A comparative view of tax policy changes since 1944

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by Daryl Acumen

There are a lot of liberals out there making claims about the tax treatment of the ‘rich’ and the ‘middle class’ by Republicans throughout history.  Just for fun, I’ve decided to play a little game with historical tax rates and a few adjusted gross income (AGI) scenarios.  My question is this – “What would the income tax returns from fixed income groups look like throughout history?”  For my test  cases, I’m going to evaluate the tax treatment of an exponentially increasing scale of earners (we’re assuming they are married coupled filing jointly).  I’ll be using historical rate data from the Tax Foundation, verified with the IRS.  My source table can be found here [PDF].

I’ll be evaluating families with the following AGI income levels (the class level assignments I use are completely arbitrary):

  • $25,000 (upper range of working poor)
  • $50,000 ( upper range of lower middle class)
  • $100,000 (upper range of middle class)
  • $200,000 (upper range of upper middle class)
  • $400,000 (…rich)
Keep in mind that the incomes I’m using in my analysis are adjusted for the Consumer Price Index (CPI).  While that means $25k in my 1944 example will have the same purchasing power as the $25k in my 2003 example, it must be noted (and liberals routinely overlook this important fact) that the standard of living for a family making $25k in 2003 was significantly higher than that of the same family with the same income in 1944.  It goes without saying that the 1944 family didn’t have a flat screen high-definition color TV in every room, central air-conditioning, a car with passenger-side airbags, anti-lock brakes and XM Radio, or a computer with considerably more power than those used for scientific calculations in the then top-secret Manhattan Project swinging in their pockets playing the latest Lady Gaga single.
The tax model I’m using for my analysis can be found here [XLSX]

We’ll start with 1944…

In 1944, the top marginal tax rate was 94%.  Just to be clear, it is my personal opinion that any tax rate above 20% is not revenue maximizing, rates above 25% are unethical, rates above 50% are criminal, and a tax rate above 90% is just plain stupid!  That makes FDR and the congress in 1944 absolutely insane!

The top rate of 94% kicked in at incomes above $200,000 per year, but I’ll be using inflation adjusted dollars in this report so that translates into $2,549,768 per year.  There were 24 tax brackets in 1944 (yes, I said twenty four), and all but the bottom rate were “unethical” by my standards and rates on incomes above $200k were “criminal.”  None of the rates in 1944 were revenue maximizing, but the Laffer curve hadn’t been invented yet so we can cut them some slack there.

Here were the tax liabilities in 1944 (effective rate in parenthesis):

  • $25,000 – $5,750 (23.0%)
  • $50,000 – $11,990 (24.0%)
  • $100,000 – $27,390 (27.4%)
  • $200,000 – $70,422 (35.2%)
  • $400,000 – $191,411 (47.9%)

To say the least, 1944 wasn’t a great time to be alive.  FDR may have been a  great wartime leader, but he and the congress knew precious little about how to use fiscal policy to spur economic growth and to incentivise people to work.

John F. Kennedy and the tax reform act of 1964…

Kennedy didn’t live to see his tax reforms become law, but he is still credited (rightly) with paving the way for conservative tax reformers around the world in the decades that would follow him.  These tax reforms were proposed before his assassination and Congress passed them in honor of his memory.

The top rate (yes, on the “rich”) was slashed from 91% to 70% and the bottom rate fell to 14% from 20%.  As you can see, there had been some erosion in rates since 1944, but nothing of the magnitude Kennedy proposed.

Here were the tax liabilities for our four sample families (again, adjusted for inflation):

  • $25,000 – $3,834 (15.3%) …down $1,915
  • $50,000 – $8,530 (17.1%) …down $3,459
  • $100,000 – $19,875 (19.9%) …down $7,515
  • $200,000 – $51,545 (25.8%) …down $18,877
  • $400,000 – $146,209 (36.6%) …down $45,201

Rates on incomes below an inflation adjusted $55k were revenue maximizing and rates didn’t become unethical until after $110k.  Rates were still criminal above $360k, but at least we were making progress.  Kennedy was a perfect example of the reality that good economic policy is NOT political…it’s just good policy.  The results of Kennedy’s policies were, as many already know, a booming economy throughout the 1960s and a balanced budget.

