Has America Always Had an Income Tax?
Fact

The top tax bracket in the U.S. used to be over 90%.

Did Taxes Used to be Over 90% Under President’s like FDR and Eisenhower? Is the 90% Tax Rate a Myth?

The top marginal income tax rate was over 90% under FDR and Eisenhower, but the effective rate in those times ranged from roughly 0% – 60%. Meanwhile, the average total effective tax burden (all state, federal, and local taxes paid after deductions) for the top 1% of income in the 1950’s was about 42% (compared to about 36% in 2014 and less than 35% under figures Reagan and Bush).[1][2][3][4][5][6]

The bottomline: FDR’s top tax bracket was over 90%, but people didn’t pay the top federal income tax rate in that era, like in any era, people pay an effective rate (which is always less than the top tax bracket rate in a progressive tax system). Meanwhile, the federal income tax is only one of many taxes that comprise the total tax burden a person pays. If we want to understand the difference between FDR’s taxes and Reagan’s taxes, then we really need to consider all of this and more. The grand result is that Reagan taxed top incomes at lower rates than FDR, and thus the general idea behind the “90% talking point” is correct… However, the full story is much more complex than simply comparing FDR’s 90% top tax bracket to Reagan’s 28% top tax bracket. For the full story we have to consider the nuances of tax brackets, and state, federal, and local taxes paid after deductions including the capital gains tax, payroll tax, and estate tax, and then we have to look at the effects of this over time regarding spending, tax revenue, and the effects on society (in terms of assistance, equality, and economic growth).

The Federal Income Tax in the 1940s and 1950s

In terms of the federal income tax, rather than paying the full 90%, the top effective federal income tax rate was closer to 40% – 60% on average in the 1940s and 50s (the effective rate being what the highest earners actually pay in federal income taxes after deductions and with marginal brackets considered). Meanwhile, the average worker would have paid around 20% and many low wage workers paid less in this same time.

This can be understood by realizing that there were over 20 tax brackets in the 1940s and 50s that ranged from about 20% for the lowest bracket and 90% at the top (see how marginal tax brackets work in a “progressive tax system;” essentially a person pays the bracket rate on every dollar within a given bracket and those rates get higher as people earn more).

Lastly, to offer a few examples that illustrate why the bracket structure is also important to consider: The top rate of 90% plus was on dollars of over $200,000 (which is about $2.8 million adjusted for inflation) in 1944 with 24 progressive brackets (see image below for what this looked like), and that can be compared to a top tax rate of 28% on dollars over $59,000 in 1988 with 1 other bracket (a rather flat tax), and compared to a top rate of 39.6% on dollars over $403,000 in 2013 with 7 brackets (a sort of middle ground).

In other words, we don’t want to just look at the top tax rate, we want to look at the number of brackets, the dollar rate for each bracket, and the effective tax rate after deductions by income percentile!… then as you’ll see in the next section, we want to then compare those numbers with the total effective tax burden for all tax types that affect income and wealth!

History of income tax rates adjusted for inflation (1913-2010)
Number of First Bracket Top Bracket
Year Brackets Rate Rate Income Adj. 2014 Comment
1941 32 10% 81% $5,000,000 $79.86M World War II
1942 24 19% 88% $200,000 $2.75M Revenue Act of 1942
1944 24 23% 94% $200,000 $2.88M Individual Income Tax Act of 1944
1946 24 20% 91% $200,000 $2.41M
1982 14 12% 50% $85,600 $211k Reagan era tax cuts
1987 5 11% 38.5% $90,000 $186k Reagan era tax cuts
1988 2 15% 28% $29,750 $59k Reagan era tax cuts
1991 3 15% 31% $82,150 $142k Omnibus Budget Reconciliation Act of 1990
1993 5 15% 39.6% $250,000 $406k Omnibus Budget Reconciliation Act of 1993
2003 6 10% 35% $311,950 $398k Bush tax cuts
2011 6 10% 35% $379,150 $396k
2013 7 10% 39.6% $400,000 $403k American Taxpayer Relief Act of 2012

FDR and Reagan both taxed the average worker at about 25%, but Reagan cut taxes on the rich while FDR raised them. That is the main difference. As you can see the many tax brackets of FDR are complex, but they also treat different incomes differently (unlike Reagan’s short-lived 1988 plan).

