Did the High Tax Rates of the 1950s Create American Prosperity?
The Instagram account @whoprofitsfromourpain posted a reel in which the author argued in favor of high marginal income tax rates, stating: “In the 1950s, the US had its largest middle class in the country’s history, and it also had a top wealth tax rate of 91%. Is that a coincidence? No. This high tax rate did two things. First, it raised revenue to fund things like the GI Bill, which made college cheap for the middle class, unlike today…”
Yes, tax rates on the wealthiest Americans were high in the 50s and 60s, but did these high tax rates translate into greater tax revenues? Phil Gramm, Robert Ekelund, and John Early (2024) argue this is unlikely because very few Americans actually paid the 91% tax rate. They state that in 1962 “…only 447 tax filers out of 71 million” (p. 117) paid the 91% tax rate. It’s unlikely that funding for the GI Bill came entirely from taxes paid by these 447 people. In recent years, the top income tax rate has been around 35%-- much lower than it was in the 1960s. What’s interesting is that even though taxes are lower, the top 1% pay a higher percentage of their income in taxes now than they did in the 1960s. Gramm, Ekelund and Early state that in 2020 the top 1% paid an average of 25.7% of their income in federal taxes, while in 1962 “The top 1 percent of income earners on average paid 16.1 percent of their income in federal income and payroll taxes…” (p. 117). If your goal is to confiscate more tax revenue from the wealthy, a 91% top tax rate may not be the best idea.
The author goes on to state: “Secondly, it disincentivized business owners from taking egregiously large salaries. Business owners were instead incentivized to reinvest or increase employee wages, which led to a broader distribution of wealth”
Many politicians alive in the 1960s would disagree that high tax rates were contributing to economic growth. President John F. Kennedy, in a special message to congress in 1963, argued in favor of cutting income and corporate taxes, stating: “…our present income tax rate structure now holds back consumer demand, initiative, and investment…our tax system still siphons out of the private economy too large a share of personal and business purchasing power and reduces the incentive for risk, investment and effort--thereby aborting our recoveries and stifling our national growth rate.” Historically, the wealthy have avoided paying these high tax rates by exploiting legal loopholes. Thomas Sowell (2011) writes that the top marginal tax rate in the 1920s was also very high, but instead of investing in business and workers’ wages, the wealthy simply reported lower incomes “…by putting their money into tax exempt securities or by any of the other ways of rearranging their financial affairs to minimize their tax liability” (p. 150). If high marginal income tax rates do not raise more revenue from the super wealthy and they discourage business investment, then we should consider alternative methods of dealing with income inequality.
References
Phil Gramm, Robert Ekelund, & John Early (2024). The Myth of American Inequality: How Government Biases Policy Debate. Rowman & Littlefield.
John F. Kennedy (1963). “Special Message to the Congress on Tax Reduction and Reform.” The American Presidency Project. Retrieved from: https://www.presidency.ucsb.edu/documents/special-message-the-congress-tax-reduction-and-reform
Thomas Sowell (2011). Intellectuals and Society. Basic Books.