 Ronald Reagan’s tax reforms 1981 & 1982

Ronald Reagan signed two tax bills early in his first term; the Economic Recovery Tax Act of 1981 (ERTA) and the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA).  It is difficult to analize the impact of these two tax packages in isolation because the 1981 bill didn’t take full effect until 1983, after TEFRA was passed.

Liberals LOVE to use TEFRA to annoy conservatives by stating (correctly) that TEFRA was a tax increase.  This is a misleading assertion because TEFRA was only a tax increase relative to the ERTA, which was a significant tax reduction relative to historical rates, but liberals will use it anyway.  If you ever hear a smug liberal brag that “Reagan increased taxes”, TEFRA is probably what they are talking about.

Remember that TEFRA cannot be reviewed in isolation.  It must be analyzed in combination with ERTA because the two tax bills overlap in their implementation time-frame.

Ronald Reagan was the first President informed by what is called the “New-classical” school of economic thought.  This taught many things, but relevant to this subject it confirmed the intuition of John F. Kennedy by explaining why lower tax rates sometimes result in higher tax revenues.  The Laffer Curve, invented about this time, illustrated what many already knew, that tax rates above a certain level produce lower revenue.  It also however speculated that the revenue maximizing rate for income taxes was somewhere in the 20% range.  The modern emergence of the “Value-economic” school of thought explains WHY the revenue maximizing point for income taxes is ‘around’ 20%, but that is beyond the scope of this analysis.

Including TEFRA, Reagan’s tax plans cut the top rate from 70% to 50% (still criminal, but just barely).  Most liberals focus on this portion of the rate cuts to bolder their misguided assertions that Reagan cut taxes only on the ‘very rich.’  They conveniently ignore the fact that the bottom rate dropped form 14% to zero and that the portion of all taxes paid by the top 1% increased after these tax reforms (lower rates, higher revenue).

Here is how our test subjects were impacted by the changes:

  • $25,000 – $2,317 (9.3%) …down $1,517
  • $50,000 – $6,989 (10.0%) …down $1,540
  • $100,000 – $22,167 (22.2%) …up $2,292
  • $200,000 – $64,888 (32.4%) …up $13,343
  • $400,000 – $163,959 (41.0%) …up $17,749

It’s interesting to note that the groups that the test families that benefited most from Reagan’s early 1980s tax reforms were the working poor and lower middle class.  The middle class test family (earning $100,000 per year) saw a net increase in their tax bill and so did our upper-middle class and rich test family.  ignoring the drop in the top rate and using only these test cases, one would actually conclude that Reagan’s tax cuts were geared towards the poor and middle class, not the rich.

Bipartisan Tax Reform Act of 1986 (Reagan)

Probably the single greatest piece of tax reform legislation in American history was signed into law in 1986 and phased in between 1987 and 1988.  It was signed by Ronald Reagan but emerged with broad bipartisan support from Congress.  Both parties deserve credit for crafting this landmark piece of legislation, and except for it’s counter productive capital gains tax provisions (which resembled Obama’s “Buffet Rule” and stood until a subsequent Republican controlled Congress and signed into law by Bill Clinton), it was a resounding success.

The 1986 law eliminated most tax loopholes, cut the top rate to 28%, and replaced the matrix of confusing tax brackets with two!  The “criminal” rate of 50% was eliminated and effective tax rates maxed out just above the unethical, but as you’ll see, only the very wealthiest families slipped into the unethical range.

Here were the results for our five text families:

  • $25,000 – $3,750 (15.0%) …up $1,432
  • $50,000 – $7,500 (15.0%) …up $510
  • $100,000 – $20,664 (20.7%) …down $1,503
  • $200,000 – $48,664 (24.3%) …down $16,224
  • $400,000 – $104,664 (26.2%) …down $59,295

Observe the impact of Reagan’s early 1980s tax reforms in combination with the bipartisan tax reform act of 1986:

  • $25,000 …down $84
  • $50,000 …down $1,030
  • $100,000 …up $789
  • $200,000 …down $2,880
  • $400,000 …down $41,545

As you can see, when viewed in totality, the Reagan tax policies of the 1980s resulted in tax cuts for all of our test families except the middle-class family making $100,000 per year, who’s tax bill in aggregate rose $789 per year.  Note: that family making $100k would today be firmly planted in the top 20% of income earners, but to us they’re regular middle class earners.

