For decades, progressives tended to accuse conservatives of wanting to bring back the ’50s, but in recent years the shoe is on the other foot, with some prominent progressives saying they yearn for the good old days when unions were strong, manufacturing was the core of the economy, and the top marginal tax rate was over 90%. I wanted to see what the real tax situation was for people in a number of different income situations, so I decided to pull the historical tax tables and do the math.
Luckily, the Tax Foundation publishes the income tax tables for every year from 2010 back to 1913. I decided to compare 2010 and 1955. Here are the 2010 tax tables:
I then got the 1955 tax tables and adjusted the income brackets to 2010 dollars using this inflation calculator. (For those interested, the inflation factor from 1955 to 2010 is 713%) The result is as follows:
Next, I wanted to see what this would actually mean for people at various family incomes. Keep in mind, I’m not looking at deductions or tax credits here; I’m just looking at the basic rate calculation. This obviously is not a full real world picture, but I think it at least gives us a view of what the basic message of the tax rates was at these two points in history.
As you can see, everyone paid more in taxes in 1955 than they do now. However, the degree to which they paid more then is interesting. Someone making 40k in 2010 dollars would have paid 1.6 times as much in 1955. Someone who made 80k, only 1.4 times as much. Someone making 120k would have only paid 1.3 times as much. It’s not until we get to the astronomically wealthy fellow, earning 1.2 million 2010 dollars per year, that he pays a higher multiple, 1.9 times as much in 1955 as he would in 2010. (Also note that the famed 91% marginal income tax rate doesn’t kick in until you’re making more than 3.2 million dollars per year in 2010 dollars. You’d have to be well into the richest 0.1% to feel it.)
So while the rich pay less in taxes in 2010 than in 1950, the middle and working classes pay much less as well. And overall, we have a significantly more progressive tax code now than we did then.
So our tax burdens are all lower today, but the federal government is spending more in constant dollars (presumably).
No big surprise, but it is a reaffirmation of why we’re running huge deficits.
To an extent, yes. But it’s also a factor that the population is much larger than it was in 1955 and real incomes have also grown quite a bit.
In 2010, standard deduction for married filing jointly was $7,300. In 1955, adjusted for inflation, it was $9,764.
So the poor paid less in 1955. The middle class paid a little more. The rich paid much more. Overall, it was more progressive back then.
There are huge fluctuations depending on the year. In 1942, when the insanely high 50’s era brackets were introduced, the deduction was $16,053, adjusted for inflation. In 1981, the last year of >50% tax brackets, the deduction was $4,798. So everyone was paying more taxes during the Carter years. Interestingly, I see the Kennedy tax cuts went almost entirely to the wealthy.
RR,
I think you’re confusing the standard deduction with a tax credit.
If you take $9,764 off 40k, that gets you $30,236 in adjusted gross income, which with the 20% tax bracket (on income up to 32,544) in 1955 makes for $6,047 in tax.
If you take $7,300 off 40k, that gets you $32,700. You hit the bottom two tax brackets and pay a total of $4,067 in 2010 taxes.
So it looks like even assuming the standard deduction you’d pay a lot less in 2010. And that’s ignoring the per child income tax credit, if you have kids, which can be a huge deal at that level. The last year when I made 40k we had two kids, and once we did deductions and tax credits I had a net tax liability of negative four hundred dollars — as in, they paid me rather than me paying them.
That’s way more progressive than anything in 1955. (In part because the country was a lot poorer then than now, making 40k in 2010 inflation adjusted income was much more middle class then than it is now.)
Wow, now I try it, it looks like even with the $16,053 standard deduction of 1942, you still would have paid $4789 in 2010 dollar taxes on an income of $40k in 2010 dollars — versus the $4067 you would pay with the $7300 standard deduction in 2010. It must just be really hard to have enough of a deduction to make up for that 20% bottom tax bracket versus the 10% and 15% brackets for 2010.
Oops. I forgot to apply the deduction to 2010. Still, it might affect your multiples enough to make taxes today no more progressive than it was in 1955.
Now, I only applied the deduction on the 40k, I didn’t try it on the others.
It really is surprising how big a deduction you need to make up for lower brackets. I graphed a 33% flat tax and found that for it to look more or less like our current system, we’d need a $30K deduction for single filers! And yet, I’d prefer that. Or an ever higher flat tax and deduction so that only half the country even files.
