The bottom line is a top marginal rate of 70% would be very, very difficult politically to effect and it won’t bring in nearly as much as either the proponents or foes are claiming. Try again.

One final word, something I’ve mentioned before. In 1960 the top 1% of income earners held 9% of wealth. Today they have 40%. Opinions can differ but I don’t think that’s due to unions, tax rates, or the inherent gifts of the top 1% of income earners. I think the change is due to a web of government policies that include tax policy, trade policy, immigration policy, and many, many others. I don’t think we can maintain a society of social equality in the presence of such stark inequality in wealth. Maybe I’m wrong. We’ve spent 80 years weaving that web of policies and it will take us at least that long to unweave them, its beneficiaries fighting to the death every step of the way.

9 comments… add one
  • Andy

    That’s my understanding as well, though I haven’t been able to find good data that goes before 1979.

    https://www.taxpolicycenter.org/statistics/historical-average-federal-tax-rates-all-households

    I have read, though, that at the peak effective tax rates were around 45% in the years after WWII.

  • Yes, when the country is fighting for its survival we will temporarily put up with a higher effective tax rate. We’ll also put up with rationing and a lot of our young men being killed. We are not presently fighting for our survival.

  • Guarneri

    Your paragraphs 3 and 4 say it all when it comes to taxes. I doubt the AOC’s of the world have a clue. Others expressing support are just dishonest.

    As for what to do about income inequality, I just don’t know, although I share the general concern. Increasing marginal rates fails. You could try to tax capital, which is where so much of the wealth gains have been derived, but that is almost suicidal. Better to abolish the Fed and their bubble making.

    I’ll bet the most effective approach would be to put a stop to the very wealthy using government to benefit themselves, whether that’s regulatory, monopoly, military industrial complex or bailouts. But neither party is up for that. They are fighting Trump with everything they have to avoid upsetting their cushy deal. And the people are too easily suckered in by false promises of free stuff to improve their lot at the expense of their neighbor. Just look at progressivism/socialism.

    These things tend only to get rectified by crises.

  • I’ll bet the most effective approach would be to put a stop to the very wealthy using government to benefit themselves, whether that’s regulatory, monopoly, military industrial complex or bailouts. But neither party is up for that. They are fighting Trump with everything they have to avoid upsetting their cushy dea

    As I have pointed out to Steve from time to time although the top .01% or top .1% are easier targets the top 10% are just as big a problem and a lot of that top 10% are firefighters, police officers, physicians, college professors, etc. who depend on the government paying them for their livelihoods. Individually, these people don’t have as much clout as those in the top .01% or top .1% do but in aggregate they have considerable clout as is illustrated by how government at all levels actually spends money.

  • Guarneri

    Tell me about it. I doubt few remember, but in a comment a while ago I pointed out that bell shaped and high GINI coefficient income and wealth distributions exist everywhere. We always have the very well off, and the very poor.

    Unique to the US seems to be a bump in that curve, above middle class but below wealthy, the so called upper middle class if you will. Some are the people you just cited, non-wealthy benefactors of government policies. Some come by it purely honestly.

    The question becomes how to separate those two. We already know we are going to subsidize the poor. Rightly or wrongly. Effectively or not. We already know the very wealthy will insulate themselves. How do we deal with the upper middle class who are taking from government, while not harming the upper middle class who are upwardly mobile on their merits?

    Just look at voting patterns and you know you have a real conundrum.

  • Unique to the US seems to be a bump in that curve, above middle class but below wealthy, the so called upper middle class if you will.

    It’s not quite unique. In many countries, particularly in MENA, 90%+ of those with college educations work for the government.

  • Andy

    You “only” need about $115k/year income to be considered in the top 10%.

  • Andy

    I meant to add that two middle-tier government employees can easily get above that. It was certainly true in my case back when I was a GS Employee (and reservist) and my wife was an active duty Officer.

  • Andy

    But also, one thing I learned from living in many different parts of the country is that $115k/year is not equal in all places – it could easily be considered “middle class” in DC or NY or very rich in poorer and rural areas. The housing cost differences alone are massive.

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