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Capital Investment Income Drives Income Inequality
A recently published analysis by Thomas L. Hungerford (see highlights below) looks at factors driving the growth of income inequality for the period between 1991 to 2006. Hungerford looked at the contributing impact of three factors, tax policy, labor wages and capital income. During the studied period he found that capital income (capital gains, interest income, business income and dividends) was by far the largest factor contributing to rising income inequality. Wages and salaries alone were not a factor and tax policies were only a minor contributor during this period, largely due to the more favorable tax treatment of capital gains.
This report doesn’t trace the history of income inequality prior to 1991 where changes in wage growth in the late 1970’s and the collapsing of upper income tax brackets in 1980 and 1985 were more dramatic.
It is worth remembering that for most of the past 100 years capital gains was treated as ordinary income for tax purposes. In recent times, capital gains have be treated as a separate class of income with a more favorable tax treatment. Capital ownership has always been more concentrated at the upper end of the income/wealth continuum. Capital is, of course, an ownership stake in our economy whether through stocks, bonds, property or business ownership. The income generated when these capital investments are bought and sold is currently taxed at 15% (if it is held for more than a year). That is less than half the top tax rate for wages and salaries. And how is capital ownership distributed in America?
Who Owns What In America?
The distribution of wealth ownership, as opposed to income inequality, is even more skewed towards the wealthy as the pie chart below shows. The whole pie represents the total wealth in America. Each of the five slices of the pie represent 20% of the US population according to how much wealth they own.
The slice of ownership for the poor and working poor are barely visible. Eighty-percent of all Americans own just 15.6% of America’s wealth. The number of people who slipped into poverty in 2010 was at an all time high of 46.2 million, so the poorest 20% of all Americans, in terms of wealth ownership, includes 15.5 million who are technically above the income poverty line. The poorest 40% of Americans essentially own almost nothing while the top 20% own almost 85% of everything. As a result, favorable tax policies for capital gains income has a highly disproportional benefit for the wealthiest Americans. Capital income for this wealthy segment is what drives rising income inequality today.
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Changes in Income Inequality Among U.S. Tax Filers Between 1991 and 2006: The Role of Wages, Capital Income, and Taxes
Thomas L. Hungerford
thunger@starpower.net
January 23, 2013
Electronic copy available at: http://ssrn.com/abstract=2207372
HIGHLIGHTS FROM THIS REPORT:
Research has demonstrated that large income and class disparities adversely affect health and economic well-being (see, for example, Marmot 2004, Wilkinson 1996, Frank 2007, Singh and Siahpush 2006).
Research has shown, however, that income mobility [in the United States] is not very great and the degree of income mobility has either remained unchanged or decreased since the 1970’s (Hungerford 2011, and Bradbury 2011).
Earnings inequality has been increasing since at least the late-1960s (Kopczuk, Saez, and Song 2010). [The] CBO (2011) has documented that income inequality has been increasing in the United States over the past 35 years.
Three potential causes of the increase in after-tax income inequality between 1991 and 2006 are examined in the analysis: changes in labor income (wages and salaries), changes in capital income (interest income, capital gains, dividends, and business income), and changes in taxes.
Increased salaries paid to CEOs, managers, financial professionals, and athletes, is estimated to account for 70 percent of the increase in the share of income going to the richest Americans (Bakija, Cole, and Heim 2010).
A declining real minimum wage could affect lower income tax filers (the inflation-adjusted minimum wage fell from $6.57 per hour in 1996 to $5.57 per hour in 2006).
Income of the richest 0.1 percent of taxpayers is sensitive to changes in asset prices and this may have been especially important in the increase in the income share of those at the top of the income distribution (Bakija, Cole, and Heim 2010).
Frabdorf, Grabker, and Schwarze (2011) also find that capital income’s share in disposable income has increased in recent years in the U.S. and show that capital income made a large contribution to income inequality in relation to its share in income.
While the individual income tax system is progressive and has been since it was introduced in 1913, the trend has been toward lower marginal tax rates and a less progressive tax system (Piketty and Saez 2007, and Alm, Lee, and Wallace 2005). As a result, the tax system may be less able to equalize after-tax incomes.