TIP: The images and tables below offer more data, these charts above just cover some basics.

The Total Tax Burden in the 1950s Compared to the that of the 1980s and Today

With the above said, the effective federal income tax rates people pay is only a small part of the total picture!

To really understand the tax system of FDR’s time or any other era, we need to consider the total tax burden under all federal, state, and local taxes on income and wealth (like we did in the introduction).

As noted, with the total tax burden considered, the effective total tax burden in FDR’s time was only slightly higher than it is today at about 40% (which is still substantial when it comes to providing for the general welfare and paying down debts).

In other words, the total tax burden was higher under FDR then it was under Obama, and it was lower under Reagan and Bush… but, while still a substantial difference, it isn’t nearly as drastic as the top federal income tax bracket makes it seem.

Meanwhile, the effective federal income tax burden for the bottom 50% of income earners essentially hasn’t changed since the 1930s (rather almost all gross increases to the total tax burden of the middle class has been in the payroll tax… which pays for the New Deal and Great Society programs Social Security and Medicare).

This is to say, taxes were higher under FDR, and the top 1% paid more than they do today, and this is contributing to the modern wealth gap (which began in the 1980’s under Reagan). Thus, although the “90% tax rate” talking point is slightly confusing (as it denotes only the top bracket), the general take away that FDR’s progressive tax rate benefited the lower incomes by taxing the higher incomes is essentially correct (although many counterpoints can and should be made).

A chart showing how the tax rates affect income and do or don’t contribute to the wealth gap. See See tables starting on pages 38 of Piketty’s Distributional National Accounts: Methods and Estimates for the United States for descriptions.

FACT: According to the tax foundation, despite these high marginal rates, the top 1% of taxpayers in the 1950s only paid about 42% of their income in federal, state, and local taxes (so their total effective tax burden was about 42% on average, some paid less, some paid more). Meanwhile, in 2014, the top 1% of taxpayers paid an average tax rate of 36.4%. Meanwhile, the rate was a little lower than 2014’s rates under Reagan and Bush. When people suggest a tax rate like FDR’s, they are suggesting a progressive tax and a higher total tax burden for the upper-incomes. A 10% difference between FDR and Reagan may not seem like much, but it has a substantial effect on how much assistance can be offered to lower-incomes and can be used to offset spending. With that in mind, the exact break down of what taxes are taxing what sorts of income and wealth matter greatly! See: Taxes on the Rich Were Not That Much Higher in the 1950s and Distributional National Accounts: Methods and Estimates for the United States∗ Thomas Piketty (Paris School of Economics) Emmanuel Saez (UC Berkeley and NBER) Gabriel Zucman (UC Berkeley and NBER) July 6, 2017.[7][8]

The data shows that, between 1950 and 1959, the top 1 percent of taxpayers paid an average of 42.0 percent of their income in federal, state, and local taxes. Since then, the average effective tax rate of the top 1 percent has declined slightly overall. In 2014, the top 1 percent of taxpayers paid an average tax rate of 36.4 percent. The difference is substantial, but not as substantial as the 90% talking point makes it sound.

FACT: When higher incomes pay lower taxes, one can argue it increases the speed at which the wealth gap grows, when they pay higher taxes (actually pay them, or re-invest in the economy rather than pay them) one can argue it stimulates economic growth. Thomas Piketty is one who argues this, and notably his study of the wealth gap is one of the more important studies of income inequality in modern history. Piketty is notably also the one who complied the data above that shows how we should understand the total tax burden paid in the 1940s and 1950s compared to the 1980s and compared to today. His main point is the same in all cases, the “90% tax rate” (understood correctly in its relation to total tax burden, the estate tax, other taxes, etc) worked to slow the wealth gap and stimulate economic growth, and we should be returning to a similar total tax burden today (he suggests an 80% top tax bracket in the video below and suggests a global estate tax in his book). That is just an educated opinion, and certainly Piketty has critics, but it is worth noting that the 90% talking point (referring to FDR’s tax rates) has real data backing it up and real arguments that can be made in its favor (this being true even when its phrased awkwardly by non-economists trying to relay the general point). See Piketty’s Capital in the 21st Century.

