Didn’t We Used to Have High Taxes and Prosperity?

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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  • http://pulse.yahoo.com/_XXUI2U5IPS7IABBMSM4I27BYDA chris

    Enter the Laffer Curve, which is based on the official tax rate, as opposed to the effective tax rate.  The harder thieves try to steal your hard earned, the more ways you find to safeguard your goodies. 

  • RFN

    Great comment.  I have a co-worker that laments “tax loopholes” and “tax shelters” and thinks the rates should go back to those days.  She even brought up our pal, Warren Buffet.  When I informed her of the all the outs in the tax code she then just said the rates should go back to those days but without the aforementioned “dodges”.  This is envy on top of economic ignorance, pure and simple.  There is no defeating that.  

  • RFN

    BTW, thank you historian Tom Woods, for the information regarding JFK using the economy as an issue against Nixon.  I did not know that.

  • remi

    Wait, if Woods is arguing that the effective tax rate was far lower in the 50’s then how does he account for low growth rate over the same period? “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.”

  • plasticmoney888

    Socialist love taxation they are parasites that live from them.  

  • Martin Brock

    I favor a progressive consumption tax, so I favor much higher marginal tax rates with the fattest possible loophole. Essentially, everyone has a tax deferred investment account with unlimited contributions, so the loophole is as fat as you choose to make it. The marginal tax rate on consumption over $200,000 annually might be 90%, but if you prefer not to pay the tax, you may consume less and invest the rest or act charitably.

    If you’re Bill Gates and have a billion dollars of income in a year, you have the same option. If you prefer to pay the tax on only $100,000 or $50,000 or $20,000, you need only limit your consumption to this level, and you pay the same marginal rate as anyone else with the same level of consumption. Essentially, no one must pay more tax than the least that anyone pays.

    Of course, this sort of tax would decimate state revenue, and that’s precisely the point. Less central authorities (wealthy proprietors avoiding the tax) replace more central authorities, but the less central authorities are not entitled to organize vast resources to produce for the consumption of a powerful few. Beyond some level of consumption, the lords of forcible propriety may only seek more profitable resource organization (adding greater value to resources) satisfying free producer/consumers or aid people unable to produce or pursue some other end that juries hearing tax evasion cases deem proper.

    A decentralized authority of this sort is far more democratic than biannual, majoritarian plebiscites selecting a small, central committee of few hundred “representatives” ruling hundreds of millions of others through an authoritarian bureaucracy, i.e. it’s far more democratic than the system we have now. We “elect” our authorities in the market, and we limit their authority through common juries enacting a common law.

  • Gmuench3

    One of my arguments against this bogus “tax rates were higher when things were better claim” has always been that rates themselves are meaningless without a full analysis of the tax brackets, in particular, how much real income and what relative percentages (relative to total taxable income and GDP) were subject to tax at the higher marginal brackets.

  • Gmuench3

    And ive yet to see one!

  • Anonymous

    I had never considered tax loopholes as encouraging investments in economically nonviable areas just to protect income, but it makes sense.

  • Johnhenry07

    The most important fact to consider is that the US GDP as a share of the world’s GDP was some multiple of what it is today.  Not to mention the welfare state, policing the world, and other methods of wasting society’s resources hadn’t reached full stride…we all weren’t Keynesians yet.

  • http://twitter.com/AnonymousHench Bruno Tata

    Higher taxes, especially that extreme, are not the answer.  However…

    1.  Prosperity is more than money.   I’d argue that the 50’s were a better overall decade than we’ve had since, excepting maybe the 80’s.  

    2.  2.2% growth in the 50’s was probably real, not the phoney calculations we’ve seen in recent years.

    3.  Per capita GDP growth is far more important.  Creating a large underclass marginally increases GDP but makes us, on average, poorer.

    4.  GDP is not that accurate a measure  of prosperity anyway.   Buying stuff on credit is less true prosperity  than buying less stuff but with real money you actually have.

    5.  The way GDP is calculated distorts true prosperity.  Buying  lot of things on credit with phoney wealth then looks better than buying fewer things but with real wealth.   And spending more on things like defense and healthcare may raise gdp statistics but isn’t making us more prosperous.

  • http://twitter.com/AnonymousHench Bruno Tata

    Everyone is a special interest.  How many decrying tax loopholes want to remove their deductions and credits for their kids?

  • http://www.facebook.com/profile.php?id=725305302 Jake Barnett

    Effective rates were far lower than advertised in the 50’s, but it was because of the aforementioned loopholes.  Those loopholes encouraged investment in economically nonviable things, and as a result economic growth was rather poor.

    What nobody seems to mention is that no matter what marginal tax rates have been, federal revenues have stayed steady at 19% of GDP since the conclusion of WW2.  The idea that we can tinker with the tax code to fleece the rich and start back on the road to prosperity is an egregious propaganda stunt. 

  • Martial_Artist

    On the up side, there actually is a way to defeat that combination. On the down side, doing so is generally considered a capital offense. Even praying for “a holy and peaceful death” for the sufferer, if they are not actually on their deathbed has serious negative spiritual consequences.