The major tax changes between 1991 and 2006 were (1) the enactment of the Omnibus Budget and Reconciliation Act of 1993 (OBRA93), which increased the top marginal tax rate from 31 percent to 39.6 percent, and (2) the enactment of the 2001 and 2003 Bush tax cuts, which reduced taxes especially for higher-income tax filers. The Bush tax cuts involved reduced tax rates, the introduction of the 10 percent tax bracket (which reduced taxes for all taxpayers), [it also] reduced the tax rates on long-term capital gains and qualified dividends. In 1991, long-term capital gains were taxed at 28 percent (15 percent for lower-income taxpayers) and all dividends were taxed as ordinary income. The next year, the
long-term capital gains tax rate was reduced to 20 percent. By 2006, long-term capital gains and qualified dividends were taxed at 15 percent (5 percent for lower-income taxpayers). Tax policy changes that affect progressivity will affect after-tax income inequality (Kim and Lambert 2009, and Hungerford 2010).
Hungerford (2010) notes, however, that about 75 percent of families contain just one tax unit (another 17 percent contain two tax units with the second tax unit usually a cohabitating adult or a working child that cannot be claimed asa dependent on another tax return). Consequently, most of the tax units likely represent a family.
Piketty and Saez (2003) argue that capital gains are not an annual flow of income and have large aggregate variations from one year to another; they exclude capital gains from much of their analysis. Blinder (1980) argues that capital gains should not be included in income because what is important is real accrued capital gains [cashed out]. Also, that capital gains represents partial maintenance of in an inflationary world. [in other words, gains shouldn’t be taxed as it serves as an inflation adjustment for capital]
capitals gains have increasingly become an important source of compensation for corporate executives (through stock options), and private equity and hedge fund managers (carried interests). Consequently, income from capital gains is included in the analysis.
Several recent studies estimate that most or all (in some cases more than 100 percent) of the burden of the corporate income tax falls on labor through reduced wages [while] other evidence suggests that most or all of the burden of the corporate income tax falls on owners of capital. [So take your pick!]
Federal individual and corporate income taxes had an equalizing effect on inequality regardless of the inequality measure. Federal taxes had a slightly greater equalizing effect in 2006 than in 1991—taxes appear to have been slightly more progressive in 2006 than in 1991. The top marginal tax rate in 1991 was 31 percent compared to 35 percent in 2006; the lowest tax marginal rate was 15 percent in 1991 and 10 percent in 2006. However, the increased equalizing effect of the individual income tax is likely due to bracket creep—more income is taxed at the highest rates—than to tax law changes. Tax policy changes appear to have played a direct role: OBRA93 tended to have an equalizing effect on after-tax income while the 2001 and 2003 Bush tax cuts tended to have a disequalizing effect.
Tax policy may have also have had an indirect effect on rising income inequality, especially between 2001 and 2006. The reduction in the tax rate on long-term capital gains and qualified dividends may have led to the increased importance of this source in after-tax income.
Overall, changes in [wage] labor income does not appear to be a significant source of increased income inequality between 1991 and 2006. Wages had no or a small disequalizing effect when other inequality measures are used.
By far, the largest contributor to increasing income inequality (regardless of income inequality measure) was changes in income from capital gains and dividends. Capital gains and dividends were less equally distributed in 1991 than in 2006, though highly unequally distributed in both years.
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Thomas L. Hungerford currently works at the Congressional Research Service (CRS) which is part of the Library of Congress. The CRS provides the policy and legal analysis to Congressional committees and Members, regardless of their party affiliation. CRS staffers sometimes do reports on their own. Hungerford says this report, “… [does] not reflect the views of the Congressional Research Service or the Library of Congress.” Hungerford is well-published in the professional literature. He has worked for the Social Security Administration, the Office of Management and Budget, and the General Accounting Office in the past. The excerpts highlighted here are of my own. You are encouraged to read the full study at the URL address provide above.
