Taxes, Taxes, Taxes

Here is a NY Times article meditating on the move to raise taxes on the wealthy. The following is the key bit...

So it is with Obama’s approach to the wealthy, especially on taxes. His agenda is a bold one in many ways. Yet his tax code would still look more kindly on wealth than Nixon’s, Kennedy’s, Eisenhower’s or that of any other president from F.D.R. to Carter. And only part of the reason for this is widely understood.

It’s well known that tax rates on top incomes used to be far higher than they are today. The top marginal rate hovered around 90 percent in the 1940s, ’50s and early ’60s. Reagan ultimately reduced it to 28 percent, and it is now 35 percent. Obama would raise it to 39.6 percent, where it was under Bill Clinton.

What’s much less known is that those old confiscatory rates were not as sweeping as they sound. They applied to only the richest of the rich, because yesterday’s tax code, unlike today’s, had separate marginal tax rates for the truly wealthy and the merely affluent. For a married couple in 1960, for example, the 38 percent tax bracket started at $20,000, which is about $145,000 in today’s terms. The top bracket of 91 percent began at $400,000, which is the equivalent of nearly $3 million now. Some of the old brackets are truly stunning: in 1935, Franklin D. Roosevelt raised the top rate to 79 percent, from 63 percent, and raised the income level that qualified for that rate to $5 million (about $75 million today) from $1 million. As the economist Bruce Bartlett has noted, that 79 percent rate apparently applied to only one person in the entire country, John D. Rockefeller.

Today, by contrast, the very well off and the superwealthy are lumped together. The top bracket last year started at $357,700. Any income above that — whether it was the 400,000th dollar earned by a surgeon or the 40 millionth earned by a Wall Street titan — was taxed the same, at 35 percent. This change is especially striking, because there is so much more income at the top of the distribution now than there was in the past. Today a tax rate for the very top earners would apply to a far larger portion of the nation’s income than it would have years ago.

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An academic study of the Clinton tax increases found that they caused corporate executives to exercise some stock options earlier than they otherwise would have. But the increases had no noticeable long-term effect. The executives didn’t ask to be paid entirely in stock, and the economy boomed. Increasing taxes on the rich, in other words, has some unintended consequences, but it mainly has the intended ones: it raises revenue and reduces inequality. That study was written by Austan Goolsbee, a University of Chicago professor who later became the first economic adviser to a Senate candidate named Barack Obama.

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For 30 years, the debate over taxes has been shaped by a faith that a flatter code is always better. There is little reason to believe that and every reason to believe that tax brackets, as well as tax rates, should be part of the coming debate.

You too can join the debate. The Economist magazine is allowing readers to interactive access to a debate in which they can view arguments and vote their opinion.