Thomas Piketty: ‘Tax the super rich at 80 per cent’!

What do people mean when they say “tax the rich at 90% like FDR or Eisenhower?” Very generally, when people say “tax the rich at 90% like FDR” (for example in the video below), they mean create a progressive tax structure with brackets that gradually move up to 90% by, let’s say for example, $30 million dollars (so 90% would be paid on annual income over $30 million after deductions) and they are suggesting this instead of say the rather flat income taxes under Reagan (especially) and Bush (to some extent). They are not suggesting we levy a 90% tax on the average citizen’s income, they aren’t even saying we should levy a 90% tax on a wealthy person’s income, they are only saying that those who make more should pay more and we should differentiate between someone making $500k and $50 million. The idea is that this sort of income tax structure incentivizes people to grow businesses and make capital investments rather than to hoard income as wealth (the corporate tax and long-term capital gains tax are much lower than the federal income tax). This sort of system, when paired with a fair estate tax and other wealth taxes, is one way to make a system work. Of course, arguments are often made for a low flat tax and the abolishing of an estate tax too (which is sort of the exact opposite plan). The truth is, all these ideas have pros and cons (and to properly assess them, you have to actually understand what their aim is). With that in mind, we are getting ahead of ourselves. Below we cover the 90% tax rate of FDR and Eisenhower and compare that to the almost-flat tax of Reagan in 1988. Doing this will help us to better understand the pros and cons of a progressive tax  and to see how the capital gains tax and estate tax are important related factors.

Economists Say We Should Tax the Rich at 90%.

TIP: This page uses a lot of general numbers like “over 90%” and “about 60%” to help illustrate general points. You can see the citations below for exact figures and calculations. Generally if we offer a round number, it is a roughly accurate number (often acting as a place holder for real numbers that span multiple years; for example “90%” really speaks to the top tax rates in 1917 and in the 1940s and 1950s which ranged from 88% all the way up to 94%). Giving exact numbers every step of the way would make the page needlessly long and convolute the already rather complex points being made. See: the Tax Policy Center’s “U.S. Federal Individual Income Tax Rates History, 1862-2013 (Nominal and Inflation-Adjusted Brackets).”

Understanding the 90% Tax Rate Under Figures like FDR and Eisenhower vs. the Lower Tax Rates Under Figures like Reagan

As noted above, essentially no one actually paid the famed 90% top tax rate under FDR and Eisenhower.

This is due to:

  1. The high dollar threshold of the top brackets of that time (the top bracket in 1944 was on dollars over $200,000, or about $2.88 million adjusted for 2014 dollars; there were over 20 brackets ranging from 23% – 94%, plus people could use deductions like the standard deduction… so low wage earners didn’t pay the full 23%).
  2. The way marginal tax brackets work in general (tax payers pay the marginal rate on dollars in that bracket, they don’t just pay the top amount!)

In the WW2 era, like in any era, those who pay into the top tax bracket generally have an effective federal income tax of considerably less than the rate of the highest bracket (for the poorest, the standard deduction brings their rates down, for those who earn more, the progressive marginal tax brackets and deductions bring their taxes down, plus most of the wealthiest citizens pay other taxes like capital gains)… and thus, if we want to look at what people actually paid, we have to look at average effective rates paid by different demographics.

With that in mind, federal income taxes in general were higher than average in the FDR and Eisenhower eras with lower incomes very roughly paying between 20% and 40%, and higher incomes paying around 60%, on average as effective rates.

Of course, the reality is, there are way more taxes to consider than just the federal income tax, and most tax changes of any sort simply shift the tax burden from some tax payers to others.

