As hard as it might be to believe, income tax rates in this country have at times exceeded 90%. And, perhaps even more surprisingly, the country was relatively prosperous during those same periods. Not so surprisingly, the high tax rates are often attributed with the widespread national prosperity. But we know correlation does not equal causation. Check out the tweet below for just one such recent example.
— gardeniabee (@gardeniabee) October 22, 2016
The insinuation by @gardeniabee being that the punitive tax rates of the period were directly responsible for the productive and prosperous 50s and 60s. But I’ve never been good at taking someone’s word for something so let’s see if we can find the truth for ourselves. On the face, it would seem that confiscation cannot lead to prosperity.
In the chart below I plotted the Highest Marginal Rates alongside the more meaningful Effective Tax Rates (1946 – 2015).
- Personal marginal tax rates were all over the place during the period ranging from 28% to 92%, but, even so, the effective tax rate was relatively stable ranging from about 10% to about 14% of personal income.
- The average effective tax rate over the period was 11.4% but was only 10.2% when the highest marginal rate was over 90% from 1946-1963. The average effective rate was 11.9% when the marginal rates were much lower between 1992-2015.
- Marginal tax rates in and of themselves are irrelevant as one must consider the income tax brackets as well as loopholes and deductions available.
- It is reasonable to conclude that higher marginal rates actually result in lower tax collections as a percentage of income because the punitive and confiscatory levels of high rates create strong incentives for high income earners to avoid taxes or stop working altogether as income approaches higher brackets (i.e. why work if you only get to keep a small fraction – 10% – of the fruits of your labor).
- It cannot be assumed that high marginal rates in the past led to greater productivity and prosperity. It would actually be more reasonable to conclude that the more income individuals are allowed to keep the greater economic growth and prosperity because the average effective tax rates were lower during the high growth period of 1946 – 1963 than the lower growth period of 1992-2015 when the average effective rates were higher.
Of course, there are many more factors that influence economic growth than just tax rates, but we certainly cannot conclude with any level of certainty that the confiscatory levels of marginal tax rates in the 1950s and 1960s were responsible for widespread prosperity enjoyed.