Top Tax Rate History

By John Ballard

The Malcolm Gladwell snip needs to be played repeatedly until more people get the point.

When Gladwell points out the ninety percent top tax rate of the fifties he's not making it up. This table comes from the Tax Policy Center which is part of Brookings and the Urban Institute.

I think when people hear "90% tax rate" most of them don't realize that it's not aboout taking away ninety percent of anyones net worth. The income tax does not reduce anyone's net worth, but takes part of an addition to that net worth during twelve months.

Some who pay little or no taxes may still have "net worth" but the reason they pay no taxes is that they have not succeeded in adding to whatever little nest egg they might have. Many people, of course, don't even have that. And the notion of setting aside enough to build a nest egg for their retirement years is as much a fantasy as winning a lottery.

Taxing those who have added yet another fortune in one year to an even bigger overall net worth already in their possession is not taxing too much. The IRS has income averaging rules which ease the burden for those who hit a jackpot or get a sudden income windfall. Entertainers and sports stars deal with that kind of thing all the time. I know because at one time I was fortunate enough to have an income increase  once (nothing like a sports figure or lottery winner) which was enough that my tax bill was eased for that year and the one that followed.

In years of inflation, those who fail to add to their net worth enough to keep up with the rate of inflation are watching their nest egg get smaller. This year (2010) saw no increase in the cost of living increase ("COLA") for Social Security beneficiaries. And I have come across a couple of places indicating that next year (2011) the same will continue. This means that the rate of inflation for two consecutive years has been so low that "keeping up with inflation" is a meaningless phrase.

In the matter of net worth, however, the last two years have seen a decline across the board for rich and poor alike. The crash of the fall of 2008 was a tide that lowered all boats. (Those with no boats to lower were not affected the same way. They are the ones living payday to payday who lost ALL income from unemployment, as well as those still at work. For them, times have been and continue to be very tight.)

There is no good argument that those who have taxable income in excess of a quarter million dollars this year should add over half of this year's taxable income to already big net worths. A little belt-tightening on the part of the wealthy is called for. The fashionable term now is austerity. It's time those at the top experienced the true meaning of that word.
Proposals have been made to make exceptions for small businesses so the argument that jobs and small businesses will be badly affected are just wrong.