This is an argument we hear a lot: in the 1950s the top marginal income tax rate was 91 percent, and the U.S. economy hummed along just fine. (Let’s set aside the question of whether 2.2% annual growth amounted to “humming along,” and leave out Kennedy’s use of the economy against Nixon — vice-president during the ’50s — in the election of 1960.) The real point is summed up in a blog comment at the indispensable EconomicPolicyJournal.com:
The dishonesty or perhaps ignorance in the tax debate that is going on today is the complete misrepresentation of the pre-TRA86 [Tax Reform Act of 1986] higher marginal rates in the old ’53 code. Sure the marginal rates were insane, but the underlying tax code was rife with loopholes that a good tax planner (I was one) could exploit to get a person’s effective tax rate as low or lower then it is today. Those loopholes are no longer part of the tax code which is a good thing as they encouraged investors to invest in projects that had no economic viability other then the income sheltering effect they created.
What else is ignored in the conversation is the fact that there was a massive amount of tax fraud at all income levels under the old code. It was so bad and so common that most people took pride in telling others how they cheated on their taxes. When I was practicing it was quite common for us to pick up clients that had owned businesses that had grown into large enterprises that cheated extensively on their income taxes sometimes for decades. Usually the only reason this ever got exposed was due to the owners wanting to sell or go public.
Today it would be very hard to get away with significant tax fraud for very long and the current code does not offer very many ways to legally shelter income, so a marginal tax rate of 70% would probably produce an effective tax rate on the top 5% of at least 45-50% which would be more then double double what the effective rate was under the old tax code. Thus, if we were to go back to those insane marginal tax rates, we would be crossing into a level of taxation never seen in this country.
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