A Flat Tax Payroll Deduction Might Save Social Security
DATA DRIVEN POINT OF VIEW: Don’t be fooled. Discussions about raising or lowering Federal Income Taxes has little to do with Social Security and Medicare, which are separately funded by payroll deductions. Is there a funding crisis for Social Security and Medicare? A long term problem, yes. A crisis, no. Can America continue to afford these programs given the number of baby boomer retirements? The answer is yes, of course we can. We are the wealthiest county on Earth. Nations with far less wealthier already provide their citizens with much more generous benefits. The reason we feel the funding punch is that the structure we’ve enacted to pay for federal insurance benefits is so regressive.
We could institute a flat tax for Social Security and Medicare. The table below shows what this might generate in premiums at the current 7.65% rate of payroll deductions. This plan would clearly generate more revenue than needed for current benefits. A flat payroll tax of significantly less than the current 7.65% would be all that is needed to fully fund Social Security and Medicare. It would reduce payroll taxes for the majority of Americans.
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Payroll Taxes for Social Security and Medicare
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Total Income from Wages
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Amount Currently Deducted
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Contribution As a % of Income
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Contribution if deductions were based on a flat tax
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$1,000
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$77
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7.65%
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$77
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This Segment Represents 57 million households
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$10,000
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$765
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7.65%
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$765
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|
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$50,000
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$3,825
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7.65%
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$3,825
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|
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$100,000
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$7,650
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7.65%
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$7,650
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|
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$500,000
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$8,423
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1.68%
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$38,250
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|
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$1,000,000
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$8,423
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0.84%
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$76,500
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There are at least 100,000 household in this segment
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$10,000,000
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$8,423
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0.084%
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$765,000
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|
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$50,000,000
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$8,423
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0.017%
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$3,825,000
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|
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$100,000,000
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$8,423
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0.0084%
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$7,650,000
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|
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$500,000,000
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$8,423
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0.0017%
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$38,250,000
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|
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$1,000,000,000
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$8,423
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0.00084%
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$76,500,000
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|
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$10,000,000,000
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$8,423
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0.000084%
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$765,000,000
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This table assumes that income from wages for the wealthy are at least $110,100, which is the income cap for 2012, and assumes they are not self-employed. Income from investments are not subject to payroll deductions. Employers pay an additional 7.65% in payroll taxes for their employees. The self employed also pay corresponding more in payroll taxes for their Social Security and Medicare benefits. Additional payroll deductions for unemployment and disability insurance may also apply in certain states and with certain individual.
These programs exist for everyone, and everyone should contribute according to their means. Those who are fortunate enough not to need the benefits still have a moral obligation to assure a minimal level of care to those less fortunate, and a social obligation to contributed to those who gave a lifetime of labor creating the fabulous wealth that the wealthy have accumulated.
A 99 Year History of U.S. Income Tax Rates
SPECIAL NOTE: Our US progressive tax structure [or whats left of it] will turn 100 years old on October 3rd. We should plan a celebration!
OUR TAX STRUCTURE USE TO BE MUCH MORE PROGRESSIVE THAN IT IS TODAY.
The Progressive Tax Code
Our progressive, or graduated income tax was signed into law by President Woodrow Wilson On October 3, 1913. The idea was to create a system where those who did well bore a greater responsibility for funding the government. In fact, the original intent was to only tax the wealthiest citizens. The income tax was never meant to burden the majority of wage earners. The new law taxed individuals making $3,000 or couples making $4,000 per year. $4,000 at that time would be equivalent to about $100,000 per year in today’s dollars. What the law did not take into account was inflation. Much the same as is presently the case with the minimum alternative income tax, the original income tax brackets stayed constant every year while inflation and working class wages slowly rose. Eventually, income taxes became a burden to lower wage earners as well as the rich. [ http://www.buzzle.com/articles/the-controversial-history-of-the-graduate-income-tax.html ]
The progressive nature of the income tax is achieved by creating multiple income tax brackets to for rising levels of income. Each tax bracket has a slightly higher tax rate. Between 1913 and 1918 the number of tax brackets that applied to wealthy incomes rose to 56 brackets. By 1940 that number of brackets fell to 24 and there it more or less remained for the next 40 years.
