The Spectacle Blog

It’s About More than Marginal Tax Rates

By on 11.10.11 | 3:32PM

The U.S. already has a very progressive tax code and has actually gotten more progressive over the course of the Bush years. Nonetheless, one of the principles (if they have any at all) of Occupy Wall Street is that the rich and super-rich don't pay enough in taxes, and that money should then be used to pay for a larger welfare state.

Jim Pethokoukis writes that that, in the past, the U.S. has had top marginal tax rates well north of 50%, and even up over 90% in the 1950s. But he also points out the problem with that line of argument:

Statutory tax rates can provide a misleading picture of the income tax burden. From 1950-1963, income tax revenue averaged 7.5 percent of GDP. During the presidency of George W. Bush — counting the years when the Bush tax cuts were in effect and the top rate was 35 percent — income tax revenue averaged 7.7 percent of GDP. This could suggest rates are right around the Laffer Curve equilibrium point in the current economy.

It would be useful to break it down even further. It's unlikely that anyone ever paid an effective rate that high. Indeed, take a look at the table of average effective rates paid by different income levels over time from the Tax Policy Center. During Ronald Reagan's presidency, the top tax rate was cut from 70% to 28%. And the average effective tax rate for the top 20% of income-earners fell all the way from 27.3% to 25.6%.

How about the top 1% that the Occupiers are so upset about? Well, in the course of having their statutory tax rate fall 42 points, they went from paying an average rate of 34.6% in 1980 to 29.7% in 1988.

Are "the 99%" really so furious about this five-percentage-point drop? Do they think we could fund the massive liberal agenda using an extra 5% in tax revenue from the top 1%?

The answer is that it's a little more complicated than merely what the top rate is. The tax code is a mess of complexity, and no one pays the statutory rate. The truth is that the 70% top tax rate of the 1970s and the 50% tax rate for much of the 1980s didn't actually have that much effect on the amount of revenue collected. There are complications with the capital gains tax, corporate income taxes, payroll taxes, deductions, credits, and other divots in the code that prevents that from happening. The fantasy world of Michael Moore where the rich faced a 90% tax rate simply doesn't exist.

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