Consider:

  • The average worker in 1944 would have paid about 23% to 25% on average (minus a few points for the standard deduction, which started in 1944), and the average worker in 1988 would have paid about 15% – 25% as an average effective rate (minus a few points for the standard deduction). In other words, the average worker paid about the same, or in some cases a little less, under Reagan as they did under FDR.[9][10]
  • Meanwhile, the top payers would have paid about 60%+ in 1944, and 28% in 1988 as effective rates. In other words, the wealthy paid much less under Reagan… In federal income tax (as we’ll see, this is not true for long term capital gains!)

Here we can see, the flattening of taxes under Reagan reduced the tax burden on high earners, but didn’t do much for workers, and the higher taxes under FDR effectively raised the tax burden on all classes (but more-so on the highest earners). NOTE: This is one reason we make the judgement on our site that “a progressive tax is more fair than a flat tax.”

Bias for or against either plan aside, the general claim is that the tax structure helped fund social programs under FDR and stimulated the economy under Reagan.

General claims aside, the reality is that the effect of both of these policies is nuanced and up for debate. With that in mind, we can at the very least say America did well in both eras despite the drastic differences in tax policy… And this is our first hint that there is much more than “just the federal income tax” happening regarding total tax burden, spending, revenue, and social and economic prosperity (of any class or the nation as a whole).

FDR vs. Reagan: The 1944 top federal tax rate on regular income was 94%, the rate on capital gains was 25%, and the corporate tax was 40%. The rate on regular income was higher than its historical average while the capital gains rate was at its average. The average annual wage was about $2,400.00. This placed the average worker in the lowest 23% tax bracket. Meanwhile, in 1988, the top rate on regular income was 28%, the top rate on capital gains was 28%, and the top rate on corporate tax was 34%. Meanwhile, the average annual wage was $19,334… placing the average worker in the lowest 15% tax bracket. With that said, none of that tells us the total tax burden that was paid by each demographic (for example sales tax hasn’t been considered), figuring that out would take calculations beyond what we offer on this page (although you can see the breakdown by Piketty above for a detailed analysis).

TIP: In both the 1940s and 1980s capital gains taxes were low. Thus the capitalist class profited in both eras by taking advantage of long term capital gains. This is part of what drives the economy in a capitalist society.

NOTE: See Insidegov.com for a quick glance at top rates of federal income, capital gains, and corporate. Remember, these top rates only tell part of the story. See also Tax Policy Historical Average Rates 1979 to 2013 for more nuances.

More on Reagan vs. FDR in Terms of Tax Policy

To sum up the above, although taxes were high in the WW2 era and low in the 1980s, FDR didn’t tax as high as people insinuate, and Reagan didn’t cut taxes as much as people insinuate, at least speaking in terms of the tax rates of the majority.

The truth in both cases is way more complex and nuanced than “Reagan cut taxes” or “FDR had a 90% tax rate.”

If we want to understand the complex and nuanced points, then we must consider the details of the tax structure (how many brackets, the rates of each brackets, the loopholes and deductions, etc), and consider the effective tax rates paid by different segments of the population (in terms of total tax burden under all taxes after assistance or tax breaks of any sort), and compare this to the fiscal and monetary policy of an age and other factors like technological booms, wars, and global crises (as these can affect how a tax policy actually impacts the nation)!

In other words, the top federal income tax bracket rate was over 90% at some points in history, but saying that tells us very little about the world… Consider:

  • In 1925 the top bracket was only 25%, but that was on dollars over $100,000 (about $17 million adjusted for inflation in 2014 dollars).
  • In 1941 the top rate was 81%, but that was on dollars over $5,000,000 (about $79.86 million adjusted).
  • In 1944 the top rate was 94%, but was on dollars of over $200,000 (about $2.88 million adjusted).
  • In 1988 the top rate was 28%, but was on dollars of over $59,000 (still about $59,000).

When you consider 1941 saw 32 different brackets and 1988 saw 2, you can see how what we really want to talk about is average effective tax rate and who actually paid it!

