When Top Tax Rates Rise, So Does The Economy

by Arlen Grossman/ The Big Picture Report/ April 9, 2012

Looking at the first chart below, you can see the top marginal income tax rates dropped from 73% in 1921 all the way down to 24% by 1929. After that, as we know from history, the stock market crashed and we plunged into the Great Depression.

Image: Susan Missal Lenner, CPA

When the top marginal rate jumped as high as 94% in 1945 (and 92% during the Eisenhower era) and never below 70% until President Reagan was in office, the American economy hummed along very nicely.

{Note: The marginal tax rate is the rate on the last dollar of income earned, which is different and less than the average tax rate, which is the total tax paid as a percentage of total income earned.}

But from Reagan’s presidency to now, the top rate dropped to its current level of 35%, and for all but the wealthy, the economy has been sluggish at best. It shouldn’t take an Ivy League mathematician to figure out from the numbers in the charts that the economy does best for most Americans when the rich are paying their fair share, something they haven’t done for a very long time.

Of course, the Republican Party is horrified at the thought of letting the Bush tax cuts of 2001 and 2003 expire (as they were scheduled to in 2010) and allowing the top marginal rate to move from the current 35% to its previous 2000 level of 39.6%.  Even with massive federal deficits, the thought of a 4.6% hike on the marginal rate of millionaires and billionaires is totally unacceptable to the GOP tax-cut idealogues.

The facts contained in the charts below should be convincing to any objective observer that the top tax rates need to rise, though not if he or she has a Republican or Tea Party bent, because to those people, facts and evidence are trumped by discredited ideology.

Chart above is from the Tax Policy Center (Urban Institute and Brookings Institution)

Chart from The American Thinker

This entry was posted in Economics, economy, government, inequality, Republican Party, taxes and tagged , , , , , , . Bookmark the permalink.

53 Responses to When Top Tax Rates Rise, So Does The Economy

  1. ragnarsbhut says:

    Arlen Grossman, I had suggested the idea of a top tax rate of 65% on any income amount above $3, 000, 000.00 at one point. That rate is rather high, yes, however, I cannot see how anybody can complain about getting to keep $3, 000, 000.00 before a tax rate that high is imposed. You said that my idea seemed reasonable to you. When you said that it seemed reasonable to you, were you referring to my tax-free threshold before the tax rate was applied or the tax rate itself?

  2. ragnarsbhut says:

    Arlen Grossman, here is a video for you: https://www.youtube.com/watch?v=nrXiSlqb8Co I watch Secular Talk w/Kyle Kulinski with some degree of regularity. When he is calm and levelheaded, that is when I enjoy him the most. Where he goes downhill is when he gets shrill in his speech.

  3. ragnarsbhut says:

    Arlen Grossman, I had suggested the idea of a 65% tax rate on incomes above $3, 000, 000.00 You said that such an idea seemed reasonable to you. I am not advocating for a tax rate that high, however, any person who could complain about that if the tax rate was on anything in excess of $3, 000, 000.00 would be acting in a ridiculous manner.

  4. ragnarsbhut says:

    Arlen Grossman, here are a few videos for you: 1: https://www.youtube.com/watch?v=MKbLLPUN5eU, 2: https://www.youtube.com/watch?v=wCdAy6pNJMQ, 3: https://www.youtube.com/watch?v=2g9Bq7KY1MI Without significant spending cuts across-the-board, I am admittedly disinclined to advocate this level of taxation on the rich. Just my thoughts.

  5. ragnarsbhut says:

    Arlen Grossman, without proper management of our money, I am skeptical of the benefits of giving government more. The top tax rate may not impact all income, however, what is a reasonable rate?

    • A reasonable rate of taxation for the wealthy is a lot more than it is now, Ragnar. Wealth inequality gets worse every day. Our economy seemed to do quite well when the rich paid a much higher tax rate. Then Reagan and other presidents lowered the top marginal tax and we’ve been going downhill ever since.

