The Good Ol’ Days: When Tax Rates Were 90 Percent

It’s quite interesting indeed when both progressives and conservatives seem to be nostalgic for those good ol’ days in the 1950s, for different reasons, of course. Conservatives want to go back to the nuclear Leave It to Beaver family and what not, while liberals like to talk about those 90-percent tax rates that we owe our prosperity to. Or something like that. We’ll focus on the latter for the time being.

Bernie Sanders noted that “When radical, socialist Dwight D. Eisenhower was president, I think the highest marginal tax rate was something like 90 percent.” Paul Krugman said the same thing, as did Michael Moore in his film Capitalism: A Love Story, and you’ll see this factoid repeated on countless memes floating around the Internet.

However, what a tax rate is and what is actually paid are two very different things. Indeed, in 1955, the only people paying 90 percent (actually 91 percent) were those making over $3,425,766 when adjusted for inflation. And these are marginal rates, so they only paid that on any earnings above that threshold.

Tax law has changed a lot over the years. As you can see by looking at the top marginal rate versus the inflation-adjusted top income bracket for those filing jointly from 1950 until 2013:

Top marginal rate versus the inflation-adjusted top income bracket
Source: Tax Foundation.

Today, there are seven tax brackets. In 1989, there were only two. In 1955, there were an utterly ridiculous twenty-four different tax brackets.

Regardless, one should ask how much the rich were actually paying. It should be noteworthy that back in the 1950s, the government wasn’t actually collecting any more in tax revenue as a percentage of GDP. There’s something called Hauser’s Law, which basically states there is a maximum threshold on how much the government can tax out of its population. I think this “law” is no such thing. If the government really wanted to expropriate more, it could do so. But Hauser’s Law is based on the fact that in pretty much every year since 1950, the government has collected between 17 to 20 percent of GDP in taxes. Here are the government tax receipts compared to the top marginal tax rate:

Total Tax Receipts vs Top Marginal Tax Rate
Sources: Tax Foundation and Tax Policy Center.

As you can see, no matter what the rate has been, the tax receipts have pretty much been the same. Whether or not you can raise the amount collected is really immaterial here; the only thing that matters is what has happened (particularly when tax rates were over 90 percent), and it’s pretty much always been the same.

Of course, there are a lot of other taxes than personal income taxes. Still, tax receipts from personal income taxes have consistently been between 7 and 9 percent. In 2014, they were 8.1 percent. Furthermore, as you can see, the chart looks pretty much the same when looking at personal income tax receipts and the top marginal tax rate.

Income Tax Receipts vs Top Marginal Tax Rate
Source: Tax Foundation.

But who is paying these taxes, a liberal might retort? Has the burden fallen more on the middle and lower classes? Well, no. In fact, the percentage of taxes paid by the highest quintile of income earners has steadily gone up since 1980. In 1980, the top 20 percent paid about 55 percent of all income taxes. Today, it’s just shy of 70 percent. The same goes for the top 1 percent, which went from about 15 percent in 1980 to just shy of 30 percent today.

The first of many reasons that this was the case is that we need to look at the effective tax rate, not the top marginal tax rate. So for example, if I make $20,000, I owe 10 percent under today’s tax code, but only on any income over $18,450 (filing jointly). So I only owe 10 percent of $1550, or $155. Yes, my marginal tax rate may be 10 percent, but my effective tax rate is 0.78 percent.

A study from the Congressional Research Service concludes that the effective tax rate for the top 0.01 percent of income earners during the period of 91-percent income taxes was actually 45 percent. Given that the top bracket is so much lower today ($3,425,766 in 1955 vs. $413,200 in 2015), the 39.6 percent top marginal rate probably yields something pretty close.

Some of this was because corporate rates have always been lower than 50 percent. And as Alan Reynolds noted, when the personal income tax rates were reduced, it “… induced thousands of businesses to switch from filing under the corporate tax system to filing under the individual tax system.” In other words, many rich people kept their money in corporate entities when personal tax rates were higher.

Another major factor was the myriad of deductions and loop holes that used to be available. Many of these were eliminated by the Tax Reform Act of 1986, which by no coincidence coincided with the biggest rate deductions. For one, interest had previously been deductible on all loans. After the act, it has only been deductible on home mortgages.

