The Dumbest Thing I Heard This Week

The Wall Street Journal is a loyal cog in the Rupert Murdoch conservative propaganda machine. Many mornings I find that their columnists have almost magically concocted responses to the prevailing facts of the day — facts that routinely undermine the conservative agenda.

Yesterday, Peter Schiff provided the latest contribution to the revisionist history of the conservative movement. This time, it is a contortionist’s reply to the fact that America experienced growth and prosperity when tax rates on the wealthy were much higher. As we review Schiff’s article, take note of the leaps of logic and shifting premises that characterize this new Republican talking point on taxes.

The top marginal tax rate in the 1950s was 91%. While this sounds onerous, it’s important to remember that the country boasted more tax brackets in the 1950s. Unlike today where everyone making over $388,350 pays the same income tax rate, the top tax rate in 1958 only applied to those making $3.08 million or more — which is over $23 million/year in current dollars.

But shouldn’t that have crippled businesses with all the wealthy people giving over 91% of their income? In a word, no. Marginal tax rates mean that the new rate doesn’t effect any income below that rate. In other words, someone in 1958 making $3.09 million would only pay 91% taxes on the last $.01 million. Lower rates apply to the rest of the income. That’s the beauty of the tax system and the reason for having many tax brackets and a system of deductions for business expenses — accumulating wealth for purposes other than business becomes increasingly more difficult as the amounts grow bigger.

So what’s Schiff’s argument:

In 1958, the top 3% of taxpayers earned 14.7% of all adjusted gross income and paid 29.2% of all federal income taxes. In 2010, the top 3% earned 27.2% of adjusted gross income and their share of all federal taxes rose proportionally, to 51%.

So from 1958 until now, the top 3% increased their share of national income by around 13 points and the tax burden grew by 21.8 points? That doesn’t seem so bad. But it’s not even that simple. Check this out “and paid 29.2% of all federal income taxes…their share of all federal taxes rose proportionally, to 51%” Seems like two different baselines to me. This is likely counting the impact of the big bucks currently earned through capital gains…even at the low rate of 15%. Despite that rate, a lot of federal tax revenue comes through capital gains because so much money is earned through the markets. CEOs are taking $1 salaries…and huge stock option grants. Before we admire these CEOs for shaving their salaries, recognize that the millions they will earn from those stocks will be taxed at the low capital gains rate. The share of taxes paid by the wealthy has surely grown, but not as starkly as Schiff suggests, and even if it had that’s not a truly scary prospect.

So if the top marginal tax rate has fallen to 35% from 91%, how in the world has the tax burden on the wealthy remained roughly the same? Two factors are responsible. Lower- and middle-income workers now bear a significantly lighter burden than in the past.

I feel somewhat out of place having to explain “broadening the base” to a conservative. With much higher relative lower and middle class wages, those taxpayers paid a much higher proportion of total taxes.

See how those poor and middle class incomes didn’t move for almost 30 years? That’s why the share of taxation didn’t grow — the poor and middle class pay a smaller portion of taxes because they literally have a smaller portion of income. When you abandon Schiff’s cherry picking of 3% (a curious number…think about all the “percents” we use in common parlance), you can see how the share of taxes paid by the bottom 60% of the country declined.

In contrast, the share of taxes paid by the bottom two-thirds of taxpayers has fallen dramatically over the same period. In 1958, these Americans accounted for 41.3% of adjusted gross income and paid 29% of all federal taxes. By 2010, their share of adjusted gross income had fallen to 22.5%. But their share of taxes paid fell far more dramatically—to 6.7%. The 77% decline represents the single biggest difference in the way the tax burden is shared in this country since the late 1950s.

So their share of income fell 18.8 points and their share of the tax burden fell 22.3 points. That seems about right actually. What makes you realize you’re reading the WSJ is that he just pointed out that 66% of the country went from over 40% of the total income to around 22% and this is not highlighted as a terrifying development.

The changes came about not so much by movements in rates but by the addition of tax credits for the poor and the elimination of exemptions for the wealthy. In 1958, even the lowest-tier filers, which included everyone making up to $5,000 annually, were subjected to an effective 20% rate. Today, almost half of all tax filers have no income-tax liability whatsoever, and many “taxpayers” actually get a net refund from the government. Those nostalgic for 1950s-era “tax fairness” should bear this in mind.

“Well son, let me read you a story about a future where your mother and I both work to live in near poverty while millionaires bitch about paying 15% of their annual income.”

Oooooo BURN! The 1950s taxed poor people more by not giving them those EITC and child care credits. Take that liberals! Except I’m pretty sure everyone would accept that

The tax code of the 1950s allowed upper-income Americans to take exemptions and deductions that are unheard of today. Tax shelters were widespread, and not just for the superrich…. Those 1950s gambits lowered tax liabilities but dissuaded individuals from engaging in the more beneficial activities of increasing their incomes and expanding their businesses. As a result, they were a net drag on the economy. When Ronald Reagan finally lowered rates in the 1980s, he did so in exchange for scrapping uneconomical deductions. When business owners stopped trying to figure out how to lose money, the economy boomed.

The 1950s did include a number of write-offs not present today. What exactly is Schiff’s point? That the high rates were really an illusion? Well, no because he already explained in the article that the handful of superrich in America were paying those rates. That these deductions actually crippled the economy? Well, no because even with all of those deductions the economy boomed and incomes grew. Contrary to the popular conservative myth that the Reagan years were “booming,” growth remained in line with the previous three decades, all that changed was a massive decline in lower and middle class wealth, shrinking the tax base.

 

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