      • ragnarsbhut says:

        Arlen Grossman, here are 3 questions for you: 1: What caused the Great Depression-bad economic policies in general or low taxes? 2: Who would you be more inclined to believe could handle tax laws better-politicians who probably never studied economics or economists who got involved in politics? 3: Did you not know that we did just fine from an economic standpoint for a number of years before we had any form of taxation on income?

  6. ragnarsbhut says:

    Arlen Grossman, tax rates being progressive I have no problem with in general, just the profligate spending habits of our government. I would support getting rid of the regressive components in our tax code if the trade-off was dramatic spending cuts across-the-board.

  7. ragnarsbhut says:

    Arlen Grossman, even if there is demonstrable proof that the economy would rise with top tax rates increasing, government has displayed a questionable track record with how it manages our tax dollars. I could cite numerous examples, however, those can also be researched.

  8. ragnarsbhut says:

    Arlen Grossman, if we had a top tax rate of 75%, to pick a number, how much money should people be able to earn before any taxes are to be paid in your opinion?

    • Hard to say, Ragnar. It should be a graduated tax starting at an income that guarantees a livable wage. Maybe $30 or $40 thousand.

      • ragnarsbhut says:

        Arlen Grossman, this may seem like a high threshold, however, if one wants a top tax rate of 75%, to pick a percentage, I would say that the first $550, 000.00 should be tax-free. Just my thoughts.

  9. ragnarsbhut says:

    Arlen Grossman, if there were spending cuts across-the-board, high tax rates would not be an issue for me. The issues are with the wasteful spending and lack of accountability among our representatives to the people. Just my thoughts.

  10. ragnarsbhut says:

    Arlen Grossman, I would like to see spending reductions across-the-board. First and foremost, even though it is an inflammatory subject, I would like to see the drug war come to an end. I would also like to see a drastic reduction in spending on maintaining overseas bases. What areas would you like to see eliminated as sources of unnecessary spending?

    • I agree with your examples, and would cut back on the military in general. But I see many areas to spend (invest) more on, and I know you wouldn’t agree with those.

      • ragnarsbhut says:

        Arlen Grossman, I do not agree with the idea of free college unless it is provided as a reward for service to one’s country. However, I believe that saying, “I have a college degree and that makes me a success story,” which would be unsubstantiated, to be an unrealistic notion.

        • The evidence is clear that a college education increases the wealth of an individual.In my opinion, college should not be only for the rich.

          • ragnarsbhut says:

            Arlen Grossman, I said that I did not agree with the idea of college-free tuition. Yes, I believe that people should vote with their dollars, however, free college is an impractical thing.

          • Think of free or low-cost college education as an investment for the good of the country.There are several countries in Europe that recognize the value of it.

          • ragnarsbhut says:

            Arlen Grossman, if there was more competition, then people would vote with their dollars. Short of college being free, I think the tuition could be less costly, as well as the books required for a field of study being wrapped into the tuition fees, so there could be a single transaction. Essentially, that would mean that the paid tuition could cover everything that the person utilized.

  11. ragnarsbhut says:

    Arlen Grossman, I know all about the argument that the economy would rise with higher tax rates. The issue is multi-factorial. What should be the threshold before anything above that gets taxed at 70%?

  12. ragnarsbhut says:

    Arlen Grossman, there may be merit to the argument that the economy would rise if the tax rates were higher. I also get that a top marginal tax rate of 91% does not mean that the government says, “We will take 91% of everything you have earned.” Even with the proposed top tax rate of 70% would not mean that you pay 70% on all of your income. I am not an extremist on the tax issue. However, the complexity does not help. If it were up to you, what areas of waste would you like to see get cut and where would you like to see the money better spent?

    • In my opinion, Ragnar, a tremendous amount of waste is found in the Pentagon budget, and subsidies and tax breaks for wealthy Americans and corporations. Wouldn’t you agree? (of course I know there will be other programs you would like to see cut.)

  13. ragnarsbhut says:

    Arlen Grossman, I know that a top marginal tax rate applies to dollars above a specific amount. The issue is what an ideal rate is.

