In light of the immense 70% tax rate Alexandria Ocasio-Cortez has introduced, which she has dubbed the ‘Green New Deal,’ it is necessary to discuss some of the claims she has referred to. In essence, she demands the wealthy pay a large portion of their income to subsidize government initiatives to combat environmental woes. Now I would hope we can all come into agreement that the environment is a vital factor that must be accounted for, after all, it is our home. Instead of discussing the varying approaches to its conservation and restoration, another conversation has been brought forth.
This is the notion that in the middle of the 20th century, the wealthy paid enormous taxes upwards of 91%. In regards to the marginal tax rate, Ms. Ocasio-Cortez is correct. However, we must dig into the nuances that are being conveniently ignored. This has created a much emphasized misconception floating around the minds of many Americans, particularly progressives, and it couldn’t be farther from the truth. To properly assess this, one must understand the history of tax laws in the United States, and their policy implications of today. Firstly, we must understand the purchasing power of money, PPM, has declined due to inflation. For example, $500,000 dollars in the 1950’s and 1960’s would equate to roughly $5 million dollars in today’s PPM. Obviously, this distorts statistics that are employed.
In the 50’s and 60’s, because there were a dramatically small number of individuals who were in that top tax bracket, and those who were did not pay anywhere near that fabled 91%. A study from the Congressional Research Service concluded that the effective tax rate for the 0.01 percent of earners paid only around 45% of their earnings. It also must be stressed, this 45% accounts for income, corporate, property, estate, and payroll taxes. This includes collections from federal, state, and local governments. In regards to income taxes exclusively, the wealthy paid an effective 16.9% in the 1950’s. How is this possible one was may ask? One observation is the mass amount of deductions and loopholes taxpayers could utilize, which were eventually disposed of in the Tax Reform Act of 1986. It has been stated by Lawrence Lindsey, the former governor at the Federal Reserve, that only eight Americans, yes only eight, paid the 91% tax rate.
Frankly, it is an erroneous belief that the “Golden Years” of mid 20th century America s was owed to the vast taxation of the wealthy. This claim is supported by the evidence that regardless of the tax rate, the government has only managed to collect roughly 20% of the Gross Domestic Product (GDP) in taxes since the 1950s, which is otherwise known as Hauser Law. Although many economists have their doubts about its validity, it has been consistent in the US economy. One can suggest this is due to a multitude of factors, namely individuals have an incentive to change their tendencies when adjusting for tax rates. One theory to this phenomenon, being a decrease in production and output due to escalated levels of taxation causing lesser tax revenues, is known as the Laffer Curve.
In conclusion, the claim that the rich are not paying their fair share and the vast amounts of financial growth in the 50s and 60s at the expense of the wealthy is a fabled myth. In fact, the top 3% of earners paid only 29% of all federal income taxes in the 1950s. In the recent decade, the wealthy contribute 51% of total federal income tax revenue, although data has shown they pay upwards of 70%. It is unfounded, and the claim has little to no evidence to support it. When will progressives, and even conservatives in regards to trade, learn that a market economy is not a zero-sum game? Just because one individual is better off, it does not make another poor. As history has shown, when wealthy entrepreneurs are engaged in large amounts of production and output, those who surround them are much better off. If we are to consider drastic policy, Ms. Cortez and her constituents should not be misleading in their observations.