I remember back in my high school civics classes we'd gasp when we learned the top income tax bracket in the U.S. was 90 percent.
Wow! That would mean that a guy making $500,000 a year (the equivalent of $2.5 million today) would have to pay $450,000 in income tax, we'd tell each other.
No, that wasn't the case then, nor is it today, as some would have you believe. That includes former Gov. Scott Walker, who talked like a wet-behind-the-ears high-schooler in a twitter debate with U.S. Rep. Alexandria Ocasio-Cortez a couple of weeks ago. Walker claimed that her plan to create an income bracket over $10 million and tax those in that bracket at 70 percent to help with the needs of and the deficit facing the country would mean the taxpayer would pay $7 out of $10 in income tax.
That hypothetical $500,000 wage-earner after World War II, for instance, would pay 90 percent only on the income over $200,000. The first $200,000 would be taxed at lower rates just like everyone else. The $300,000 over the threshold would indeed be taxed at 90 percent. That still left a hefty tax bill — $270,000 on that $300,000 (Ocasio-Cortez's plan would put the 70 percent tax on income over $10 million), but Americans after the war were set on reducing the national debt while paying for post-war veterans' benefits like the GI bill, neglected infrastructure (remember during Dwight Eisenhower's presidency the ambitious interstate system?) and helping Europe recover.
Today, many of the so-called 1 percent are outraged over her 70 percent proposal which, incidentally, was the highest tax bracket through the late '50s, the '60s and the '70s. It was slashed to 50 percent in the early '80s and is now at 37 percent on income earned over $600,000. Income for a married couple is taxed at 10 percent up to $19,000, income between 19k and 77k at 12 percent, the chunk between 77k and 151k at 22 percent and so on, with the rate gradually rising to 37 percent on any earnings over 600k. The effective tax rate for those earning over $600,000, of course, is well below 37 percent.
None of this is suggesting this portrayal accurately compares apples to apples — there were changes in deductibles, credits and other factors — but it does present a snapshot of what's happened through roughly three-quarters of a century and how we tax the rich among us.
Some economists contend that the changes in tax policies and the rates paid by the wealthy are precisely why we have the incredible income gap between the rich and poor. In the years of the 90 percent rate, the ratio of CEO pay to their workers' pay was roughly 20-1. Today, it's estimated at 339-1 — in other words the corporation's CEO makes as much in one year as 339 of his or her employees.
One research agency estimated that in 219 of the 225 corporations it studied, an average worker would have to work 45 years to earn the money that his or her CEO would command in just one year.
The higher tax rate for the upper bracket greatly influenced executive pay by discouraging top management from commanding higher pay when they could keep just $100 of each extra thousand in income. As a result more income flowed to the corporation's employees. Today when the CEO can keep up to $600 of each additional thousand earned — and even more thanks to loopholes — the flow goes the other way.
Americans may be starting to understand how that works. Several plans floated by the likes of Ocasio-Cortez and mainstream politicians like Elizabeth Warren haven't been met with scorn as many conservatives expected. Instead, they've been taken quite seriously.
Recent polls have shown that up to three-fourths of the people support higher taxes on the rich, particularly those with incomes more than $10 million.
This wouldn't solve the gaping income inequality, but it would surely be a start.
Dave Zweifel is editor emeritus of The Capital Times. firstname.lastname@example.org, 608-252-6410 and on Twitter @DaveZweifel.
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