Charting tax rates and economic growth in the U.S.

As accusation and counter-accusation fly around during the election season few places–excepting the recent, tragic embassy attacks–garner any more attention than taxes. Should we raise taxes on the rich and cut taxes on the middle class? What about that phantom 50% who, supposedly, do not pay any taxes at all? Should we extend the Bush tax cuts??

The Democratic Party wants to raise taxes on the “wealthiest Americans,” while the Republican Party wants to keep taxes low. Both Republicans and President Obama agreed to keep the “Bush tax cuts” in place, though they are set to expire soon. Many conservatives believe that allowing the wealthy to keep more of their earnings will trend toward economic growth. Many liberals believe taxes should be raised on the wealthy to continue social programs that benefit the poor.

Plenty of citizens are convinced that raising taxes on the wealthiest Americans will hurt an already depressed economy. Another boat load of citizens believe raising taxes on the wealthy is the only way to realistically talk about balancing the budget. To my amusement many people who identify as liberal want the wealthiest to pay “their fair share,” while many who identify as conservative want the poor to pay “their fair share.” I am not sure what is “fair” is ever going to make everyone happy.

My friend Jonathan Howe assisted with the chart below. Combined from a number of sources it offers no opinions or policy evaluation. The chart offer a clear overview of personal, corporate and capital gains taxes from 1916-2011. It also demonstrates the growth or decline of GDP (as %) from 1920-2010 and the national debt during those same years. (Left scale refers to percentage related to taxes. Right scale for national debt. GDP line is to show trends related to years.)

tax debt gdp graph

(Click for an enlargeable graph)

A few things are pretty clear:
1. The income tax has been much higher in the past than right now; from 1951-1964 the top rate was 91%.
2. Even taking into account the Great Depression, GDP % growth was on a consistently upward trend from 1920-1980 including the times the top tax rate was between 62-91%.
3. The acceleration of our national debt began vigorously under Ronald Reagan, slowed slightly under Clinton, and, under Bush II and Obama, is like a rocket heading to Jupiter. The 2012 debt number would not fit on this chart as presented.
4. During the last 30+ years, as the highest tax rate trended down, U.S. GDP has been slowing while our debt has been soaring.

Now before my more left-leaning friends begin to cheer too much, it should be noted the top marginal tax rate, historically, applied only to those people making a serious amount of money. For instance, in 1917 when the highest rate jumped from 15% to 67% an earner needed $2M in taxable income–not net worth–to hit that tax rate. In 1941, when the rate was at 81% one needed to make $5M per year. Even during the years of Eisenhower, Kennedy and LBJ, when the top rate varied between 91-92%, only earners making $400K a year hit the top margin. These are not adjusted for inflation.

Adjusted for inflation these numbers are quite substantial, enough to make Mitt Romney’s $21M 2010 income look startlingly paltry in some instances. Using a CPI simple inflation calculator to determine 2012 dollars we find these equivalent top-tier brackets: 1917, $35,797,500.00; 1941, $77,926,530.61; while in 1963, the year income tax rates began to fall, $2,994,823.53. It should be noted in big letters that many people now believe higher tax rates should apply to people making more than $250,000.00. This, historically, has not been even close to the highest rate. Until Ronald Reagan’s presidency the top tax bracket had only fallen under $200K (non-adjusted) between 1925 and 1931 (around $2.6M adjusted). You can see a full tax chart here with dozens of explanatory footnotes for all the exemptions, exclusions and the like.

Related to this subject: How one Christ follower decided to vote for Ron Paul, Part 2

Marty Duren

Just a guy writing some things.