The Top Tax Rate is 27% Below US Historical Average

The average top tax rate in the United States since 1917 is 61.4%.  Currently the highest rate of income tax the rich have to pay is 34.5%, which is 26.9% below the average.

The Bush tax cuts are set to expire on December 31st, 2010.  The Democratic plan under President Obama was initially to renew the tax cuts for anyone with an income under $250,000 per year, and letting them expire for the rich.

Following the Republicans seizing the US House of Representatives in the midterm elections, Obama seems to be considering capitulating to their demands that tax cuts for the rich are extended, a move that will not only balloon the debt by $3.4 trillion in the next 10 years, but set off a fierce backlash among progressives if it happens.

Following World War II, the top tax rates were as high as 94%, a considerable larger share of the wealth created by American workers was allowed to be kept, and as a result, the inequity between the rich and poor was leveled significantly.  However, when fiscal conservatism became the dominant economic paradigm with the election of Ronald Reagan, tax cuts for the rich and an unapologetic culture of greed reversed this egalitarian trend, creating an increasing redistribution of wealth from the poor and middle class to the rich, widening chasm between the rich and poor, and a skyrocketing gini-coefficient.

Ezra Klein sums this situation up succinctly: It’s also worth saying that government is far more effective as a check on inequality than as an accelerant.  Various trends, some pernicious (corporate greed, union decline), some not (technology, globalization, single mother families), contribute to inequality.  What government can do is tax and redistribute in such a way that growth is shared equally across society.  During conservative moments, it doesn’t even make an effort to do that, and society is the worse for it.

Allowing the Bush tax cuts for the rich to expire will not be the end the America as we know it.  Much to the contrary, it might actually restore some semblance of economic sanity to our economic policy, and would still be 22% below the historical average.

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12 Responses to The Top Tax Rate is 27% Below US Historical Average

  1. +2 Vote -1 Vote +1Matt
    November 22, 2010 at 2:09 am

    A couple of points – tax rates for all Americans are below their historic averages. If you’re calling for higher taxes for the wealthy, wouldn’t that same logic apply to all tax brackets?

    The comments and chart showing a $3.4T increase in debt with an extension of the tax cuts fail to mention that most of that debt is due to tax cuts to non wealthy households (less than $200k/$250k income)

    Finally, the chart showing the average tax cut per income bracket is incomplete. If you were not trying to make a point, you’d also include a) how many tax payers fall into each bracket and the total cost of the tax break by group, and b) the net contribution of each tax group to the federal operating budget under the current system.

    The story is a little different when you explain how much the rich pay to support the system compared to the rest of the country.

  2. Vote -1 Vote +1John Bailo
    November 22, 2010 at 4:18 am

    Even with the cuts, and under both plans, the marginal tax rates paid by Americans making under $100K are way, way too high! 28%? That’s a quarter of all money earned on top of social security tax, medicare, state, city, county, property, sales taxes and fees.

    The effective tax rate for people making less than $100,000 (which I consider poverty in this country) should be no more than 5%….across the board! That is, such a person should pay no more in tax than 5 percent of income.

    • +2 Vote -1 Vote +1Russell Beal
      November 23, 2010 at 9:08 am

      John,
      The 28% is only on the portion of income above $82K (single) or above $137K (married filing jointly). The tax bracket rates only apply to the income within that bracket. No one that earns $100K pays $28K in income taxes. A typical family of 4 earning $100K will pay under $10K in federal income tax. You can play with the figures yourself here:
      http://www.calcxml.com/do/inc02

  3. +3 Vote -1 Vote +1basementfrog
    November 22, 2010 at 8:37 am

    Here’s an idea that makes sense and will reduce the deficit.

    Eliminate all deductions and consider all income regardless of source as in a given year, (salary, stock profit, inheritance, etc.)

    Set tax rates at current levels for all individuals making less the $1 million.

    Tax every dollar of total income over $1 million dollars at 50 percent regardless of source of income.

    Tax all corporations at 20 percent no deductions, favors, etc. Exxon

    Mobile has not paid taxes in the US for 7 years (last I heard) and most pay less than 10 percent. Exxon receives substantial benefits at the expense of US taxpayers — US naval ships escort Exxon tanker ships everyday through various danger zones at the expense of the most profitable US corporation in the world –Exxon.

    So they can and should pay tax, or pay for all the escort and clean up of their environment mess — from air to land polution. Let’s start charging companies for cleaning up the Offshore wells, lands and air polution. That will put Americans back to work by the millions.