Interesting side note: I recall as a kid watching the news reports of this tax reform bill and listening to Democrats bragging that they’d finally closed all the loopholes and had arrives at a tax code that wold make sure the “rich” would pay their fair share.  I remember as a 15 year old kid wondering aloud “gee, I wonder if this means they’ll finally stop complaining about how much the rich pay in taxes.  If they’re being genuine, then this should shut them up forever on the subject of fairness.”  Of course only a few years later the Democrats were complaining that the rich weren’t paying their “fair share” again and angling for a tax hike, which you will see described below.   Listening to these fairness arguments repeated with every budget cycle, in spite of whatever tax changes to soak the rich were passed just a few years before, has convinced me that the Democrats will NEVER be satisfied with how much the “rich” pay in taxes, even if the top marginal rate rises to 100%.

Bush 41 breaks his “No new tax” pledge

In 1991, liberal Democrats who controlled both houses of Congress pressured George Bush Sr. into breaking his “no new tax” pledge and agreeing to a “soak the rich” tax increase against his own will.

The background was the economic decline caused by the decline of the Eastern block and the subsequent collapse of the defense industry and decline in exports caused by Western Europe suddenly coping with her dysfunctional half-sister starving and cold on her back porch.  Graham-Rudman, passed a few years earlier to force a balanced budget within a set time-frame, was about to mandate significant spending cuts to programs the democrats thought essential in order to stay on track to balance the budget in the prescribed timeline.  The Democrats begged for an exit from Graham-Rudman and in Dick Darman, Bush’s budget Director, they had a sympathetic ear.  Darman convinced Bush to scrap Graham-Rudman and to enter into budget negotiations with the Democrats, which quickly descended into a political ploy to weaken the President and open the door for a rival in 1992.

“Stick it to the rich!  Stick it to the rich!  Stick it to the rich!” – Barbara Mikulsky pounding on the Senate podium urging tax increases on the wealthy in 1990

After a federal government shut-down and heated debates on the House and Senate floors, George Bush Sr. blinked!  He agreed to break his tax pledge in order to re-open the federal government and to stop the heated debates and negative press.  He agreed to a new 31% tax bracket, luxury taxes on furs, boats, planes, and a tax on expensive automobiles that resulted in the decimation of whole industries and among other things the cancellation of the Cadillac Allante (since taxes can’t be financed, the down payment for cars as expensive as the Allante literally doubled overnight).

I remember watching the drama of this budget deal unfold on C-SPAN day after day in horror.  I knew it was a mistake, but so-called “adults” in Washington were completely unaware of the folly.  What made me even more angry is when the exact same liberals who forced the 1990 budget deal down George Bush Sr.’s throat, changed their story in 1991 and accused Bush of passing a tax increase on the “middle class.”  Bill Clinton was the most notable purveyor of this fiction, and it used to bother me that someone who should have known better was willing to lie so blatantly to the American people – and that the voters loved him for it.

Here’s the impact of the 1990 budget deal on our test families:

  • $25,000 – $3,750 (15.0%) …no change
  • $50,000 – $7,500 (15.0%) …no change
  • $100,000 – $20,718 (20.7) …up $53
  • $200,000 – $50,658 (25.3%) …up $1,993
  • $400,000 – $112,658 (28.2%) …up $7,993

I still find it amazing that people could have voted for Bill Clinton on the basis of such a blatant and obvious lie.  The fact that Clinton won election in 1992 while he and the Democrats who forced the 1990 budget deal continued to claim that Bush had raised taxes on the middle class (true only for the “upper” middle class in my test cases), was disgusting to me.  I was so turned off that in 1992 I stopped watching television so that I would never have to hear one of Clinton’s lies again.  I still don’t have cable.