  14. ragnarsbhut says:

    Arlen Grossman, here is a video for you: https://www.youtube.com/watch?v=QidUgUWk2GE The guy in this video is presenting his analysis of the flat tax plan as proposed by Rand Paul. In the plan Rand Paul proposes, he exempts the first $50, 000.00 a family earns from any income tax, as well as eliminating the payroll tax, which is regressive. Any person who can say that if you earn $50, 000.00 a year or less you will get a tax hike is inherently not credible, as well as being economically illiterate.

    • A flat tax does seem regressive. A graduated tax would be fairer. But the idea of simplifying our tax system is very appealing.

      • ragnarsbhut says:

        Arlen Grossman, flat and regressive have 2 separate meanings from a tax standpoint. Any person who equates flat taxes and regressive taxes is economically illiterate, as well as having no direct knowledge of how the tax system works.

    • I think I understand what you are saying. A flat tax would be regressive, but with those exemptions is would be less regressive. But as always, either way the rich will get richer. Why is it always that way with conservative tax plans?

      • ragnarsbhut says:

        Arlen Grossman, flat and regressive have 2 different meanings. Flat means that the rate is constant. Regressive tax means that as your income goes up, your tax rate goes down. The idea of flat taxes being regressive just goes to show that many people who say that are economically illiterate, as well as having no knowledge of tax policy.

    • I understand what you are saying. In general, a flat tax is regressive. But if you have exceptions as you indicate, it would not be as regressive.. I don’t know if Pakman is aware of those exceptions. If he was, he should have presented them.

  15. Arlen Grossman, I know that people will argue that high tax rates may be a greater incentive to invest money. To answer another argument that advocates of high tax rates will make, I know that they will make the argument if the rate is higher, people will put money back into their businesses and do other things which provide tax write-offs, ultimately resulting in that money flowing back into the economy. My only real issue with the tax the rich crowd is that you might have some people who may not be rich who only say tax the rich as an act of spite. Just making the argument that they can afford to pay more is not adequate enough.

  16. Arlen Grossman, here is an idea: Tie the tax rate of a wealthy business owner to how much the business owner pays his or her employees. If the business owner writes a bigger paycheck, the business owner pays very low taxes on the income the business earns.

      • Arlen Grossman, in my idea, the only time a wealthy business owner would pay relatively low taxes on the income the business earns is if the owner wrote a bigger paycheck for his or her employees. You said that the rich still need to pay their fair share of taxes, as well as provide liveable wages for their employees. To factor in my idea, here it is in a nutshell: You sit on the money, you pay a higher tax rate. If you write bigger paychecks for your employees, your tax rate on the income is low, however, only on the condition of bigger paychecks being written.

        • I wish Congress would go along with your idea, Jeffrey. It sounds good to me!

          • Arlen Grossman, it is clear that the rich would also have to uphold their end of the bargain in this scenario. I get that. Now, if the tax rate a wealthy business owner would pay is tied to how much money said person paid his or her employees, the wealthy business owner could write bigger paychecks without the risk of increased tax rates on the money that was earned. A business owner who pays his or her employees more money would pay a lower tax rate. Should that same business owner pay his or her employees less, they would pay a higher tax rate.

  17. I call b.s. on this. The only thing high taxes do is give government politicians license to spend our money excessively, with no net positive result.

    • You say there is no net positive result. I would say higher taxes have resulted in many positive results and the potential to result in great investments for the country.

      • Arlen Grossman, high tax rates only grow the wallet of the government. They also fund things that we don’t need. Paying for welfare of people who cross over our border from Mexico, paying for incarcerations of people who use drugs, which is absurd, funding Planned Parenthood, which I find morally reprehensible. The money also gets wasted by funding federal departments that are not Constitutionally authorized. Can you refute any of that logically?

        • What I don’t understand, Jeffrey, is why you don’t complain about all the tax cuts, tax breaks, and subsidies that go to the wealthy. They got almost all of the recent tax cut, resulting in a huge increase in our national debt (which now conservatives don’t seem to care about). Wealth inequality expands every year. The rest of what you complain about pales in comparison to the breaks given to corporations and billionaires.

          • Arlen Grossman, the national debt is a big problem. I will not dispute that at all. The problem is that as tax rates go up, that gives politicians license to spend our money in unnecessary ways.

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