But what was probably the biggest lost deduction for wealthy individuals was the elimination of deductions on passive investment losses on real estate. Before 1986, wealthy individuals would often buy real estate with no hopes at all of it cash flowing. That wasn’t the point. The point was that real estate is depreciated every year in the eyes of the IRS. Even though in the long run, properties usually go up in value, the IRS assumes that every twenty-seven-and-a-half years, a property’s value will depreciate to zero.

This “loss” can be written off. So, for example, say a man earning $100,000 a year buys a property worth $275,000. He rents out the property and breaks even on it. The tax code allows that person to write off $10,000 as a loss which he can count against his income for that year. So now he only has to pay taxes on $90,000. If he owned ten such properties, his income would be zero, at least according to the IRS.

That deduction is now gone for everyone but “active” real estate investors, or those who invest in real estate as a career.

Indeed, one former tax accountant even made the case that there were so many deductions, loop holes and the like in the pre-1986 tax code that “… there was a massive amount of tax fraud at all income levels under the old code. It was so bad and so common that most people took pride in telling others how they cheated on their taxes.”

I’ll leave how true that statement is to the reader; but from what I’ve heard, it sounds about right.

Regardless, the simple fact is that the rich never paid 90 percent of their income in taxes or anything even remotely close to that. Unfortunately though, some memes die hard.

This commentary originally appeared at and is reprinted here under a Creative Commons license

Here Is By Far The Stupidest Tax Americans Pay–Are You Paying It?

One of the stupidest, most asinine, and most evil things that Americans will encounter this tax season is the gift tax.

According to the IRS:

The gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not.

The gift tax applies to the transfer by gift of any property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.

How bad does the IRS want to tax you for giving someone a gift? Here is your answer: “The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts.”

  • Gifts that are not more than the annual exclusion for the calendar year.
  • Tuition or medical expenses you pay for someone (the educational and medical exclusions).
  • Gifts to your spouse.
  • Gifts to a political organization for its use.
  • In addition to this, gifts to qualifying charities are deductible from the value of the gift(s) made.

And what is the annual exclusion amount? Again, according to the IRS: “All of the gifts made during the calendar year to a donee are fully excluded under the annual exclusion if they are all gifts of present interest and they total $13,000 or less.”

My, how generous is the federal government! As long as you don’t give someone a gift worth over $13,000 then you don’t have to pay any gift tax.

But why do we have a gift tax in the first place? Don’t we already pay taxes on the money we earn? Why should we be taxed again just because we give away money instead of spend it? Is this not double taxation? Of course it is. But the federal government loves taxing money twice. Is there a tax deduction for Social Security and Medicare taxes paid? Of course not. Are dividends taxed after corporations already paid taxes on their profits? Of course they are.

The reason why we have a gift tax is because we have an estate tax. Without a gift tax, the rich could give away all their money before they die and thus avoid paying the estate tax. But what’s wrong with that? Haven’t they already paid taxes on not only the money they earned, but also on their capital gains and interest they received? For more on the estate tax, see my article “A Libertarian View of the Estate Tax.”

The rule that you cannot give away to someone more than $13,000 in a year without paying a gift tax is a stupid rule.

Stupid rule; stupid Republicans.

Republicans? How can I possibly blame this stupid rule on Republicans? Hasn’t the gift tax been around since 1932?

First of all, let’s be clear why I am singling out the Republicans. It is Republicans that talk about cutting taxes, not Democrats. It is Republicans that talk about limiting government, not Democrats. It is Republicans that talk about smaller government, not Democrats. It is Republicans that talk about getting the government out of our lives, not Democrats. This doesn’t mean that Republicans really believe any of these things, but they are the ones talking about them, not Democrats.

The Republicans gained a majority in the House and Senate in the third year of Clinton’s first term as president. This was the first time that the Republicans had controlled the entire Congress since the 83rd Congress of 1953-1955 under President Eisenhower. The Republicans could have put a bill to repeal the gift tax on Clinton’s desk every day. When Clinton refused to sign it, they could have garnered enough public opinion in support of repealing the gift tax so that Clinton was forced to sign it. The Republicans made absolutely no attempt to do so. Instead, all we heard from them were excuses about needing a larger, veto-proof majority in Congress or a Republican in the White House to ensure the passage of Republican bills.