Then, when you realize that the income tax is only one of many taxes that people pay (especially the rich who pay many taxes), then your realize the point becomes even more nuanced.

So yes, the top bracket was over 90% in history, but the effective federal income tax wasn’t… and the total tax burden for a given class is a different concept all together!

Simply stated, this “90% talking point” has a ton of complexity hiding behind its facade.

Below we look at the federal income tax rates of different eras in context and explain why marginal tax brackets, effective tax rates, and total tax burden matter.

FACT: After deductions and assistance only about 50% of Americans pay an effective income tax rate here in 2017. This isn’t to say they don’t pay taxes, almost everyone pays sales, excise, payroll, etc, it is only to say that about 1/2 of American doesn’t pay the income tax due to the way effective tax rates.

Understanding Taxation: Progressive Taxation, Marginal Tax Rates, Effective Tax Rates, and Total Tax Burden

With the basic covered, for those who want to understand more about the tax system, the definitions and bullet-points below will help to provide clarification.

How taxation works: There are a number of different taxes that everyone pays. Everyone thinks about the federal tax on ordinary income, as that is the one labor pays every year on their dollars earned as wages, but this is only one of many important taxes. Payroll and capital gains taxes can comprise a large part of a given citizen’s tax burden, payroll for our poorest and employers, and capital gains for our richest. Looking at the top federal income tax bracket alone tells us very little. Thus, the “taxes used to be 90% talking point” is almost meaningless out of context (unless one is specifically advocating for a progressive tax structure with many brackets in which the highest bracket has a high dollar amount and tax rate).

This is what is actually happening with Federal Taxes. Source: Tax Policy Center Table T16-0092 and Table T16-0077. This is the actual share of the tax burden. Flattening the tax means moving the blue bar on the right over to the left AKA redistributing the tax burden from the rich to the middle class. At the same time, raising taxes means raising EVERYONE’s taxes… unless only the higher brackets are raised!

How the progressive income tax works: The income tax is progressive, and is calculated by brackets. When one pays this tax they pay the marginal rate on all dollars in each bracket their income falls under (after deductions), then the average rate paid in all brackets is their effective federal income tax rate. That added with all other taxes they pay is their total tax burden. Learn more about the how the progressive income tax works.

Average vs. Marginal Tax Rates.

Total Tax burden: The total amount someone owes under all taxes.

Average Effective Tax Rate: The actual rate a person pays on average for a specific tax.

Marginal Tax Rate: Referring to the bracket rate a person’s income falls into after deductions (so the tax rate on dollars in a specific bracket in a progressive tax system).

If I had to point to one image to explain what the tax rate was really like in an era it would be this one. Imagine a third line in the middle, that would be the average effective tax rate for all classes. A progressive would probably tell you, the bigger the gap between the red and blue line, the more fair. A Reagan supporter will tell you that the smaller the gap, the better.

On capital gains and taxes on the rich: Most capitalists make the bulk of their money in capital gains. Long term capital gains are today and always have been taxed at a much lower rate than ordinary income. With that said, short term capital gains are treated as ordinary income (so that means a higher income tax does affect the high earners of the capitalist class… just not to the degree one might assume). On the flip side of this, a capitalist also pays directly or indirectly for all the taxes that business pays. So corporate taxes, payroll, tariffs, sales taxes, etc should all be counted in respect to the capitalist’s total tax burden. This makes things very complex.

Long term capital gains are taxed at a lower rate than the income tax and short term capital gains. As you can see, to Reagan’s credit, he really did flatten all taxes. Meanwhile FDR kept the capital gains tax nice and low despite taxing ordinary income at high rates (on the highest tax brackets, that were so high no one paid them). These nuanced points ARE the only real conversation to have regarding taxes…. the rest is talking points.

Why care about the income tax? Despite the infinite complexity the income tax is a tax that everyone pays when they take short term profits from capital or wage labor. So a high tax means less incentive to take profits and more incentive to invest, and it means higher taxes on labor, and a low tax means less incentive for capital to invest and lower taxes on labor (but also less money for assistance and government spending). So income taxes matter, but they don’t tell the full story in isolation, and certainly a single bracket of a given era tells us very little about the full conversation surrounding taxes.

