Are taxes really at 60-year lows?

A popular talking point in leftist circles seems to be that taxes are at 60 year lows. The implications for this being: with government deficits running high, we’re in a position where we can afford to dig ourselves out of it by taxing, rather than cutting spending.

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Indeed, as Bruce Bartlett noted in a 2011 New York Times column, “the Congressional Budget office estimated that federal taxes would consume just 14.8% of G.D.P. this year. The last year in which revenues were lower was 1950.” Bartlett is technically correct in this point, but we have to remember the structure of the US government: federal, state, and local.

When you hear that taxes are at 60 year lows, the person making the claim is only looking at federal taxes and excluding state and local ones. Total tax revenues at all levels of government were a hefty 22.7% of GDP in 1950, but an even larger 32.4% in 2011. This is a sizeable 42% increase in taxes are a percent of GDP, though this is hidden by the fact that taxation has shifted from the federal level to the state and local levels.

Another popular liberal talking point is that America excelled when taxes were at its highest.  The 1950s and 1960s are known as America’s “Golden age of Capitalism,” and yet during this time period, as Paul Krugman writes, “[in the 1950s] incomes in the top bracket faced a marginal tax rate of 91%,” and that “the best estimates suggest that circa 1960 the top 0.01 percent of Americans paid an effective tax rate of more than 70 percent, twice what they pay today.”

Krugman is measuring a marginal tax rate in his first example, and his effective tax rate on his second. The marginal tax rate is almost like an advertised tax rate (think: a college that charges $50,000 a year tuition), while the effective rate is what you actually end up paying (think: what that tuition costs after receiving scholarships, etc.). So right off the bat, the 91% figure is meaningless because it neglects the existence of tax loopholes and tax shelters that exist. But the second example is striking, as it would imply that the wealthy paid 70% of their income in taxes, and it clearly had no negative effects on economic growth during the Golden Age of Capitalism.

The problem here is that Krugman didn’t even bother to get his numbers right. The top 91% rate hardly reduced top earners to tax collectors working on a 9% commission. According to the Congressional Research service, the top 0.01% of income earners paid an effective tax rate of around 45% in the 1950s. By the 1960s, the top 0.01% were paying an average of 31% of their income in taxes, which is only slightly higher than the rate that the top earners pay today.

If there’s something to be learned from these two myths, it’s that there’s no overlap between the type of people who want to forcibly take your income and the type of people who are going to argue honestly.

What do you think?

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