Bill Clinton’s 1993 tax plan

Clinton not only ran for President based on the idea that George Bush Sr. raised taxes on the middle class (as opposed to the wealthy), but that HE would only raise taxes in the rich himself.  Bush Sr. gave this warning during a debate with Clinton in 1990:

“When he says he’s going to raise taxes on the rich, watch your wallet – because he’s going to have to raise taxes on the middle class and lower to get the kinds of revenues he’s talking about.”

One of Clinton’s first proposals upon taking office was to raise gas taxes, which would have done exactly what Bush predicted.  Fortunately Clinton was watching the polls that month and backed away from this original proposal.  He did eventually work with a democratic Congress to pass a tax plan in 1993 which moved the country further away from the tax bill of 1996 by adding two new tax brackets on top of the three that were in place under Bush Sr.  The top rate now climbed to 39.6%.  here’s how the new rates affected our test families:

  • $25,000 – $3,750 (15.0%) …no change
  • $50,000 – $7,500 (15.0%) …no change
  • $100,000 – $20,520 (20.5%) …down $197
  • $200,000 – $50,348 (25.2%) …down $309
  • $400,000 – $122,524 (30.6%) …up $9,866

George W. Bush Tax Cuts (2001 & 2003)

Now we come to the present debate over George W. Bush.  Liberals continue to argue, in spite of reality, that George W. bush cut taxes in the wealthy.  That fact amazes me, because most of them were alive when the tax cuts went into effect and few of the liberals I talk to suffer from amnesia.

Obama himself spent a lot of time on the campaign trail in 2008 talking about how Bush cut taxes on the rich.  I never thought he was a liar like Clinton, I just figured he was too lazy to check his facts.  I was confident that in 2009 when Obama begged Congress to renew the “Bush tax cuts for the middle class,” it would be the end of the ignorant mis-characterizations of the Bush tax cuts, but today I still bump into liberals online who blindly argue that Bush cut taxes only on the rich and the Mitt Romney will do the same.

Here are the facts:

Bush cut the top tax rate back to 35%, closer to the revenue maximizing rate of around 20%, closer to merely “unethical” and far from criminal.  Rates were ratcheted down across the board.  here’s how our test families made out:

  • $25,000 – $2,896 (11.6%) …down $853
  • $50,000 – $6,646 (13.3%) …down $853
  • $100,000 – $17,219 (17.2%) …down $3,300
  • $200,000 – $44,025 (22.0%) …down $6,323
  • $400,000 – $109,765 (27.4%) …down $12,758

As you can clearly see (contrary to modern liberal orthodoxy) all tax brackets benefited from the Bush tax cuts.  The aggregate rates for my test families are all near revenue maximizing except for our rich family, which barely edges above “unethical.”  In spite of these cuts, it is worth noting that the share of all taxes paid by the wealthiest taxpayers increased during this period.

Evaluating the share paid by the “rich” in taxes from 1986 (the earliest year for which I have data) to 2008 (the last year of the Bush administration), we see that Reagan/Bush policies caused the wealthiest Americans to pay higher and higher portions of the total tax burden, in spite of lower rates shared by the wealthy, the middle class and by poor.

Top 1% income tax share:

1986 – 25.75% (earliest year this data covers)
2000 – 37.42% (peak of the dot-com bubble)
2003 – 34.27% (Bush tax cuts go into effect)
2007 – 40.42% (peak of the Bush economy)
2008 – 36.73% (last year of the Bush administration)

In 2008, the last year of the Bush administration, the top 10% of income earners paid 69.94% of all taxes compared to 66.45% in the last year of the Clinton administration. Note: the INCREASE in the percentage of all taxes paid by the top 10% of income earners in this country between 2000 and 2008 (the Bush years) was greater than the total percentage of all taxes paid by the bottom 50% combined! The change in taxes paid by the top 10% was 3.49%, while the bottom 50% of income earners in 2008 only paid 2.59% of all taxes. Also interesting to note that the 2.59% paid by the bottom 50% of income earners in 2008 was almost HALF of the 4.6% they contributed in the last year of the Clinton administration.