Understanding the Federal Income Tax of Different Eras in Context

When we look at taxation we have to look at a few different things, they are:

  • The tax bracket structure, to understand which percentages of the population by income pay which rates.
  • The effective federal income tax rate that people pay.
  • The effective total tax burden that people pay under all tax types after deductions and assistance. So we have to look at loopholes, deductions, assistance, state income tax, payroll tax, property tax, sales tax, capital gains (long and short term which have different rates), the estate tax, the corporate tax, and more.

In other words, looking at the top marginal tax bracket without consider the dollar amount tells us very little about the total tax burden of its citizens, about the disparity of after-tax income, or about the total revenue received by the nation.

With that in mind, the following points will help you generally understand taxation throughout history compared to 2017.

  • The income tax started back under Lincoln, but it didn’t become official until 1913 under the 16th Amendment.
  • By 1917 the top rate was as high as 67% on dollars over $2,000,000 (adjusted to about $36.5 million in 2014 dollars). The top rate fluctuated but rose to as high as 94% under FDR (on income over $200,000 which adjusted for inflation is about $2.88M in 2014 dollars).
  • From 1917 to 1965 there were over 20 tax brackets, that means someone paying the full 94% rate paid into over 20 tax brackets (thus their effective rate would have been lower, let’s say 60% on average).
  • Meanwhile, the lowest tax bracket’s rate has gone up and down and the dollar amount it started at shifted over time. This means those with lower incomes paid more or less taxes in a given era. When the top rate was 94% the bottom rate was 23%, so no tax payer paid less than 23% (unlike when the top rate was 67% in 1917, in that era the lowest bracket only paid 2%!)
  • Taxes generally evened out under LBJ, with the bottom bracket being in the teens and top bracket being in the 70% range.
  • Reagan then came along and flattened taxes and the bracket structure and brought the top tax bracket down to a historically low $59,000 in 1988. This means in Reagan’s era almost all citizens who paid taxes paid the same effective federal income tax rate.
  • With the above said, a citizen’s total effective federal income tax rate tells us very little alone, we need to look at other taxes and the total tax burden.
  • Even in the Reagan era, when we nearly had a flat tax, the richest Americans paid a ton of taxes, as in any era the wealthy are paying a similar capital gains tax and corporate tax (and that is how the wealthiest Americans make their money, they are “capitalists”). The richest paid less in income taxes under Reagan, but their total tax burden was still significant (especially if you factor in corporate income taxes, business related taxes, and capital gains).
  • To the above point, capital gains has been rather flat throughout history and the corporate tax rate hasn’t fluctuated as much either (the capital gains tax was low under FDR, but corporate tax was higher, for example). This means that the richest Americans, the capitalist class, always benefits about the same in any era.
  • The class most affected by the income tax is labor, that is low-level and high-level labor. However, low-income labor pays the lower brackets if any and gets assistance and thus has a low effective tax rate.
  • Therefore the working middle class is the most burdened by the income tax.
  • With the above point made, a low top tax rate allows would-be capitalist to claim short term capital gains and ordinary income at a low rate and disincentives investing in the economy (via long term capital investments). Due to this, a low rate and low dollar amount top marginal tax bracket incentives a wealth gap and disincentives economic growth.
  • Meanwhile, a federal income tax rate that is too burdensome to the wealthy could disincentivize spending.
History of income tax rates adjusted for inflation (1913-2010)
Number of First Bracket Top Bracket
Year Brackets Rate Rate Income Adj. 2014 Comment
1913 7 1% 7% $500,000 $11.86M First permanent income tax
1917 21 2% 67% $2,000,000 $36.68M World War I financing
1925 23 1.5% 25% $100,000 $1.34M Post war reductions
1932 55 4% 63% $1,000,000 $17.14M Depression era
1936 31 4% 79% $5,000,000 $84.45M
1941 32 10% 81% $5,000,000 $79.86M World War II
1942 24 19% 88% $200,000 $2.75M Revenue Act of 1942
1944 24 23% 94% $200,000 $2.88M Individual Income Tax Act of 1944
1946 24 20% 91% $200,000 $2.41M
1964 26 16% 77% $400,000 $3.03M Tax reduction during Vietnam war
1965 25 14% 70% $200,000 $1.49M
1981 16 14% 70% $215,400 $563k Reagan era tax cuts
1982 14 12% 50% $85,600 $211k Reagan era tax cuts
1987 5 11% 38.5% $90,000 $186k Reagan era tax cuts
1988 2 15% 28% $29,750 $59k Reagan era tax cuts
1991 3 15% 31% $82,150 $142k Omnibus Budget Reconciliation Act of 1990
1993 5 15% 39.6% $250,000 $406k Omnibus Budget Reconciliation Act of 1993
2003 6 10% 35% $311,950 $398k Bush tax cuts
2011 6 10% 35% $379,150 $396k
2013 7 10% 39.6% $400,000 $403k American Taxpayer Relief Act of 2012

