On One Hand

October 25, 2008

What are YOUR ideal tax changes?

Filed under: Uncategorized — ononehand @ 9:48 pm

In 1987 during Ronald Regan’s last term in office, the top income tax bracket was lowered from 50 percent to 38.7 percent on those making more than $90,000 a year. Bush (who inherited a tax system that was by then more progressive so those earning $90,000 a year already paid less) dropped the highest bracket down to 35 percent, and Barack Obama’s plan is to raise it back to where Regan had it but only for those making much more than $250,000 a year rather than $90,000 a year (meaning Obama’s tax rates are effectively lower than Ronald Reagans). Rather than arguing that a candidate’s position is “socialist” for bumping the highest payment rate up by three percent, lets figure out what we all think the highest rate should be.

For historic reference, the highest marginal income tax rate in U.S. history was 91% in 1951 under Republican Dwight Eisenhower, applying to married couples earning more than $400,000 a year. This does not inclue tax deductions or exemptions that most people had for various reasons.

The lowest marginal income tax rate since World War I was in 1929 under Herbert Hoover, just before the stock market crashed, at 24 percent on those earning more than $100,000 a year.

The highest tax bracket’s marginal income tax rate was above 60% consistently from 1932 until 1981.

Barack Obama plans to cut taxes for lower, middle, and many upper-income individuals and households by raising them for those in the highest bracket to where Ronald Regan had them in 1987. Those in the lowest brackets would see the highest percentage tax cut while those earning around 150K a year would see the highest net tax cut in dollars. He also plans to raise the capital gains tax (profit earned through investments) from 15% (which is much lower than the income tax rate for almost all brackets) to closer to 20-25% but ONLY on those earning more than 250K a year, making that tax system “progressive” (where the rich pay higher rates than the poor) for the first time.

John McCain plans to cut taxes for most taxpayers but mainly for those in the highest bracket, by preserving the Bush tax cuts set to expire. Those in the highest bracket would see the highest percent tax cut as well as the highest net tax cut in dollars. He promised not to raise the capital gains tax rate and to cut corporate taxes.

But rather than these arguments about whether taxes should be “HIGHER” or “LOWER,” something as confusing as it is complicated, lets start off by deciding where, by the numbers, certain tax rates should be:

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3 Comments »

  1. The highest marginal tax rate actually reached 94 percent during World War II. It dropped down to 91 percent in 1946, where it stayed (aside from a brief blip up to 92 percent under Truman for Korea) until the Kennedy tax cuts. Eisenhower did not become president until 1953.

    I would also note that the Obama plan does not cut anyone’s marginal rates. Instead, his plan uses targeted tax credits for certain activities and individuals. McCain also does not cut any rates (and certainly not dependent on whether or not they are “voters”!) but rather preserves them as they are now.

    Your question about how much “average” people should pay in taxes says the current rate is 25%. That ignores state taxes and payroll taxes. The third question confuses wealth with income, which are very different things.

    I’m not sure who will pick your “make the tax code less progressive” since it’s one of those words that nobody would want to deny believing in — who’s against progress? I could just as easily write it as “broaden the tax base to ensure everyone pays a share” or “reduce instability caused by relying on only a small number of people to fund government programs.” (You also first define progressive as higher marginal rates, but then in the question use it as meaning higher effective rates.) But then again polls are often written to encourage the response the pollster wants.

    On that note, we did a poll annually through 2007 that addressed many of these questions (http://www.taxfoundation.org/research/show/22331.html). Americans usually underestimate how much the wealthiest pay in taxes, misunderstand what the federal government spends money on, thinks anything above 10 or 20 percent being paid in taxes is usurious, and doesn’t understand that corporations are pass-throughs not taxpayers.

    For my lengthier response to the argument that the pre-1980 American economy is something to emulate, see here: http://www.taxfoundation.org/news/show/23552.html.

    Ultimately, it comes down to a difference about whether it would be preferable to have everyone equally lower middle class (Scandinavia at the best end, Cuba at the worst); or to have some rich, most middle class, and some poor, but mobility. You chase one goal and you usually end up doing worse on the other.

    Comment by jdhenchman — October 26, 2008 @ 6:04 am | Reply

    • Thanks for correcting me on the tax rate, I just went by the guide I found online which showed taxes being highest at 91 percent and a little lower during World War II.

      I wasn’t trying to cover state and payroll taxes so intentionally left them out.

      As for making the tax more or less “progressive,” I think that everyone understands the definition of progressive tax system being that you pay a progressively higher tax rate as your income increases. This is similar to the “pro-life pro-choice” thing that seems to benefit one position over the other, but once people understand the term well enough it makes no difference.

      Ultimately, it comes down to a difference about whether it would be preferable to have everyone equally lower middle class (Scandinavia at the best end, Cuba at the worst); or to have some rich, most middle class, and some poor, but mobility. You chase one goal and you usually end up doing worse on the other.

      That’s exactly the kind of ideological “it’s either this extreme or that one” conversation I wanted to avoid by posting the question in this way. What if you want don’t want taxes to be 10 percent or 94 percent; what if you think they should be somewhere BETWEEN 10 percent and 94 percent? That’s where most people are.

      Comment by ononehand — October 26, 2008 @ 9:01 pm | Reply

  2. Taxes

    One note: Eisenhower wasn’t president in 1951.
    Tax all income the same.

    Comment by poimen — November 4, 2008 @ 9:24 am | Reply


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