We Used to Tax the Rich at 91%. It Worked, and We Should Do It Again.
We Used to Tax the Rich at 91%. It Worked, and We Should Do It Again.
Warning: This one has a lot of graphs.
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A few weeks ago, there was an online spat between progressive commentator Sam Seder and Fear Factor host-turned-Heritage Foundation spokesperson Joe Rogan. Seder had stated that his ideal tax system would be one similar to America’s post-World War II period, in which all income over $200,000 (about $3 million in today’s dollars) would be taxed at 91%. Rogan, a muli-millionaire himself, called Seder a “fucking dork” and chastised him with the usual Conservative charge of being an out-of-touch, pie-in-the-sky hippie-type who “doesn’t understand economics.”
So, to measure if Seder’s assertion was correct, I’ve examined the post-War era top marginal tax rates, their effects on wealth distribution, and how their reduction has contributed to the record-breaking income inequality we experience today.
Let’s begin.
Taxes, Historically Speaking
Despite the rich constantly complaining about high taxes, today’s rates are the lowest in over a century.
As we can see in the chart above, contemporary rates are a fraction of what they were between 1945 and 1963. While many are familiar with the high-tax period of the 1950s and 1960s, there are misconceptions about its origin. Typically these high rates are framed as “leftover from World War II,” when the government needed extra money to make tanks, bombs, etc. But looking at the pre-WWII tax rates shows that this framing is untrue.
After a brief hike imposed by World War I, the wealthiest paid only 25% of their income in taxes until the start of The Great Depression. In 1932 it rose to 63% to fund the New Deal programs and continued climbing. The year the U.S. entered the War, the richest were taxed at 81%. The top marginal tax rate peaked at 94% in 1944, then fell to 91%, where it stayed until 1964.
If Conservatism’s central premise that taxes stifle economic development, job creation, and overall, hamper society is true, then this period in which all income over $200,000 was taxed at 91% should be a dark time in American history, one filled with bread lines, mass unemployment, and despair.
To my great shock, Joe Rogan was wrong about this one. (Gasp!) The post-World War II era was not a despairing time for the working class, but one of relative prosperity.
The Great Compression, 19456 — the 1970s
Following the end of the War, the median American had a decent life. (It should be noted the majority of this prosperity went to White Americans, as Blacks, Latinos, and other minorities still faced rampant discrimination.) Veterans benefited from the G.I. Bill, New Deal programs were still in effect, and unions were vibrant thanks to the National Labor Relations Act of 1935.
This led to a period of record-low wealth inequality, known as “The Great Compression.” We can see this effect in the graph below, which illustrates the share of pre-tax household income going to the Top 1%, .1%, and .01%. Notice how in the years between 1945 and the late 1970s, the ultra-rich were getting a much smaller portion of the country’s wealth than they were prior to the War and after the 1980s tax reduction.
While there are unlimited factors that contribute to an economic outcome such as a greater share of the country’s wealth going to the working class, there’s strong data to suggest it was the high top tax rates that drove this compression.
Looking at this graph from the research of economists Thomas Piketty and Emmanuel Saez, we can see how the share of wealth going to the top .1% fell in the U.S., U.K., Canada, (Panel A) Japan, and France (Panel B) following the Second World War. But, we also see that the top .1% reclaimed their disproportionate share of the wealth in the three English-speaking countries starting around the 1970s. Conversely, no such rebound can be found in Japan and France, where the .1% of the population held only about 2% of their country’s wealth into the new millennium.
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