UNDERSTANDING TAX RATES AND THE WEALTH GAP: It is very hard to understand the significance of income taxes without diving into details on marginal tax rates and tax breaks and comparing that to other taxes families pay in practice. Learn more about how the progressive income tax system works. Consider the mathematics behind this example: You earn 2 million dollars in 1944, that means on dollars after $200,000 you pay a 94% rate (meaning you are going to invest in business and not claim profits and grow the wealth gap). Now, consider, you make 2 million in 1988 under Reagan, there you pay only 28% after $29,750 (just like Joe the butcher does). The difference is you get to keep 72% of your profits (unlike the 6% after $200,000 you kept under FDR). This is why the wealth gap is growing, simple economics. This does have a trickle down effect (supply side), that is true… but that isn’t the only thing going on. When there are less brackets, a flatter tax, and lower top marginal tax rates it grows the wealth gap and lifts up the bottom. When there are more brackets, higher top brackets, and a higher top rate it decreases the wealth gap and means more money for the state. There is no right answer, but there is some serious implications that are hard to get without really thinking about every aspect of taxation (and that is only regarding the federal income tax alone, there are many other types of taxes).

TIP: We need money to make the economy work. Taxation isn’t just about playing Robin Hood, its also about staving off having to sell our country wholesale when we default on our debt.

How the economy works

Democrats spend and tax, republicans spend and don’t tax, the fed is owed interest over time.

How to Create a Fair Total Tax Rate

Ensuring a fair tax is all about creating a tax that sustains the system without giving too much power to one class. It is all about ensuring checks and balances.

Reagan shows us the pros and cons of a flat tax (the wealth gap and debt began to spiral under Reagan, but growth in business and higher-end markets was good) and FDR shows us that social and military spending require taxation to support (and that we can have a high top tax rate without having a high effective tax rate).

Taxes used to be much higher, but top brackets used to be much higher too. Reagan cut the rates and lowered the brackets, but since mainly the rates have been increased. This leaves us in a mid-way point between Reagan and FDR that puts a burden on the middle class more than than highest earners, but we can’t simplify to just this. We also have to consider factors like debt, other taxes, and increases to spending.

Adding Nuance and Looking at the Pros and Cons of Tax Types

The above explainer doesn’t even begin to really describe everything we need to know. I’ve loosely described the situation with the federal income tax, capital gains tax, and corporate tax… but just as important are the estate tax, payroll tax, loopholes, deductions, and other factors.

If a President/Congress passes a budget with a ton of loopholes, it can make other factors not matter as much. If the top tax bracket is high, but so is the threshold, then it doesn’t matter as no one really pays it. If Reagan comes along and says he is lowering taxes, but really just flattens them, then the tax cut primarily benefits the wealthy (who already pay that low corporate and capital gains tax).

With that in mind, let’s end with a quick explainer on why each tax type matters by offering some pros and cons:

Many progressive tax brackets with high top bracket: Pro: It incentivizes growing one’s income, and taxes high earners at higher rates. Con: Makes taxes complicated.

