Monday, February 23, 2009

Income taxes

In 1957 the marginal income tax rate in the US was 91% and most people think that economic growth thing and worker productivity was doing pretty good even though they think over 90% is pretty high taxation

Actual facts is one thing. Economic theory is another.

the top marginal federal income tax rate in the United States was 91% (beginning at taxable income of $400,000). This is an unimaginably high rate by today's standards, when the dominant view in Washington is that a marginal rate of 39.6% (the top rate from 1993 to 2001) is too high. The key turning point in the process of abandoning high marginal tax rates occurred in the presidency of Ronald Reagan. When Reagan became President in 1981, the top marginal federal income tax rate was 70%; when he left office in 1989, the top rate was 28%.

The reduction of marginal tax rates in the Reagan years was driven by a new policy consensus that still persists today. That consensus is that high marginal tax rates on the rich come with an unaffordably high price for the U.S. economy in the form of reduced incentives for the rich to work and to save, and increased incentives to engage in socially wasteful tax planning. And yet 1957, when Rand wrote Atlas Shrugged and the top income tax rate was 91%, falls in the middle of the period from 1951 through 1963. Those were the golden years of the U.S. economy, in which the average annual rate of productivity growth was 3.1% (compared with about 1.5% after 1981). Of course, the growth might have been even faster had the marginal tax rates been lower, but the coincidence of high rates and high productivity raises challenging questions for those who believe that high marginal tax rates carry an unacceptable cost.

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