Okay, I graphed all the incomes I’d tried, and you always pay less in 2010, but the difference in progressiveness mostly goes away with a blip in the low 100k range:
At 40k you pay 1.5x more in 1955
At 80k you pay 1.4x more
At 120k you pay 1.26x more
At 1.2M you pay 1.9x more
I want to say the flat tax proposals I’ve seen have had 30k+ standard deductions — though I think there’s also an extent to which people would be willing to pay a bit more if the tax code were just simpler.
Frankly, if my taxes were something I could fill out simply on one sheet of paper, I’d happily pay a bit more than I do now. As it stands, I always spend a whole weekend with TurboTax and still worry that I got something wrong and the IRS will come after me. (After moving to a state and city with income tax, I may break down and hire a tax guy this year. Sucks.)
I always do my own taxes, as with two businesses they tend to get fairly convuluted, and I think I understand the Code as well as most accountants, although my math skills are appalling. (I have my wife, who has excellent math skills, check everything.)
I am not a big fan of flat tax proposals. I have never seen any proposed that I think would keep the virtue of simplicity for more than a few years, before the tinkering of politicians would destroy that key feature. I certainly am also not a fan of the current system either. The problem though is not really the tax code, but the fact that we simply have far more government than most people are willing to pay for, and too many politicians eager to spend money in order to ensure their re-elections.
I am curious – do the differences between the 1955 and 2010 tables also reflect other payroll deductions, such as FICA (SS and Medicare – 7.6% of paycheck up to $108,000, if my research is correct)?
“So while the rich pay less in taxes in 2010 than in 1950, the middle and working classes pay much less as well. And overall, we have a significantly more progressive tax code now than we did then.”
It seems to me that one would have to take into account sales tax and spending habits as well in order to make a true comparison of this (in addition to FICA deductions, etc.). Indiana, for instance, levied its first state sales tax of 2% in 1963.
Any idea how much they paid into Social Security back then? I don’t pay that much in actual income tax today, but being self-employed, SS really hammers me. And you can’t deduct any of it away with charitable giving or anything like that; the only way to pay less is to make less.
Ah, that’s a really good point about social security. (And Medicare, which didn’t even exist in 1955.)
According to this table, it looks like the difference is pretty big.
In 1955 the rate for employees was a total of 2% (just SS, there was no Medicare) while in 2010 the total rate is 7.65%
It’s far worse for the self employed. In 1955 they paid only 3% total, now they pay 15.3%.
Since the entitlement taxes are not progressive at all, that pretty much evens up the field on tax progressiveness between 1955 and 2010.
And the non-self-employed still pay that 15.3%. Half of it doesn’t show up on their pay stub, but their employer has to pay it, so it comes out of their productivity one way or another.
That does far more than even up the progressiveness. On 40K, assuming the standard deductions you mentioned earlier, I get:
1955: 40K – $9,764 = $30,236 * .03 = $90.71
2010: 40K – $7,300 = $32,700 * .153 = $5003.00
So you might be paying half as much income tax now, but 50 times more FICA. And that money is for the programs that even the Tea Partiers don’t want to cut.
You slipped a digit there, the 1955 social security taxes would have been $907.10, not $90.71, but the point is dead on. (Actually, it would be a little more than that, because in 1955 the self employed effectively got a discount, for those who were employed it was 2% from the employee and 2% from the employer, so 1208.)
Also, that underlines how the supposed era of fiscal responsibility in fact (though arguably unknowingly) was no such thing. The social security tax rates have gone up so much because the structure of social security was based on bad demographics, and so those of us paying 15.3% now are effectively subsidizing the low tax rates which people working in the 50s and 60s paid.
There’s more to the story than that. In 1955 they didn’t have the Earned income tax credit. This is particularly helpful for lower income families and making the current tax brackets more progressive than they appear compared to 1955. Also, a big part of Reagan’s tax package was to close many tax loopholes that were widely used by and only beneficial to those with very high incomes. Despite how many leftists like to characterize it, the rich didn’t receive as huge of tax decrease as the tables would indicate. It was just a more straightforward approach and shift in emphasis regarding where taxes were paid – relaxing capital gains to encourage investment, was the largest relief the rich saw. However, many middle class folk benefit from that as well.