Well, they got their Republican president in 2000, and what happened to the gift tax? Absolutely nothing. Why wasn’t the elimination of the gift tax made part of the Bush tax cuts? The Republicans controlled the Congress and the presidency from the inauguration of George Bush on January 20, 2001, until May 24, 2001, when Republican senator Jim Jeffords switched from Republican to independent. After the 2002 election, the Republicans regained control of the Senate. The Republicans lost both the House and the Senate in the 2006 election. This means that for four years without interruption, the Republicans controlled the Congress and the White House. If ever in history the gift tax could have been repealed, then that was the time. But it wasn’t repealed any more than any other wealth redistribution scheme was repealed. Instead, the government grew by leaps and bounds. It is not government that Republicans want to limit, make smaller, and get out of our lives, it is only government controlled by Democrats.

The late Sam Francis (1947-2005) used to call the Republican Party the Stupid Party. Is there any doubt that he was entirely correct?

Laurence M. Vance [send him mail] writes from Pensacola, FL. He is the author of Christianity and War and Other Essays Against the Warfare State and The Revolution that Wasn’t. His newest book is Rethinking the Good War. Visit his website.

Copyright © 2012 by

This article originally appeared at and is reprinted here under a Creative Commons license

Watch: Fox News Host Just Destroyed Liberal Guest With Seven-Word Question She Can’t Answer

Amid widespread civil unrest concentrated within college communities across the nation, one group of university students is making a bold demand for three specific – and costly – federal benefits.

Keely Mullen, who serves as the Million Student March’s national organizer, spoke to Fox Business Network’s Neil Cavuto regarding the group’s list of demands.

“Um, well, so the movement, the Million Student march is a movement for a more equitable and fair system of education,” Mullen insisted, “as opposed to the really corporate model we have now.”

She went on to list the three demands: “Free public college, cancellation of student debt and a $15 an hour minimum wage for people who work on the campus.”

Cavuto immediately steered the conversation toward how Mullen envisioned such a plan might be funded:

And how’s that going to be paid?

The guest took a pregnant pause before suggesting that she did not understand the question. Finally pressed to name a source for the incalculable new revenue stream needed to enact her utopian dream, Mullen acknowledged that she is anxious to see America’s greedy rich have their wealth confiscated.

“Um, the one percent of people in society,” she said, “that are hoarding the wealth and really sort of causing a catastrophe that students are facing. I mean we have a relationship now where one percent of the population owns more wealth than the 99 percent combined.”

Cavuto pointed out that the nation’s top earners have already seen their tax rate jump twice in recent years, as well as a deep cut in the deductions they are allowed to declare.

“How much more do you think they should pay?” he asked.

“Um,” she responded, “I think enough until we have a system where not 1 in 2 American families are threatened with poverty.”

Cavuto explained that the “one-percent hoarders” are “smart people,” asking her “who’s going to pay for all this stuff you want” when the wealthy leave the U.S.

“There’s always going to be a one percent in the U.S.,” she reassured him.

When Mullen began citing the world’s wealthiest citizens to further her narrative, Cavuto got her back on track.

“Are we talking about 85 billionaires,” he asked, “or are you extending this to the one percent or whomever who earn a little bit north of $250,000? At what level, Keely, do you start saying, ‘You’ve got to pay a hell of a lot more than you’re paying right now in taxes?’”

She said she supports a tax rate of at least 90 percent on those in the top tax bracket, suggesting her own peers would gladly give all but a dime of every dollar they earn to the federal government.

“I dare say,” Cavuto shot back, “unless you’re high as a kite, you wouldn’t volunteer to pay 90 percent.”

Social Security: The Long Slow Default

When an investor buys an annuity or another retirement product from an insurance or mutual fund company, the contract is constant and enforceable through the United States court system. When a United States taxpayer is forced to pay for a government backed retirement system such as the Old-Age, Survivors, and Disability Insurance program (OASDI) — also known as Social Security — the “contract” can be, and is, changed on a regular basis by the United States government, and those changes are generally not to the benefit of the taxpayer.

