March 4, 2019

Making America Tax Greatly Again?

Taxes and Greatness

Promises have been made to "make America great again". So, when was America great before? That's been cleared up. It was the late 1940s and the 1950s. Whether or not one agrees with that assessment, at least that's the parameter that is proposed. Let's go with it. So, if we are to talk about "greatness" for America, we'd also need to consider how America's government ran things, and one thing that was very different from the current day was the structure of income taxes.

It just so happens that the people at the Tax Foundation have published all US tax brackets from 1913 to 2013, and those from 2014 to 2018 can be looked up from multiple sources. We can use this along with consumer price index information from the same years to literally draw a picture of total federal income tax load by income for the years 1913-2018.

What I did was to back-adjust incomes of $25k, $50k, $100k, $250k, $1M, $5M, $10M, and $50M in 2018 to the equivalent values of each prior year, via a fraction of the CPI for 2018 vs. that year. Then I calculated total federal income taxes to be paid (as a percentage of income) for that year and adjusted income, including the standardized exemption. Total income taxes paid is not the same thing as tax bracket, at least not in the USA. Instead, we have incremental taxing. A simple explanation: Suppose we have a tax system where the first $10,000 is subject to a zero percent rate. Up to $50,000 is subject to a 5% rate, and over $50,000 is hit with a 10% rate. How much would $100,000 be taxed? Is it $10,000? Nope. It is $0 (10% × $10,000) plus $2000 (5% × ($50,000 - $10,000)) plus $5,000 (10% × ($100,000 - %50,000)) = $7,000. That's 30% less than just applying the top rate to the total income. This, by the way, is why I consider anyone who only cites the top marginal tax rate of any year to be dishonest, stupid, or both.

I used the rates and exemptions that would have been used each year by married couples filing jointly, no children. If someone wants to pay me my consulting rate, I'll be happy to make it more complicated.

Federal Income Tax as Percent of Total Income

Remember, that this is on CPI-adjusted income, or 2018 dollars, not nominal income for a year. For example, what would be calculated on $100,000 for 2018 was calculated on $10,665 for 1955 tax percentages. As I already mentioned, this is total final taxes as a percent of income, not just the highest marginal rate for that income. So, what you will notice is that total taxes on the wealthy were far higher during the era that America was "great" than they are in the present day. Indeed, if one takes the timeline of America's "decline" to begin in the 1960s and get ever worse as time goes on, as taxes on the wealthiest decline, so did America.

What is the take-home on this? I'm not claiming that high taxes on the wealthiest make everything "great". I'm also not saying that low tax rates on the wealthiest lead to "decline". If I have a take-home, it's that "greatness" as a package needs to look at all aspects of that package, and if one wants to replicate a long-lost supposed "golden age", one has to look at all aspects of that era and then decide if the costs are worth the alleged benefits.