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July 19, 2012

Tax Shenanigans, In Context

Because the blog princess is a truly amazing human being who cares deeply about the wellbeing of each and every one of you angry, snake handling, self aggrandizing Red State types, she has constructed what may well be The Most Confusicating Tax Chart Ever.

You may now grovel abjectly before her. Her latest effort is prefatory to a delightful discussion of tax policy, which (due to her unceasing efforts on your behalf) will hopefully be an informed one.

On the bright side, the Princess now has a renewed appreciation for the transporting unhelpfulness of most tax charts. It makes little sense to look at how marginal tax rates for the highest earners have changed over time (as this chart, and about 90 gazillion others do) without also taking the changing composition of the highest tax bracket into account.

This may enhance your understanding of how our tax policies have changed over the last 60 years. Or it may cause you to head for the liquor cabinet. Three guesses which effect it had upon Moi?

At any rate, enjoy:


Data source: ABC News and the Tax Policy Center. I should note here that I strongly suspect the historic cutoffs for the top tax bracket are not in constant dollars, but don't have time to prove it. If I find out, I reserve the right to revise the chart but given the wild swings in the cutoff, I'm not sure that matters as much as I hope it doesn't.

Confused and vaguely frightened? You're not the only one.

Posted by Cassandra at July 19, 2012 08:49 AM

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So, if I read this correctly, while the tax rate may have declined, the taxable income ceiling has been incrementing upward resulting in a 'real' tax increase that should be noticeable to anyone who bothers to read the pay stub or income tax statement. True??

Posted by: Clayton Yendrey at July 21, 2012 01:46 PM

Actually, it'll be a tax decrease as fewer and fewer are paying the top rate. For example, the person making 100k at the end of Reagan's term was paying a ~30% marginal tax rate. That person today is paying a smaller marginal tax rate, because that 30% tax rate doesn't apply until you reach 350k+ (and by extension so is everyone else as they move down into the lower tax brackets).

As a seperate note, the income amounts are not in constant dollars. In 1955 (Eisenhower) the top bracket was at $400k in 1955 dollars. Today that would be the equivalent of ~$3.4mm.

Posted by: Yu-Ain Gonnano at July 24, 2012 09:09 AM

I have a chart that shows the bracket cutoffs in constant dollars. I just haven't had time to post it (or think about it!).

Here's what I saw on both charts (and my brain is pretty fried this week):

1. The cutoff for the top income bracket has declined (IOW, people making far less money pay the top marginal rate now). This is true whether you look at current or constant dollars.

2. If anything, converting to constant dollars exacerbates the effect. As Yu-Ain notes, $400K then is equivalent to several million (depending on which constant dollar calculator or measurement you use). My new chart using purchasing power, because I believe that most accurately reflects the "value" of a salary: it's what you can buy with it.

3. Yu-Ain's point is correct - as the top bracket widened, the marginal tax rate decreased. Which makes sense.

4. Progressives like to remind us that marginal tax rates are at a historic low. And that's correct, but on the other hand, TONS more people are paying the top marginal tax rate.

This poses problems for both the liberal and conservative dogma on taxes. It's batsh** crazy to pretend that increasing the marginal tax rate would have the drastic effects conservatives say it would. History just does not support that position.

Reasonable people can argue about where we are on the Laffer curve, but conservatives like to pretend that ANY increase in the marginal tax rate will kill the economy. I don't believe that's true.

2. Progressives like to argue that we should jack the marginal tax rate up to 70 or even 90%, but they are ignoring the fact that such an increase would have a much larger effect than the same tax rate did in the past because people with far lower incomes are now in the top tax bracket.

What this would amount to is a punitive tax on dual earner couples, and the amusing side effect is that it would punish women for working.


Posted by: Cassandra at July 24, 2012 10:19 AM

I have a chart that shows the bracket cutoffs in constant dollars. I just haven't had time to post it (or think about it!).

Ok, I was actually just putting that together myself from the same source I just linked to.

What this would amount to is a punitive tax on dual earner couples, and the amusing side effect is that it would punish women for working.

Looking at the tax rates through history for our current income bracket, I certainly would question whether it would be worth it for both of us to work, prior to Reagan's second term.

Of course, fewer people working would lower the productivity (and GDP) of the country. That may not "kill the economy" but it certainly wouldn't help it. It's a lot easier (and more appropriate) to take a 3% hit to the economy if it were growing at 6% (thus yeilding 3% growth) than to take a 1% hit to the economy at a time when it were growing at 0.5% (thus yeilding a 0.5% decline).

To mix a metaphor, even if a higher tax rate were the right move generally, I don't think you should vaccinate an immune compromised patient.

Posted by: Yu-Ain Gonnano at July 24, 2012 11:18 AM

... it would punish women for working.

But only if they are married. And since marriage and dual incomes causes inequality you shall be smited for your theft of resources from your fellow man!

Posted by: Yu-Ain Gonnano at July 24, 2012 11:57 AM