There is no question that the able producers and earners (those who can invest and work and do) are paying much higher taxes now than in the 1950s. The ‘poor’ and by that I mean the able unproductive (those who can work and choose not to) are paying far, far less or are actually net receivers of wealth transfers thanks to LBJ’s New Deal on steroids from the 60s.
We can discuss rates of taxation, deductions, capital gains, etc.; however, the fact is that we have to count FICA (payroll taxes) as ordinary income taxes. FICA is not a separate account funded like a pension, FICA taxes are general revenue – there are no segregated funds. FICA is just a ploy to collect more in taxes while allowing people to think they are being taxed less. This also increases the entitlement mentality to the middle-class. By making people think their money is being held to be paid out as an annuity, people who otherwise disdain ‘welfare’ begin to defend it. This was also foisted on senior citizens (who have more time to be politically active) in the 60s with Medicare. It was intended by Roosevelt that people feel that they are ‘owed’ their OASDI benefits in order to keep the program alive forever (at least politically speaking, it was economically dead from the get go) and to make it untenable for politicians to repeal it – the so-called ‘political suicide’ of unprincipled politicos.
When you factor ordinary income, FICA and capital gains (taxes that affect many more in the middle class today than in the 50s) we are paying more in taxes now and for far less of anything except more government, more that is not enumerated in the Constitution.
The biggest tax of all though is unseen. The devaluation of the dollar by the political spending addicts and their drug dealer the Fed has cost ALL, but the small clique of connected bankers and corporatists, more than any other tax.
The real question is how much of the taxes from all sources, and there are many more today, now go to service the usurious debt than in the 1950s. Taxes are supposed to fund the general purpose of government for the common good within the Constitutional constraints. This is not why we pay taxes now. We are all debt-slaves and more so now than in the 1950s. People are always regarding themselves as ‘taxpayers’ or exclaiming their loyalty to the country by stating that “I pay my taxes so I am entitled to such and such” – this is a slave mentality. Americans prior to 1913 would NEVER have referred to themselves as such, in fact, they would have likely killed the tax-farmer than call themselves a taxpayer. We have been conditioned to think our taxes pay for ‘necessary’ services, yet so-called services are funded by debt and we are servicing the debt. We may as well live in Goshen.
I know this seems dramatic, and the reality is this is not as bad as I am presenting it, yet – but, we are on a path that will make all of us wage-slaves to cover taxes that only serve to service debt. Since wages represent time working, we become slaves rendering our tribute to Caesar by servicing ‘our’ debt. If we are rendering all of labors to Caesar, what do we render to God?
The primary culprit here is that despite the fact that the 50s were not the Utopia ‘conservatives’ paint it to be, as a people, we Americans, were far more moral then than we are now and that is why we are slaves. It is as St. Augustine told us centuries ago, as many vices as a man has, he has masters.
We can say as many government handouts, subsidies, programs, tax-incentives, etc – basically debt for perceived benefits as we have, we have a master and that master is our Federal (feudal) overlord and his banker (the Fed).
Your analysis is interesting, but why do you stop at a mere 1.2 million? All the action in the last half century has been in the stratospheric range. Today’s hedge fund managers would have paid much much more under the 1950’s system. Here’s a little food for thought, courtesy of a commenter at the NYT:
“In 1968, the largest American corporation was General Motors. The CEO of GM made 66 times more than the average GM worker. He paid a top marginal federal income tax rate of 70%. By 2005, the largest American corporation was Wal-Mart. The CEO of Wal-Mart made 900 times more than the average Wal-Mart worker. He paid a top marginal federal income tax rate of 35% (and probably really only paid about 15% if he was paid mostly in “dividends”)
I would like to see a more thorough analysis than what you have presented here.
Doug,
The 1.2M figure was semi-arbitrary, but also because the standard tax rates are on salary-type income. As you point out, executives and hedge fund managers and such often make much of their income in some other form than salary income.
For instance a CEO may be given a stock grant or set of stock options worth $40M, but not be able to sell those shares (or exercise that option) for a certain amount of time. The taxes on those kind of earnings work differently, so it was simpler to not deal with them.
Similarly, hedge fund managers get much of their money via getting a share of the profits of their fund, which is taxed as capital gains rather than salary.
But my question here is in whether a regular guy actually paid less in taxes back in the “golden age” of the 1950s, not how much CEOs pay. After all, it’s not really any skin off my nose if some other guy I never meet makes more than me.