The False Narrative of the 1950's

Recently, liberal economists have been arguing that very high marginal tax rates on the economy spur growth - and the 1950's are frequently cited as an example as a time where the economy was booming.

Between 1950 and 1960, real GDP grew by about 35% - roughly double the rates of the last 10 years and the top marginal tax rates during the 1950's were a whopping 91%.

Thus, the narrative goes something like 'If we return to high marginal tax rates on the 'rich' then this will help the middle class and working poor and the economy will boom - look what happened in the 1950's!'

However, this narrative has a number of holes and is not grounded in fact.  Let's examine some of them.

Hole #1:  U.S. Businesses faced far fewer external threats in 1950 than they do today.

During the 1950's the Chinese and Indian economies were stagnant - their share of World GDP actually shrunk and percentage of World GDP was about 15% of what it is today.  Implication: China and India were non-factors economically during the 1950's.

Europe was also in ruins following World War II - with most of it's industrial production destroyed as well as Japan's.  The quantitative effects are astounding.

Western Europe's GDP was 175% of the U.S. GDP in 1913 and in 1950 that figure had been reduced to a paltry 96% - while it is factually correct that Western Europe's GDP grew tremendously during the 1950's and 1960's, much of that was  simply rebuilding - not producing. Japan and the USSR's GDP during the the comparative time period relative to the U.S. also fell (by about 10 points each).

The world is a much more competitive place today than it was in 1950.
Source for stated figures:

http://en.wikipedia.org/wiki/List_of_regions_by_past_GDP_%28PPP%29 note:  yes it's Wikkipedia, but they used a highly regarded external source that I verified.

Hole #2:  The higher marginal rates didn't produce nearly as much revenue as one might think.

Here is a rolling 10 year period of Federal Revenue as a % of GDP:

1950's - 17.19%
1960's - 17.86%
1970's - 17.8%
1980's - 18.28%
1990's - 18.49%
2000-2010:  17.12%

The 91% tax rate failed to collect substantial amounts of revenues because of the way the tax code was written.  Just a couple specific examples:  Credit Card interest was tax deductible up until the Reagan Administration and the standard deduction was about 80% of the per capita income in 1950, as opposed to just under 30% as of 2010, there was a 4% tax credit on dividends and depreciation deduction allowances were much more generous than today. The bottom line is that yes, marginal tax rates were higher, but so were the deductions and credits.  Tax deductions and credits, are simply special interest spending by another name - an efficient tax policy would create incentives to maximize income - and not try and manage their lifestyles to avoid taxes.

http://www.taxpolicycenter.org/legislation/1950.cfm

Hole #3:  The United States is already more dependent on the wealthy for  than most other developed nations.

I don't really find it necessary to find a video or article showing where President Obama feels that taxes on the 'rich' must be raised.  Unless you've been living in a cave 100 miles from any civilization for the last 5 years, this should be universal knowledge.

However, in the United States, the top 10% of tax payers pay substantially more - 46% vs. 32% of the average of OECD nations.  That figure was based on total taxes - not Federal Income taxes (that figure is 73%).

It's tough to justify that the wealthy in the United States aren't paying their 'fair share'.

 Hole #4:  Higher income earners pay more of Federal Taxes today than they did under Clinton.

Marginal tax rates today are lower than they were in the Clinton era - but the wealthy actually pay a greater percentage of Federal Income taxes today than they did in 1999 - and this is true for the top 1, 5, 10 and 25%.

While the Bush (and now Obama) tax cuts are certainly not the sole reason that the wealthy pay a higher share of taxes than the 1950's AND 1990's, the narrative of forcing a greater share of the tax burden onto the wealthy to spur growth simply isn't justified by fact or data.