What did rise over this time period were the marginal tax rates. By the 1950’s the top marginal tax rate for the wealthiest earners was 90 percent. The top marginal tax rate was gradually lowered over the next 30 years until it was at 70% in 1980. In 1981 President Ronald Reagan collapsed the top 9 tax brackets to lowered the top marginal tax rate from 70% to 50%. During is second term he eliminated 10 more upper tax brackets dropping the top marginal tax rate from 50% to just 28%. He also raised the tax rates on the lowest income earners, those who were originally not expected to contribute. At the same time, tax breaks for the wealthiest Americans combined with huge jumps in military spending resulted in huge budget deficits and a large national debt that has been with us since.
The top marginal tax rate for wage income was eventually raised back to 35% but not before capital gains income was stripped from the progressive tax code and separately taxed at a rate of just 15%. Capital gains income represents the major source of income for the wealthiest Americans. So the original intent of the progressive tax code, that the tax burden should only fall on the wealthiest American’s, was turned upside down.
For a glimpse of the problem with our current tax structure, see the US states map at the following URL to see how much more the bottom 20% are paying in taxes, as a percentage of income, over the top 1%. http://tiles.mapbox.com/occupy/map/TaxBurden
The graph below shows the 99 year history of tax rates for four incomes levels in the US. The data are adjusted for inflation and reflect the current value of the dollar. Tax rates for those making one-million dollars are in blue, those making $100,000 are in pink, those making $50,000 (approx. median household income) are in brown, and those making $25,000 (half of all American make less than $26,364) are in black. All rates are based on the married, filing jointly category. The tax information begins in 1913 and continue through 2011.
See data source here: http://taxfoundation.org/article/us-federal-individual-income-tax-rates-history-1913-2011-nominal-and-inflation-adjusted-brackets
What the graphic says to me is that for most of the last 100 years the wealthiest Americans have been paying more taxes than they are today, a lot more. Also, there was a period from around 1932 to 1988 when tax rates were lower for the working poor than for middle Americans.
I also noticed that beginning in the early 1980’s the tax brackets for the wealthy began collapsing until 1987 when a person making a million dollars a year was paying the same tax rate as someone making $117,760 per year. This had the effect of adding millions of tax payers into the same federal tax bracket as the ultra-wealth. From a political perspective, they became a single voting block on the issue of taxation. Also note that the tax rates for the two lower incomes jumped significantly in 1942-1946 and has been relatively steady since, decreasing only slightly during the Reagan administration when taxes on the wealthiest Americans began dropping sharply. Remember that mantra in the 80’s, “It’s not what you make, it’s what you keep.” This was never truer than for the wealthiest among us.
See Raw Data Here
http://www.taxfoundation.org/files/fed_individual_rate_history_nominal&adjusted-20110909.pdf
The Rise and Fall of the US Progressive Tax Structure
Below is a companion chart to the 99 Year History of Tax Rates in America (Click Here to see chart). This graph charts the number of tax brackets into which income was divided over the years. Looking back, it is apparent that our progressive tax structure had many more tax brackets separating rich and poor for most or hour history. There was a peek of 56 income tax brackets in 1918. In 1924 (the Roaring 20’s) that number was compressed to just 23 tax brackets. The number of tax brackets fluctuated over the next 62 years but maintained an average of 25 brackets until the 1980’s.
In 1981 the first of Ronald Reagan’s tax cuts was passed dropping the top tax rate from 70% to 50%. Five years later his Tax Reform Act of 1986 dropped the top tax rate again to 28% while raising the bottom rate from 11% to 15% where it remains today. The 1986 law also collapsed the number of tax brackets from 15 in 1984 to 5 in 1985. While lowering the top tax rate for the rich from 70% to 28% was a huge boost for the wealthiest Americans, compressing the top 10 tax bracket helped assure that the changes would not be undone. The reduction in tax brackets meant that the number of people in the top earners bracket went from tens of thousands of the riches voters to many millions of voters including those with much more modest incomes. By lumping together people making over $300,000 with those earning many times that amount the change created a large voting block of voters who would oppose future tax hikes.
