Left-wing politicians who demand higher taxes on the rich argue that the United States has, in the past, prospered when tax rates were very high, proving that high taxes do not harm the economy. And it is true: In the 1950s and early 1960s, the top federal personal income tax rate in the US was a horrendous 91 percent, after which it was lowered to 70 percent. Under Ronald Reagan, it was then successively reduced to 28 percent by 1988 (before being raised several times and then lowered again under Trump).
However, as Phil Gramm, Robert Ekelund, and John Early show in their book The Myth of American Inequality: “The top income tax in 1962 was 91 percent. After deductions and credits, only 447 tax filers out of 71 million paid any taxes at the top rate. The top 1 percent of income earners on average paid 16.1 percent of their income in federal and payroll taxes while the top 10 percent paid 14.4 percent and the bottom 50 percent paid 7.0 percent.”
Even when the top tax rate was lowered to 70 percent, not much changed. Only 3,626 out of 75 million taxpayers actually paid taxes up to 70 percent. Interestingly, the actual percentage paid by the top 1 percent of earners in the US was only 16.1 percent in 1962, when the top marginal rate was 91 percent. However, in 1988, when the top rate was only 28 percent, the percentage paid by the top 1 percent of earners had risen to 21.5 percent! As the top tax rate fell by two-thirds, the percentage of their income that the top 1 percent of tax filers paid in federal income and payroll taxes rose by a third.
This seems paradoxical, but it is logical, because it is not only the tax rate that is decisive, but the amount of income that is actually taxable. In the pre-Reagan era, there were numerous exemptions, loopholes, and tax-saving schemes that top earners could use to reduce their taxable income. Reagan abolished many of these opportunities, thereby increasing the proportion of income that was subject to taxation.
Hellbound and Down 