    Pax et bonum,
    Keith Töpfer

  • Martial_Artist

    @Bruno Tata,

    How many? I know of one family consisting of two persons. If the government would simply do three things [(1) disestablish those portions of the Federal government not authorized by the U.S. Constitution—this amounts to a significant number of Cabinet Departments and a large number of Federal agencies; and (2) establish a realistic fixed per capita personal deduction and a flat rate for every dollar of earnings over that deduction], I will be pleased to sign up. What I have described comes as close to the standards of the Rule of Law as I have been able to imagine. Stated in other terms, it treats everyone equally before the tax laws, rather than establishing special exemptions for a variety of reasons that each only applies to a segment of the taxpaying public.

    Pax et bonum,
    Keith Töpfer

  • Dan from ct

    You could always move to the libertarian paradise of somalia, look at how great that turned out…

  • Martial_Artist

    Also not to mention the there is no logical way that anyone can justify counting Federal spending as a product, yet it is counted as a component of GDP.

  • Mike

    Again, this is either sarcasm or a complete idiot.

  • http://www.facebook.com/people/Jeffrey-Knoll/100003176885156 Jeffrey Knoll

    Using data from here, the average annual GDP growth from 1950 through 1959 was 4.17% using chained 2005 dollars.  It was 6.69% using current dollars.

  • Colin

    The whole debate brings this to mind:

    Human action always confronts experience as a complexphenomenon that first must be analyzed andinterpreted by a theory before it can even be set in thecontext of an hypothesis that could be proved or disproved;hence the vexatious impasse created whensupporters of conflicting doctrines point to the same
    historical data as evidence of their correctness. The
    statement that statistics can prove anything is a popular
    recognition of this truth. No political or economic
    program, no matter how absurd, can, in the
    eyes of its supporters, be contradicted by experience.
    Whoever is convinced a priori of the correctness of
    his doctrine can always point out that some condition
    essential for success according to his theory has not
    been met. Each of the German political parties seeks
    in the experience of the second Reich confirmation of
    the soundness of its program. Supporters and opponents
    of socialism draw opposite conclusions from
    the experience of Russian bolshevism. Disagreements
    concerning the probative power of concrete historical
    experience can be resolved only by reverting to the
    doctrines of the universally valid theory, which are
    independent of all experience. Every theoretical
    argument that is supposedly drawn from history necessarily
    becomes a logical argument about pure theory
    apart from all history.

    Ludwig von Mises
    Epistemological Problems of Economics, 1933

  • RobHolmes

    Exactly!!! When I looked at the formula for GDP and saw that government spending counted as part of it I couldn’t believe it. No wonder the Keynesians think govt. spending boosts GDP–it does (well maybe in the short term) if you use that crappy metric.

  • Experienced

    I lived through that period of time and had friends and relatives around the country.

    All I know is that I grew up in the 50’s and 60’s in a middle class neighborhood – all salaried people. I did not know anyone whose mother had a paying job. One guy – at a lower than average income – is all it took to support a family. Also, reasonable paying jobs were more plentiful and easier to get. The few who wanted to go to college or tech school were able to pay their tuition with a part time job. And I knew a few lower-middle income people who saved their money for a few years and were able to buy a new car for cash. 
    I can also say that I took several bookkeeping/accounting courses in high school and college – and I do not remember many people taking deductions. The only thing that I can think is that taxes were much less complicated. You did not have to pass the CPA test to understand how to minimize your taxes on a corporation or any other type of structure. Before the FASB, during the gold standard, personal finance was more basic and easier to navigate. In fact, there were not many CPA’s back then – did not need them. 

    I would suggest that we get rid of fiat money, eliminate the overly complicated legal and accounting monopolies, and repeal all types of income taxes. Those factors would cause a larger boom than trying to fix the current income tax system. 

    The question still remains with me, however. How was it possible to have such high tax rates and achieve a much better standard of living (based on the technology at that time)?.  Or did I answer it?

  • Michael Tontchev

    Why don’t you search for one?

  • Reason Liberty

    Moreover, there are things which decrease GDP which are in fact signs of a healthy economy. For example, computer prices have declined sharply while quality has increased. This decreases GDP, while it’s an amazing achievement. Just one example of how GDP perverts economic progress.

  • Reason Liberty

    Considering that they’re better off than when they had a government?
    Why don’t you move to France, then?

  • Reason Liberty

    I’m for eliminating tax loopholes by bringing down all the taxes :D

  • Reason Liberty

    Careful, though. The conclusion is to lower all taxes, not to increase some.

  • Reason Liberty

    And by how much would this distort the market?

  • Anonymous

    Ah ya absolutely…. It’s amazing how much abolition of the 16th amendment would fix.