During these same years the Reagan administration began deregulating the banking and finance industries leading to more and more wealth building opportunities for those already blessed with riches. Ronald Reagan was following the economic path created by the economist, Milton Friedman, who, in turn, was influenced by the Objectivism philosophy of Ayn Rand. Ayn Rand believed that altruism and self-sacrifice for others is evil. See more here]
Fiscal Cliff’s Specific Tax Breaks About to Expire
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
From Wikipedia, the free encyclopedia
Key aspects of the law include:
§ Extending the EGTRRA 2001 income tax rates for two years. Associated changes in itemized deduction and personal exemption rules are also continued for the same period. The total negative revenue impact of this was estimated at $186 billion.[7]
§ Extending the EGTRRA 2001 and JGTRRA 2003 dividends and capital gains rates for two years. The total negative revenue impact of this was estimated at $53 billion.[7]
§ Patching the Alternative Minimum Tax to ensure an additional 21 million households will not face a tax increase. This was done by increasing the exemption amount and making other targeted changes. The negative revenue impact of this measure was estimated at $136 billion.[7]
§ The above three measures are intended to provide relief to more than 100 million middle-class families and prevent an annual tax increase of over $2,000 for the typical family.[8]
§ A 13-month extension of federal unemployment benefits.[2][9] The cost of this measure was estimated at $56 billion.[7]
§ A temporary, one-year reduction in the FICA payroll tax. The normal employee rate of 6.2 percent is reduced to 4.2 percent. The rate for self-employed individuals is reduced from 12.4 percent to 10.4 percent.[9] The negative revenue impact of this measure was estimated at $111 billion.[7]
§ Extension of the Child Tax Credit refundability threshold established by EGTRRA, ARRA, and other measures.[7] According to the White House, this would benefit 10.5 million lower-income families with 18 million children.[2]
§ Extension of ARRA’s treatment of the Earned Income Tax Credit for two years.[7] According to the White House, this would benefit 6.5 million working parents with 15 million children.[2]
§ Extension of ARRA’s American opportunity tax credit for two years, including extension of income limits applied thereto.[7] According to the White House, this would benefit more than 8 million students and their families.[2]
§ The above three provisions, as well as some other similar ones, are intended to provide about $40 billion in tax relief for the hardest-hit families and students.[8]
§ An extension of the Small Business Jobs and Credit Act of 2010‘s “bonus depreciation” allowance through the end of 2011, and an increase in that amount from that act’s 50 percent to a full 100 percent. For the year of 2012, it returns to 50 percent.[9] The White House hopes the 100 percent expensing change will result in $50 billion in new investments, thus fueling job creation.[2]
§ An extension of Section 179 depreciation deduction maximum amounts and phase-out thresholds through 2012.[9]
§ Together, the above two business incentive measures were estimated to have a negative revenue impact of $21 billion.[7]
§ Various business tax credits for alternative fuels, such as the Volumetric Ethanol Excise Tax Credit, were also extended.[10] Others extended were credits for biodiesel and renewable diesel, refined coal, manufacture of energy-efficient homes, and properties featuring refueling for alternate vehicles.[9] Also finding an extension was the popular domestic Nonbusiness Energy Property Tax Credit, but with some limitations.[7]
§ Estate tax adjustment. EGTRRA had gradually reduced estate tax rates until there was none in 2010. After sunsetting, the Clinton-era rate of 55 percent with a $1 million exclusion was due to return for 2011. The compromise package sets for two years a rate of 35 percent with an exclusion amount of $5 million. The negative revenue impact of this provision was estimated at $68 billion.[7][11]
§ An extension of the 45G short line tax credit, also known as the Railroad Track Maintenance Tax Credit, through January 1, 2012. This credit had been in place since December 31, 2004 and allowed small railroad companies to deduct up to 50% of investments made in track repair and other qualifying infrastructure investments.[12]
2. ^ a b c d e f “Tax Cuts, Unemployment Insurance and Jobs”. The White House. Retrieved December 17, 2010.
7. ^ a b c d e f g h i j k “Tax Cut Extension Bill Wends Its Way to White House”. Accounting Today. December 17, 2010. Retrieved December 17, 2010.
8. ^ a b “Fact Sheet on the Framework Agreement on Middle Class Tax Cuts and Unemployment Insurance |”. The White House. December 7, 2010. Retrieved December 10, 2010.
9 ^ a b c d e Dupree, Jamie (December 9, 2010). “Tax Cuts Compromise Package Summary”. The Atlanta Journal-Constitution. Retrieved December 10, 2010.