Flat taxes (or very low top bracket): Pro: It makes taxes simple. Con: The rich pay less in income tax and thus the burden is necessarily shifted to the middle class (the poor don’t have money).

Many deductions and loopholes: Pro: It incentives using your capital wisely. Con: It punishes those who don’t exploit the loopholes and take deductions (and generally requires a lot of paperwork).

Capital gains: Pro: Long term capital gains are taxed at a lower rate, this incentives growth (same for short term when they are too). Con: Only the capitalist class tends to have the excess capital to invest this way. Therefore the rich end up paying way lower total effective tax rates than the working class.

Estate tax: Pro: The last defense against the wealth gap and dynastically oligarchy (we can avoid high income tax if we have a respectable estate tax). Con: The small business and farmer risk getting double taxed.

Payroll and Sales Tax: Pro: These taxes ensure that businesses are constantly part of the tax system and they help pay for social programs. Con: These taxes burden the poor the most.

Corporate tax: Pro: like the capital gains tax, this is a tax on those who make the economy work, and thus it makes sense it helps fund our nation. Con: If this tax is too low, then business takes advantage of government, if it is too high, then it can disincentivize business growth.

Other taxes on wealth (the rich pay a bunch of taxes no one else thinks of: Pro: The wealthy get to dodge a lot of taxes, so having extra taxes on them helps to even out total effective tax rates. Cons: Some odd taxes that nickel and dime the rich aren’t always fair (especially when some wiggle out of them and others don’t, that creates its own gap).

So Again, What is Fair?

When we talk about the fairness of taxes we can’t just talk about the top tax bracket or the income tax, we have to talk about total effective tax burdens by percentile of income and wealth. That is so complex that I couldn’t even approach doing a full analysis on this page.

With that in mind, fair is a system where everyone pays in an amount proportional to their ability to pay, and gets out that which is proportional to their contribution to society. Of course, if that means the poorest suffer in squalor while the rich control all capital resources, then fair becomes about offsetting that.

Ultimately then, while we can confirm the tax rate has been as high as 90% at the top and as low as 28% in modern times, denoting either of these numbers alone is little more than a talking point (well intentioned or not).

People point to Reagan to show why cutting taxes leads to prosperity, people point to FDR to show how taxing leads to prosperity, but the reality is somewhere in the middle.



Conclusion

The top tax bracket was over 90% at a few points in history, but this doesn’t tell us much about how taxes worked in those times. The reality FDR’s tax rate for workers wasn’t much different than Obama’s or Reagan’s, meanwhile while the top rate of FDR was higher, his capital gains tax was the lowest of all of the aforementioned!

To really have the tax data mean anything we need to look at the rates of all brackets, and the effective total tax burden by income percentile, and then consider other factors like social spending, debt, and the events of an era.

We can conclude that flat taxes and different flavors of progressive taxes have their pros and cons, but also must conclude that when people say “the 90% rate under FDR” and the “28% rate under Reagan” it means very little out of context. Neither of those points alone make for a very good argument for or against taxation or spending.


Citations

  1. The Good Ol’ Days: When Tax Rates Were 90 Percent
  2. U.S. Federal Individual Income Tax Rates History, 1862-2013 (Nominal and Inflation-Adjusted Brackets)
  3. A 95-Year History of Maximum Capital Gains Tax Rates in 1 Chart
  4. Tax History, the Definition of Income Taxes, a Taxucation
  5. A Guide to Statistics on Historical Trends in Income Inequality
  6. Historical Average Federal Tax Rates for All Households
  7. Taxes on the Rich Were Not That Much Higher in the 1950s
  8. Distributional National Accounts: Methods and Estimates for the United States∗ Thomas Piketty (Paris School of Economics) Emmanuel Saez (UC Berkeley and NBER) Gabriel Zucman (UC Berkeley and NBER) July 6, 2017.
  9. Tax History: The Love-Hate Relationship With the Standard Deduction Joseph J. Thorndike
  10. Federal Standard Deduction Historical Amounts (1979-2017)


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