  • Anon

    Posted this to Reddit…awaiting the flood of down-votes and inflammatory comments… 

  • Anonymous

    Hmmm… The wealthy used loopholes to bring their tax rate down from 91% to today’s levels…not quite. Today, the secretary pays more that her employer, or at least Romney’s does! 13% doesn’t sound like the45-50% you quote. If your numbers were correct, you would be making a compelling argument. Now, I’m no expert, but if I can see this, and by this I don’t mean playing more ‘games with numbers..I mean this is what the man paid, how could you not? I’m afraid all those years spent helping people cheat on their taxes has left you with a health dose of ‘Stockholm Syndrome’… Face it, you’ve made a living by bringing joy to the faces of wealthy, but did you even notice the secretary’s face on your way into their offices? Or the faces of hungry children made more hungry because the money you saved the ‘fat cats’ wasn’t there for them? You’re ‘entitled’ to your opinion and Lord knows..you’re not alone. But with the re-election of Barack Obama, my opinion like the majority of Americans is that it’s a corruption and misrepresentation of reality.

  • http://tomwoods.com Tom Woods

    If you actually believe the secretary pays more than her employer, you understand zero about taxes. Ever heard of double taxation? If not, look it up.

    As for Stockholm Syndrome, you’re the one singing the praises of a violent institution that expropriates, bombs and maims people, and throws kids in cages for victimless crimes.

    And yes, I’m sure I’ve thrilled the wealthy by opposing all bailouts and the Federal Reserve!

  • Anonymous

    Yes! Double taxation! Romney had talked about that, and when I looked it up I found many conflicting opinions. Some say as you do, that the rate is actually 45-50%. But if that’s so…why didn’t Romney claim those numbers instead of 13%. Actually, there was discussion that his return was readjusted or better to say inflated to 13%. He took a beating over this that I find hard to believe he wouldn’t have stopped it if he could. As for singing praises for a man that brought us home from Iraq and is bringing us home from Afganistan.. Unlike Romney who would have us in Benghazi, possibly Iran and who else? Oh yea! our main adversary…. RUSSIA! Or was it China?

  • Anonymous

    P.s…your opinions on the ‘bailouts’ and the ‘Fed’ are opinions based on your perceptions. And while I agree that the Fed or any other ‘central bank’ are theives, tax returns are not interpretive, they are definitive! Romney paid 13%! That’s not my opinion, impression or what ‘I think he paid’…this was his admission! He has to own it, just like anyone else presenting the wealthy as overtaxed!

  • Anonymous

    Seriously…you see killing those that disagree with you as an option? Killing fellow Americans? And end your veiled threat with ‘peace and goodness’? Gabby Giffords is twice the man you ever were!

  • Anonymous

    Finally! A breath of fresh air in this room!

  • Anonymous

    Long way to say ‘there are two sides to every story’ but it was fun to decode! Two thumbs up!

  • http://www.facebook.com/michael.fleischer.908 Michael Fleischer

    I wrote to dr Woods and Dr Bob Murphy about this b/c there was a congressional study released that seemed to show no link between higher taxes and lack of economic growth. This study apparently was treated with disdain by some republicans and they tried to supress the publication of the study and this fact was picked up by the New York Times. A few co-workers and acquaintences have seized on this study as some kind of proof that higher marginal rates dont hurt growth. One colleague in particular wants real proof in the form of actual tax returns that higher earners actually had a lower effective rate than the higher marginal rates in the 1950s would lead us to expect.

    I found #1 a discussion of Mitt Romneys father: George and his actual effective tax rate for several years in the 1950s and 1960s


    I also include a link to the NY times article and the study that they cite.


    and heres the actual study:


    I invite anyone to read this particularly ridiculous passage at the bottom of page 9 of this study that says that higher capital gains rates could actually lead to MORE investment?

    Michael Fleischer

    Tenafly NJ

  • http://twitter.com/BongBong BongBong

    A quick review of US demographic trends would have revealed a growing population of workers and taxpayers and a relatively smaller government at that time (not to mention a stronger currency). We have today a vastly larger government and a declining tax paying population. Something here screams “math problem”, even without a dollar-for-dollar analysis.

  • Nicholai

    The strength of your arguments is damaged by the distraction of your repeated incorrect use of “then” when you should have used “than”. Grammar issues aside, your points are well-taken.

  • http://tomwoods.com Tom Woods

    Presumably you noticed that this is a block quotation, which means I am quoting someone else.

  • http://againstjebelallawz.wordpress.com/ Enopoletus Harding

    A fall in inflation raises RGDP and does not affect nominal GDP. Quality adjustments are also made in the CPI and PCE indexes. However, you’re right the CPI can’t possibly capture the benefits of all the free information that exists on the Internet today.

  • Loomy

    The Information above is one person’s OPINION based on his limited experiences, and not backed up with any facts or references to prove anything that is insinuated by him is in the least true.

    What were those Loopholes? Why can’t you get away with Tax Fraud today? Show or prove why there are so few Legal ways to Shelter Income? What exactly was the amount of Tax Fraud under the old code versus the Tax Fraud today?

    Back up all these assertions with the evidence and proof that show what YOU are saying is in the least part True and actual fact. By not doing so, you are adding to the ignorance and the dishonesty you claim surround this debate.