U.S. Global Business Competitiveness Slipping
The World Economic Forum published a study on global business competitiveness that ranks 144 nations according to indicators in 12 categories. We American’s sometimes inflate our greatness among nations. With respect to our Militarily this is justified. The United States represent nearly half of the worlds total military capability. But on measures of national well being, ecology, human rights, health care, press freedom and many other critical areas we often fall short in comparison to other advanced nations.
Given how highly our politics regards U.S. business interests, you might assume our global business competitiveness makes us number one in the world. Keep in mind as you read on that many of the specific measures that make businesses competitive are not in the best interest of ordinary citizens. Business interests and social interests are sometime opposed.
The business competitiveness study categories and where the United States ranks:
CATIGORY RANK (Out of 144)
| 1. Institutions | 42 |
| 2. Infrastructure | 14 |
| 3. Macroeconomic Environment | 111 |
| 4. Health and Primary Education | 34 |
| 5. Higher Education and Training | 8 |
| 6. Goods Market Efficiency | 23 |
| 7. Labor Market Efficiency | 6 |
| 8. Financial Market Development | 16 |
| 9. Technological Readiness | 11 |
| 10. Market Size | 1 |
| 11. Business Sophistication | 10 |
| 12. Innovation | 6 |
Overall, the United States is very competitive, ranking 7th out of 144 nations. This is a decline from last year, however, when we were 5th out of 142 countries. Major reasons for the overall low marks can be found in our Macroeconomic situation, primarily our government budge imbalance and huge national debt on which we were ranked 140th and 136th respectively . Our gross national savings is also very low, with a rank of 114th in the world. Still, confidence in America’s credit rating remains high, 89.4%, or 11th among the nations.
Looking at our strengths and weaknesses, in the Institutions category our top ranking was 5th in investor protections. Our next highest rankings were in efficiency of corporate boards (23rd), intellectual property protection and ethical behavior of firms (both ranked 29th). Our lowest ranking was on the business cost of terrorism (124th). Next lowest rankings were in the business cost of crime and violence, and the business cost of organized crime (86th and 87th).
We did better in Infrastructure. We ranked 1st in available airline seats and 15th in telephone land lines. Interestingly, mobile phone subscriptions were our lowest indicator (72nd) followed by the quality of our electric supply (33rd in the world). Our transportation infrastructure didn’t fair much better (30th).
In the category of Health and Primary Education we had no malaria impact on businesses (1st) but the prevalence and business impact of HIV was high ranking the US 92nd and 90th in the world. Also surprising was our low ranking on primary school enrollments (58th), infant mortality (41st) and the quality of our primary education (38th).
In Higher Education and Training we are doing well in post-secondary education (2nd) and the availability of research and training opportunities (9th). We ranked 47th in secondary school enrollment and the quality of our math and science education.
In Goods and Market Efficiency we rank 9 and 10 in market dominance and buyer sophistication. Our worst ranking is on the business tax rate to profit ration (103rd).
In the area of Labor Efficiency we apparently have the lowest labor redundancy costs in the world (1st) and our hiring and firing practices are also great for business (8th). The labor redundancy variable estimates the cost of advance notice requirements, severance payments, and penalties due when terminating a redundant worker. We also ranked 5th in the brain drain measure and 8th in the efficiency of our hiring and firing practices. Our low rankings here were in the women to men ratio in the work force (we ranked 44th) and our cooperation in labor-employer relations (42nd) , perhaps no surprise give our ease and thrift in firing people).
In the Financial Market Development category we are very competitive in the availability of venture capital (10th) but weak on the strength of our banking institutions (80th). Regarding the regulation of security and exchange, we also ranked low (39th) although it is unclear if this means we are over or under regulated.
In the area of Technological Readiness we ranked 8th in the number of internet subscribers yet 20th in the percentage of individuals using the internet. We rank lowest, (43rd) on foreign direct investment and technology transfer.
Market Size, we remain number one in domestic market size (we buy more things) and number two in foreign market size.
In the category of Business Sophistication we are third in the extent of marketing and ranked in the low teens on other measures, such as production process (13th) and local supplier quality/quantity (14th).