Participation in the Social Security system became compulsory in 1935, and the first monthly retirement checks were issued in 1940. The first monthly check was issued to Ida May Fuller of Ludlow, Vermont. She had paid approximately $25 into the Social Security system and received over $22,000 in benefits from the system due to living to 100 years of age. The other early retirees of the Social Security system on average also did very well. Retirees in 1977 are estimated to have received seven times what they paid into the Social Security system. Retirees entering the program as recipients today will probably receive a negative return on their “investment.”

The “Primary Insurance Amount”

The way that Social Security benefits are calculated is complicated, and can, of course, be modified at any time.

The amount of monthly income a Social Security enrollee receives is called the Primary Insurance Amount. The current Primary Insurance Amount (PIA) benefit formula was created in 1979 and is based on two “bend points.”

For an individual who first becomes eligible for old-age insurance benefits or disability insurance benefits in 2015, his PIA will be the sum of:

(a) 90 percent of the first $826 of his average indexed monthly earnings (AIME), plus,
(b) 32 percent of his average indexed monthly earnings (AIME) over $826 and through $4,980, plus,
(c) 15 percent of his average indexed monthly earnings (AIME) over $4,980,

where the Average Indexed Monthly Earnings (AIME) is currently the average of the Social Security recipients’ top thirty-five years of income during his lifetime divided by 12.

Significantly, each year’s monthly income is expressed in 2015 dollars using the Consumer Price Index (CPI).

Benefit Cuts Since the 1970s

By the late 1970s, it became obvious that the Social Security system was going to have significant solvency problems since the ratio of workers to retirees decreased from around 40-to-1 in 1945 to around 3-to-1 in 1980, and most of the money paid into the system had been spent on other government programs.

Payroll taxes were therefore increased, and a series of changes were made to the Primary Insurance Amount (PIA) payment formula to cut the benefits that Social Security enrollees would receive.

The PIA formula before 1979 was even more complicated than the one used in 2015. It had ten bend points, but gave more credit to high income workers. According to Robert J. Myers in his book Social Security, the changes in the benefit formula in 1979 resulted in, on average, a 7 percent reduction in monthly Social Security payments for new retirees. Under that current benefit formula, if a Social Security enrollee has a life-time income over $2 million, he will very likely have a negative return on his investment. For lifetime incomes between $0.5 million and $2 million, the enrollee has a chance to break even. Enrollees with a lifetime income less than $0.5 million have a good chance of still benefiting from the Social Security system. The number of years included in the earnings base (the number of years of income averaged to determine the monthly benefit payment) was gradually increased from twenty-three years, for people born in 1917, to twenty-nine years for people born in 1923 to thirty-five years, for people retiring in 2015.

For mothers who took time off from their career, people who spent a long time in graduate school, and people whose income was much larger during later parts of their life, this resulted in a significant decrease in benefits. (See The Social Security Book by Jack and Erwin Gaumnitz.)

Using the CPI to Keep Payments Down

Since the 1970s, the AIME used to determine the PIA has been indexed using the Consumer Price Index (CPI). So the higher the CPI, the larger a recipient’s monthly Social Security benefits will be. Social Security benefits for current retirees are also increased annually by the CPI. This means that one way the government can lower benefit payments is by under-estimating the inflation rate. The Bureau of Labor Statistics (BLS) has redefined how the CPI is calculated several times since the 1980s, lowering the CPI in each case. According to economists at Shadow Government Statistics, the CPI currently underestimates the inflation rate by at least 4 percent per year. If this is the case, Social Security recipients receive a 4 percent reduction in their buying power each year.

“Mini-Defaults” in the Social Security System

The US government knows it cannot keep up its end of the original Social Security bargain. So, to address its insolvency issue, the federal government simply responds by reducing benefits while increasing taxes. Increasing the retirement age, for example, is an easy way to reduce benefits.

The retirement age was increased from sixty-five for those born in 1937 or before to sixty-seven for those born in 1960 or after. Since enrollees do not get maximum benefits until age seventy, it could be argued that seventy is really the current full retirement age.

