Taxes on rich people are, by historical standards, very, very low. The top marginal income-tax rate was 70 percent—that’s twice the current top rate--when Ronald Reagan came into office in 1981, and from 1950 through 1963 the top marginal rate never fell below 91 percent. The top capital-gains rate was 25 percent during the 1950s and 1960s, and 35 percent during the 1970s. (Today it’s 15 percent.) Yet the country prospered.
Whenever I write this—and yes, I’ve written it a lot—someone invariably points out that marginal rates aren’t the same as effective rates, i.e., what people actually pay as a percentage of their total income after all the deductions and exemptions are figured in. And in my book The Great Divergence I go out of my way to absolve tax policy of blame for creating the income-inequality boom of the past 33 years. For one thing, the inequality is observable—and more dramatic—before you even factor in taxes and benefits. And for another, when you factor in those taxes and benefits, effective taxes on the top one percent, though they’ve certainly dropped since 1979, haven’t dropped nearly as much as you might suppose.
But when we talk about the really, really rich—the top 0.1 percent or 0.01 percent, or tax filers today earning in excess of $1.7 million and $9.1 million, respectively—it’s an entirely different story. Their effective taxes have come crashing down. A new report by the Congressional Research Service’s Thomas Hungerford has a chart illustrating this point that I’d like to share with you.
There is some mythology abroad that when tax rates were very, very high, the super-rich paid about the same in taxes that they pay today because they exploited lots and lots of loopholes. I’m sure they did exploit lots of loopholes, but it wasn’t enough to keep their effective tax rates from being a lot higher then than they are today. In general, total deductions, as a share of adjusted gross income, were considerably lower in the high-tax “bad old days” of the 1950s and 1960s than they are today. Remember that next time somebody tells you that we need to lower rates further in order to get rid of tax loopholes.