On Monday, The Washington Examiner posted an article with the following headline:
Debunking the myth that the US once prospered despite extremely high taxes
The article explains how the tax system in the 1960’s was very different from the tax system today:
Left-wing politicians who demand higher taxes on the rich argue that the U.S. had previously prospered when tax rates were very high, proving that high taxes do not harm the economy. And it is true: In the 1950s and early 1960s, the top federal personal income tax rate in the U.S. was a horrendous 91%, after which it was lowered to 70%. Under former President Ronald Reagan, it was then successively reduced to 28% by 1988 (before being raised several times and then lowered again under former President Donald Trump).
However, as Phil Gramm, Robert Ekelund, and John Early show in their book The Myth of American Inequality, “The top income tax in 1962 was 91 percent. After deductions and credits, only 447 tax filers out of 71 million paid any taxes at the top rate. The top 1 percent of income earners on average paid 16.1 percent of their income in federal and payroll taxes while the top 10 percent paid 14.4 percent and the bottom 50 percent paid 7.0 percent.”
Even when the top tax rate was lowered to 70%, not much changed. Only 3,626 out of 75 million taxpayers actually paid taxes up to 70%. Interestingly, the actual percentage paid by the top 1% of earners in the U.S. was only 16.1% in 1962, when the top marginal rate was 91%. However, in 1988, when the top rate was only 28%, the percentage paid by the top 1% of earners had risen to 21.5%! As the top tax rate fell by two-thirds, the percentage of their income that the top 1% of tax filers paid in federal income and payroll taxes rose by a third.
The article concludes:
This growth was a direct consequence of Reagan’s deregulation and tax reform policies in conjunction with falling oil prices. The growth rate in the 1980s was higher than in the 1950s and 1970s, though substantially below the growth rate of 5% following John F. Kennedy’s 1964 tax rate cuts of 30%.
This growth, along with the elimination of numerous deductions and exemptions, led to a sharp increase in tax revenues. Exactly what Reagan had predicted now came to pass: At a press conference in October 1981, Regan quoted the 14th-century Muslim philosopher Ibn Khaldūn’s foreshadowing of the Laffer Curve theory, as this effect is called in economic jargon: “In the beginning of the dynasty, great tax revenues were gained from small assessments. At the end of the dynasty, small tax revenues were gained from large assessments.” Reagan added: “And we’re trying to get down to the small assessments and the great revenues.”
So the myth that the U.S. experienced strong economic growth when the top marginal tax rate was high is false. In fact, the top marginal tax rate was only nominally high because there were so many exemptions, loopholes, and deductions.
Higher taxes slow economic growth. The Laffer Curve is real.