Revisiting the High Tax Rates of the 1950s

April 29, 2013

It is sometimes claimed that the 1950s were the Golden Age for taxes. It is said that the wealthy paid more taxes and the system was fairer following World War II. However, an examination of the facts suggests otherwise, says Arpit Gupta, a doctoral candidate in finance and economics at Columbia University.

  • In the 1950s, very few people paid the very high income tax rates that were aimed at the wealthiest Americans.
  • While the top tax bracket faced a marginal tax rate of 91 percent, less than one-tenth of one percent of Americans paid this rate.
  • While the tax rates were very aggressive for higher income earners, average tax rates have remained relatively steady from 1960 to 2004.

The "extreme individual income taxes" of the 1950s and 1960s, which pro-tax advocates use as evidence that higher taxes accompany economic growth, were lower than is thought due to lower rates on capital gains, as well as deductions for interest payments and charitable contributions.

  • Because of these loopholes and deductions, the income tax rate structure of the 1950s was similar to today.
  • High corporate income and estate taxes, which fall disproportionately on the wealthy because capital income is concentrated at the top, are the reason why proponents of higher taxes say Americans paid higher taxes in the 1950s.
  • The entire burden of corporate tax rates do not fall on bodiless entities but on real individuals, and not solely on investors but also on employees.

Despite these reasons why claims about the 1950s and higher taxes are false, there is an even more basic reason why higher taxes did not contribute to economic growth.

  • Following World War II, postwar industrial capitalism created a period of high corporate earnings and rapid economic growth that we are unlikely to replicate in the future.
  • The past is not a model for today's revenue debate because the progressiveness of the income tax rate has remained relatively stable despite higher corporate income tax rates.

Source: Arpit Gupta, "Revisiting the High Tax Rates of the 1950s," Manhattan Institute, April 2013.

 

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