A Tax System That Works!

My last blog was about comments President Eisenhower made when he was leaving office. He handed over the reins of government to John Fitzgerald Kennedy. I was impressed with his comments, but wanted to continue my thoughts on a tax system that works.

I have heard what Eisenhower’s tax rates were, 91%, and the first thing I thought about was what did people actually pay during his Presidency? I was born in 1950, so I really didn’t care, but my parents did. So I did a little research on the issue. First, let’s look at the marginal tax rate, or the percentage tax applied to one’s income. And for the sake of the inequality discussion, let’s focus just on the top income earners.

Under Dwight D. Eisenhower, the Marginal Tax Rate on regular income for wage earners over $400,000 was 92% at the beginning and 91% at the end of his Presidency. The highest rate was 94% during FDR’s Presidency. Nothing changed under JFK, While during Lyndon B. Johnson’s Presidency over $400,000 was taxed at a rate of 91%, while over $200,000 was taxed at 72.25%.

During Richard Nixon’s Presidency the tax for anyone making over $200,000 was 77% initially but reduced to 70%. Following Nixon was Gerald Ford, who did not change anything, however, it is interesting to note the Long-term capital gains tax rose to 39.875% during this time. It has not been that high since. During Jimmy Carter’s Presidency the amount taxed at the top rate was $215,400 and the rate was 70%. When Ronald Reagan took over he restructured the top tax rate from 69.125% on income over $215,400, to 28% on all income over $29,750. Now that is a significant tax cut. I think this is problematic, and I do not think it is fair to tax someone who makes a multimillion-dollar income the same amount I pay.

What did George H.W. Bush do in response to his “read my lips, no new taxes?” He raised taxes, at least on those who made more that $86,500. They paid a 31% marginal tax rate. When Bill Clinton took over The tax rate for those making $288,500 rose to 39.6%, and George W. Bush lowered that tax rate for those who make over $357,000 to 35%. During President Obama’s time in office there has been no real change to the tax rate, which stays close to the 35%.

Obviously over the 50 years since the time of Eisenhower the marginal tax rates on the wealthy have changed quite a bit. But it got me thinking about what the wealthy actually paid? This is called the effective tax rate. In other words after deductions how much do the wealthy pay?

In 1953 the effective tax rate for those who made $200,000 to $500,000 was 45.9%. If you made $500,001 – $1,000,000 your effective tax rate was 46.3%. If your made $1,000,001 and above your rate was 49.3%. In 1961, we are looking at 27.2%, 29.1%, and 31.5%. However, what the wealthy are effectively paying today is significantly less than the marginal rates. Especially when long-term capital gains taxes are at 15%. According to Joseph Thorndike and Martin Sullivan that those who made more than $100,000 paid less than 5% of the taxes collected in the United States during the 50’s. “A far smaller share of what the wealthiest shoulder today.”

However, we also need to understand what was going on in the world during Eisenhower’s time. American primacy was at an all time high. There was not a lot of opportunity outside of the U.S. There was competition from Europe, but it was still recovering from WWII. Japan had not recovered yet, thus U.S. manufacturing was leading the world, thus creating wealth for many people who owned the means of production.

Today we have an integrated global economy. Now the wealthiest can follow John Galt wherever he leads. Thus there is more of a push for lower tax rates, and when corporations buy companies in other countries and move headquarters to tax shelters we hear cries and accusations of being unpatriotic.

I am a firm believer that we need as little government intervention in our lives as possible. I also believe that government will take more no matter how much we give. But I also believe that in order to hold someone accountable to actions taken, or not taken, one needs something to be kept simple that one can understand it. This is where I think our tax system needs to change.

Why do we need marginal tax rates and effective tax rates? Why not have a simple flat tax. Why don’t we try establishing rates like these:
$400,001 and above: 45%
$200,001 to $400,000: 40%
$100,000 to $200,000: 20%
$50,000 to $99,999: 15%
$25,000 to $49,999: 5%
0 to $24,999: 0

We then charge a 20% on all long-term capital gains, and a corporate tax rate of 18% on all income generated by the company anywhere in the world. The question in my mind can we guess how much government revenue would this generate? In 2012 the top 1% had an income of $1,976,738,000,000. If we tax that at 45%, the revenue would be $889,532,100,000. The top 1-5% earn $1,354,206,000,000. This will result in $541,682,400,000. The top 6 -10% earn $996,955,000,000 if taxed at 20% will result in $1,993,910 in revenue. The top 10% to 25% earn $1,933,778,000,000 and if we tax those at a flat rate of 15% there will be a revenue of $290,066,700,000. Just in the top 25% the total tax revenue would be a total of $1.7 Trillion. This would be a 70% increase in revenue, and remember these are 2012 numbers. Add on to this corporate and capital gains taxes, and we have a system that will more than pay for it’s self and pay off our debt.

I don’t know if everyone would like this, but it could be a start. And with a simple flat tax we can pay for the programs we need to have in place. Will we be more like Sweden? I don’t know! But we do need to do something different. The current system is not working well enough and we are mortgaging the future of our grand children in the process.

And that is my thought for the day!

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