When Were the Rich Taxed the Most
The data here comes from the most important book on government policy I`ve read in a long time – titled "The Triumph of Injustice," which will be published next week. The authors are Emmanuel Saez and Gabriel Zucman, both professors at the University of California, Berkeley, who have done groundbreaking work in the field of taxation. Saez won the award, which recognizes the best academic economist under the age of 40, and Zucman was recently portrayed on the cover of Bloomberg BusinessWeek magazine as "the wealth detective." Are the rich taxed too easily? This is a question that has been coming up again and again for more than a century. Tax records leaked by billionaires could again tip the pendulum. According to ProPublica, the answer is clear: "Taken together, [the data] destroys the fundamental myth of the U.S. tax system: that everyone pays their fair share and that the richest Americans pay the most. A corporate income tax (IRS) is levied by the federal and state governments on corporate profits. Many businesses are not subject to the IRS because they are taxed as intermediary businesses, with income reported as personal income tax. In addition, there may be reasons to support higher taxes that go beyond their ability to generate income. A popular theory among left-wing intellectuals – currently advanced by Piketty, Saez and their protégé Stefanie Stantcheva – is that high tax rates actually reduce income inequality by discouraging CEOs and professionals from demanding exorbitant salaries for their services. to become so rich. After all, there is no point in negotiating a huge bonus if the government cuts most of it. I wouldn`t say the theory has been accepted as a consensual fact at this point, but it is certainly alive and well and taken seriously.
The tax disclosures come at a time when income inequality is an issue of great importance to some Americans. And while the tax system has not caused this inequality, the question is open as to what it is doing to restore balance. The challenge goes far beyond a debate about what rate high-income Americans should pay, and it`s hardly limited to Mr. Bezos. Last week`s best-selling report showed that Elon Musk, Michael Bloomberg, Carl Icahn and George Soros have not paid income tax at least once in the past 15 years. Even if Facebook were to pay dividends, Mr Zuckerberg would benefit from another pause that the tax code has offered shareholders since 2003: a rate not exceeding 20% – lower than the higher rate for wages and salaries. This break helps all investors a little if they earn a few hundred or thousands of dollars with their shares. It helps rich people a lot when their dividends are in the millions. American progressives fondly remember the mid-20th century as a time when the only thing higher than the caudal fin of a Cadillac was the top marginal tax rate (which reached over 90% for the very rich during the Eisenhower years).
Uncle Sam took 90 cents on the dollar from the highest incomes and, as any good Bernie Sanders supporter will remind you, the economy prospered. They built a historical database that tracks household tax payments at various points on the income spectrum, dating back to 1913, when federal income tax began. The story they tell is crazy – and yet ultimately challenging. The U.S. economy simply doesn`t work very well when tax rates for the rich are low and inequality is very high. This was true in the run-up to the Great Depression, and it has been true lately. Which means that raising high-end taxes is not about punishing the rich (who, by the way, will always be rich). It`s about creating an economy that works better for the vast majority of Americans. Serious discussions about a tax reform that includes a wealth tax (which conservatives see as detrimental to growth) or a European-style VAT (which scares liberals about their potential to hit the poor more than the rich) are on hold. But Biden is proposing an increase in the capital gains tax rate and is actually seeking to tax great inherited wealth.
I already know what some critics will say about these arguments – that the rich will always find a way to avoid taxes. This is simply not the case. Certainly, they will always manage to avoid certain taxes. But history shows that serious attempts to raise taxes tend to succeed. While most Americans support the idea of taxing the rich, for many, it`s not a major problem, according to Gallup, the polling agency. Only 1% of Americans say the gap between rich and poor is the nation`s biggest problem, and in a way, they like to have a rich class, perhaps as something they can aspire to for themselves. President Trump`s tax cut in 2017, which was largely alms to the rich, also plays a role. This has helped bring the tax rate of the richest 400 households below the rates of almost everyone else. The highest income tax rate has been lowered to 37% for tax years beginning in 2018. The additional 3.8% is still applicable, so the maximum federal income tax rate is 40.8%.
Thus, the real tax rates that wealthy Americans paid in the 1950s may not have been as stratospheric as some progressives assume. But they may also have helped create a more egalitarian society. This seems worth considering. The southern colonies, on the other hand, were hostile to taxation. Plantation owners feared that taxes would undermine slavery by undermining shareholder wealth, as historian Robin Einhorn explained, and ensured that tax rates remained low and tax collection was inefficient. (The Confederacy`s hostility to taxes ultimately hampered its ability to raise funds and wage civil war.) But the tipping point came in 2017 with the passage of the Tax Cuts and Jobs Act. The legislation introduced by President Trump and then House Speaker Paul D. Ryan (R-Wis.), was a stroke of luck for the rich: it lowered the top bracket of income tax and lowered the corporate tax rate. "The best estimates suggest that the tax system is progressive — the rich paying a higher tax rate than everyone else," Furman said.
Nearly a decade ago, Warren Buffett made a claim that would become famous. He said he paid a lower tax rate than his secretary thanks to the many loopholes and deductions that benefit the rich. After the war, the idea of a general income tax remained stalled, but the practice of taxing $9 by $10 of the income of the rich gradually fell out of favor with the Republican and Democratic presidents who imposed cuts to the top rate. In 1986, President Ronald Reagan and Democrats in Congress struck a bipartisan deal that lowered the top rate to 28 percent to fill many loopholes that the rich had used to avoid taxes. Democrats, to the extent that they care about the budget deficit, want to raise taxes they deem too low – especially for the rich. Conservatives, however, often try to fend off this side of the story by pointing out that these surprisingly high tax rates existed mostly on paper; relatively few Americans actually paid for them. Recently, Scott Greenberg of the Tax Foundation went so far as to claim that "taxes on the rich in the 1950s were not much higher" than they are today. Between 1950 and 1959, he notes, the 1 percent of Americans paid an effective tax rate of 42 percent. By 2014, it had fallen to only 36.4% – a significant decline, but by no means astronomical.
By the middle of the 20th century, advocates of high taxes had prevailed. The United States had arguably the most progressive tax code in the world, with a 91% higher income tax rate and a corporate tax rate of over 50%. However, economists generally agree that the tax burden on the rich has decreased significantly in recent decades. The focus on the ultra-rich is necessary, Saez and Zucman write, because these households control a disproportionate share of the country`s wealth: the 400 richest families have more wealth than the poorest 60 percent of households, while the richest 0.1 percent own as much as the poorest 80 percent. The top 400 families are a "natural point of reference," Zucman says, as the IRS publishes information about the top 400 taxpayers as a group and other sources like Forbes track the fate of the richest 400 Americans. A new book-length study on the tax burden on the ultra-rich begins with a surprising result: in 2018, america`s richest billionaires paid a lower effective tax rate than the working class for the first time in history. It`s a question that has regularly rocked America over the past century: How much should rich Americans pay in taxes? The rate was 90% and 28%. Then there are completely legal procedures that allow billionaires to requalify their income so that they pay less tax and sometimes not at all. This month, investigative website ProPublica revealed how much the richest billionaires in the United States have paid in income tax relative to the gains from their wealth. From 2014 to 2018, Jeff Bezos, the richest person in the world, paid only 1%; Warren Buffett, the famous investor, paid 0.1%. In 1980, on the other hand, the richest 400 had an effective tax rate of 47%. In 1960, this rate was 56%.
In contrast, the effective tax rate paid by the poorest 50% has hardly changed over time. .