The taxable earnings base (the maximum income that is subject to Social Security taxes) and Social Security tax rates have increased drastically since the system was first created. The taxable earnings base was $3,000 in 1937, $25,900 in 1980, and $118,500 in 2015. The Old-Age and Survivors Insurance (OASI) tax was 2 percent in 1937, 9.04 percent in 1980, and 10.98 percent in 2015. This number includes both the employer and employee portion. When the 1.42 percent Disability Insurance tax and the 2.9 percent Medicare tax is added, the total payroll tax is currently 15.3 percent.

In 1983, legislation was passed to tax Social Security benefits for the first time. Currently, if a taxpayer’s provisional income is more than $25,000 on a single return or $32,000 on a joint return, their Social Security benefits will be taxed at between 50 percent and 85 percent of their normal tax rate.

Further Tax Increases and Benefits Cuts are Likely in the Near Future

According to the Social Security Administration, by 2033 future payroll taxes will only cover around 77 percent of estimated benefits. It is therefore likely that even further benefit cuts and tax increases will occur in the near future. Increasing Social Security tax rates from 12.4 percent to 15.5 percent and eliminating the taxable maximum (i.e., making all income subject to Social Security taxes) is currently being considered. Other tax increases being proposed include taxing contributions to flexible spending accounts and creating a national Value Added Tax (VAT).

Further cuts to Social Security benefits are also on the table. Proposals to cut benefits include increasing the retirement age from sixty-seven to seventy years, increasing the number of years included in the earnings base from thirty-five to thirty-eight or forty, and increasing the percentage of Social Security benefits that are subject to income taxes. Redefining the CPI index to further underestimate the inflation rate is also on the table.

Social Security has long been sold to the public on the notion that what a worker will receive back is what he or she pays into the system. For decades, however, the government has been changing the terms of this “agreement” as part of an effort to avoid outright default. This long, slow method of piecemeal default, however, is likely to continue.

This commentary originally appeared at and is reprinted here under a Creative Commons license

The views expressed in this opinion article are solely those of their author and are not necessarily either shared or endorsed by

A Simple Flat Tax For Economic Growth

American workers are the most creative and dynamic people in the world, if they aren’t shackled by Washington. As President Reagan showed—and before him, President Kennedy in the 1960s (average annual growth of 5.3%) and Presidents Harding and Coolidge in the 1920s (4.7% growth)—tax reform is a powerful lever for spurring economic expansion. Along with reducing red tape on business and restoring sound money, it can make the U.S. economy boom again.

That’s why I’m proposing the Simple Flat Tax as the cornerstone of my economic agenda.

In constructing my plan, I had several requirements. The plan should: spur robust economic growth and job creation, while raising after-tax income for all Americans; be dramatically simpler, to allow working people to file their taxes with a postcard or phone app; and shrink Washington by getting rid of the rat’s nest of complex tax requirements, credits and loopholes.

With these goals in mind, based on a structure suggested by President Reagan’s tax adviser, Arthur Laffer, my Simple Flat Tax plan features the following:

  • For a family of four, no taxes whatsoever (income or payroll) on the first $36,000 of income.
  • Above that level, a 10% flat tax on all individual income from wages and investment.
  • No death tax, alternative minimum tax or ObamaCare taxes.
  • Elimination of the payroll tax and the corporate income tax, to be replaced by a 16% Business Flat Tax. This would tax companies’ gross receipts from sales of goods and services, less purchases from other businesses, including capital investment. Simple, efficient, fair.
  • A Universal Savings Account, which would allow every American to save up to $25,000 annually on a tax-deferred basis for any purpose.

Today, the U.S. taxes American producers that export goods, but it imposes no burden on imports. My business tax is border-adjusted, so exports are free of tax and imports pay the same business-flat-tax rate as U.S.-produced goods. By shifting to a territorial tax system that doesn’t tax income earned overseas twice, my plan will reverse the incentive for U.S. companies to relocate overseas. Instead, businesses will be relocating to America.

The views expressed in this opinion article are solely those of their author and are not necessarily either shared or endorsed by