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How did we achieve good growth in the 1950s despite high marginal tax rates?



How Did We Get Good Growth in the 1950s Despite High Marginal Tax Rates?

In my latest OLLI speech, ‘Economic growth: crucial but uncertain’, in which I Posted and talked about on Substack, I didn’t discuss a single question that any of the participants asked. I hadn’t thought to do this because John, the A/V guy, made some cuts and for some reason that question and my answer aren’t on the video.

I took the audience on a quick tour of the highest marginal rates through the 20th century: from 7% when the first income tax was introduced; up to 77% under Woodrow Wilson; to 25% under Treasury Secretary Mellon (worked his way up through the Harding and then Coolidge administrations; to 63% under Herbert Hoover, then 79% during peacetime FDR, and to 94% during the latter part of the war under FDR; then down to 91% for most of the 1950s and early 1960s; then down to 70% under LBJ (as part of the Kennedy tax cut);

Of course I gave a more summary statement than the above, but the audience understood what I meant.

One of the audience members, a man named Ed, said, “Don’t high marginal tax rates in the 1950s mean that high tax rates don’t make that much difference to economic growth, since growth was quite good in the 1950s?”

I responded that the top marginal tax rates came into effect at a very high income level and that one had to adjust for inflation to see how irrelevant they were for more than 90% (and probably more than 95%) of income earners. (I use “earner” in the broadest sense of the word; if I own stocks that gave me nice dividend income, I count that income as earned.)

I could have given a better answer if I had had the data at hand, and that’s what I’m going to do now. But I completely left out another answer: the economy was much less regulated in the 1950s than it is today. It was much easier to get a permit for the construction of a house, a bridge, a pipeline, an office building. Also, the liability revolution that Walter Olson has written about so well had not yet occurred, so manufacturers did not have to waste much effort on idiot-proofing their products. Etc. All of these positive factors can easily offset the negatives of high marginal tax rates for a small percentage of the population. (One caveat: We didn’t have deregulation of airlines, freight, or railroads, and that hurt somewhat.)

Now to the tax data. The Tax Foundation provides data on tax brackets and tax rates from 1862 to 2021 here.

Look at the marginal tax rates for 1954. For married couples filing jointly, if you had $400,000 or more in taxable income, your marginal tax rate was 91%; for singles it was $200,000. That percentage with the same income groups was the same from 1954 to 1963.

But $400,000 in 1954 was $4.66 million. Moreover, the entire real income distribution is now higher, probably at least twice as high. So that would be like imposing a 91% marginal tax on a married couple with $9.32 million in taxable income.

To be sure, marginal tax rates were well above current rates, even for much lower incomes. Think again of 1954. For a married couple with $24,000 in taxable income, the marginal tax rate was a whopping 43%. In today’s dollars, $24,000 would be $280,000. So my point is not as strong as I initially thought. On the other hand, there were no Medicare taxes and Social Security tax rates were much lower. In 1954, the combined SS tax for employer and employee was 4%, compared to 12.4% today. Moreover, it was zero after an income of $2,400, which in today’s dollars is $28,000.

Here is my speculation, although I don’t have time to do the calculations and check a lot of data. Through 1963, marginal tax rates, including Social Security and Medicare, were lower for more than 80% of American taxpayers in the top half of the income distribution than for more than 80% of taxpayers in the top half of today’s income distribution . .