When it comes to Innovation, The United States is still doing very well. We are ranked in the single digits on most measures, including University-industry collaboration in R&D (3rd), Availability of scientists and engineers (5th), Quality of scientific research institutions (6th), Capacity for innovation and Availability of scientists and engineers (both ranked 7th). Our lowest ranking in this area was in government procurement of advanced tech products (15th).
Read more at: http://reports.weforum.org/global-competitiveness-report-2012-2013/
Income Taxes Then and Now – Why All the Fuss?
I came across a 1963 tax return the other day that belonged to a 63-year-old, self-employed tradesman named Edward. For context, that was the year John F. Kennedy was assassinated. Historically speaking, it wasn’t that long ago. In 1963 Edward’s income was $6,806. He paid $933 in income tax plus $259 in self-employment tax for a total of $1,192 dollars.
My own father was a Sears repairman and my mother a bookkeeper back then. Together they made around $5,000 and paid about $1,020 in taxes. But what struck me most about Edward’s income tax return were the rate tables for that year. The top income listed was only $400,000. The tax on that was a whopping $313,640 while income over that amount was taxed at a rate of 91% . Did the rich really pay that much more back then? (Imagine the stir today if we called for a return to the 1963 tax rate.)
It’s hard to put this into perspective because inflation rose by over 700% since then. What wondered what these numbers would look like in today’s dollars? How does the tax rates today compare with the tax rates back then?
The Inflation Adjustment
When we adjust for inflation, Edward made $ 50,247 in todays dollars and paid $8,800 in taxes. He paid $1,912 in self-employment taxes and $6,888 in income taxes (a 13.7% income tax rate, close to what Presidential candidate Mitt Romney paid in 2010).
My parents, with two children, made $ 36,956 in today’s dollars, and paid $ 7,531 in taxes (a 20% income tax rate).
Someone making only $700 then would make $4,988 in today’s dollars and pay about $28.50 in taxes (a 0.6% income tax rate).
The guy who made $400,000 in 1963 was making $2,850,405 in today’s dollars. He paid $2,235,003 in taxes (a 78% tax rate). That sounds like a lot, yet it seems the rich in American some how always seem to getting richer.
(Bureau of Labor Statistics Inflation Calculator at: http://www.bls.gov/data/inflation_calculator.htm)
The Tax Rate Adjustment
Today, someone making $4,988 is taxed at 10% , or $49.88, That’s $16.88 more than in 1963.
Both Edward, and my parents would be taxed at 15% today. Edward would also pay a 15.3% self-employment tax for a total of $14,087. That’s an increase of $5,287 from the ‘63 tax rates. Edward would pay slightly lower income taxes, $6,384 vs. $6,888, but self-employment taxes rose dramatically. Since 1963, Edward’s self-employment tax jumped from $1,912 to $7,703. So much for helping the small business man.
My folks would have to paid $5,344 in taxes at today’s rate, or $1,924 less than the 1963 rate. That’s surprising. We keep hearing how high our taxes are, yet we are paying less now than we did 46 years ago.
The top income tax rate today is 35%. President Obama wants to raise the top marginal income tax rate on salaries and other ordinary income from 35 percent to 39.6 percent by letting the extended temporary Bush tax cuts expire at year-end. The income tax rates on millionaires has already been cut in half for some. Someone making $2,850,405 pays $997,642 in taxes at today’s rates. That is $1,237,361 less than they would pay at the 1963 rate.
(US 2010 tax rates: http://taxes.about.com/od/preparingyourtaxes/a/tax-rates_2.htm)
So what’s the point?
America is still a very wealthy nation. There is plenty of wealth. We can afford to be a much better country than we are. When the income tax code was first implemented in 1913 it was intended to tax only people who were financial well off. Adjusted for inflation, the bottom rate at which a person had to start paying income taxes was about $100,000 in today’s dollars. It was because the income tax rates weren’t indexed to inflation that income taxes eventually reached the middle and lower income households. Our financial crisis has a lot to do with the decline of income taxes for the richest Americans. We are asking those who have benefited most from this great American system to pay a tiny fraction more. It is hard to see how so much resistance to this small ask is justified. What’s all the fuss?
Data Driven Viewpoints 