    • Ole Ole Olson
      +3 Vote -1 Vote +1Ole Ole Olson
      November 22, 2010 at 10:06 am

      Excellent response basementfrog. On top of raising the top tax rate, I think part of the solution is certainly revising our severely outdated tax code to stop loopholes like you mentioned. It is a travesty that the rich and multinational corporations can manipulate the system the way they do.

    • +2 Vote -1 Vote +1Steve Wright
      November 23, 2010 at 8:16 am

      Do any of you people look at facts or do you merely repeat the blather of the mainstream media.

      The FACTS on how much Exxon has paid in taxes (note: their tax bill has averaged over 41% and exceeds the total amount paid by the lowest 65 MIL tax filers:

      Over the last three years, Exxon Mobil has paid an average of $27 billion annually in taxes. That’s $27,000,000,000 per year, a number so large it’s hard to comprehend. Here’s one way to put Exxon’s taxes into perspective.

      Source: http://seekingalpha.com/article/63131-exxon-s-2007-tax-bill-30-billion

  4. Vote -1 Vote +1rj
    November 22, 2010 at 1:11 pm

    I fail to understand the logic (because there is none) in anyone being taxed at a higher rate than someone else just because their labor is compensated at a higher rate.
    A 20 k a year laboror, a 50k a yr skilled craftsman, a 75k a yr master craftsman, or a 150k a yr manager who all labor and are compensated according to their skill set should be taxed at the same rate. The fruits of their labor should mainly remain theirs, not be taken in excess to be doled out to those who fail to make something of theirselves.
    Those who fail to labor should fail to eat, no person has a requirement to labor so that another may benefit.
    Corporate tax rates should be set at a reasonable level fixed and not be according to earnings or the whim of govt. If xyz company that profits at 100 k their rate should be the same as abc company that profits at 200k etc…
    Last time I looked a company that has its profits excessively confiscated does not continue to to business, hire, manufacture etc.
    There is such a thing as a point of diminishing returns, once a person, company etc finds their labor is excessively taxed they will cease to be productive. Therein is the fault of the sliding indexed tax scales, and those who believe that the govt can and will be better stewards of someone elses money.
    Those who constantly preach the govt can better allot my resources are forever seeking to take more of my resources to allot.
    They often cite fairness, reasonableness, etc as justification for taking the weath created by others.
    That attitude has been and will be the downfall of this great country.
    Our founders knew the greed and uncontrolled confiscation of a monarchy, and set up a system of checks and balances to preclude our enslavement to a govt, unfortunately too many have lost sight of the gift of freedom and we turn to govt instead of self.
    We stumble toward a future of enslavement to govt while our freedoms are barganed away by those we continue to empower who have no compunction about taking more power than is granted under our constitution.

  5. +3 Vote -1 Vote +1Liam Fox
    November 22, 2010 at 2:23 pm

    RJ – that is nothing more than a superficial understanding of economics. It only sounds ‘fair’ if you don’t dig deeper and actually think about. Your proposal does nothing but retain the wealth with the wealthy and increase the economic divide. A fixed tax percentage for the wealthy still leaves them wealthy… 25% (insert your # of choice) from a multi-millionaire, or a corporation, or even the upper middle-class is nothing, or at least very little and certainly manageable, for them, while 25% to someone starting out, trying to rise out of poverty, will only ensure that they remain poor. This system you propose will only lead to an enslaved working class and a privileged elite. The result is civil strife, perhaps war, oppression of the angry disenfranchised to protect the privileged elite, class struggle, etc., etc. etc. This stuff you suggest is Glenn Beck school of economics and sociology. Don’t take advice from a rodeo clown.

    • +1 Vote -1 Vote +1George Johnston
      November 23, 2010 at 10:25 am

      I agree that we shouldn’t have a “flat tax” system for income taxes. BUT, what we have today is 40% of our ‘working” population who is getting PAID by the other 60% to work. THAT is patently unfair. You will not convince a rational person that we should subsidize others wages because we make $100K per year — check the cost of living, raising children, educations, food, energy, etc. That is hardly rich, yet they are paying that 25% plus FICA, Medicare, State and local income taxes, sales taxes, etc.

      The tax code has tilted somewhat to the so-called rich, but in reality, it has tilted much farther — and too far — toward those who have “less” whatever that means.

      Hyping class warfare isn’t productive, yet many in politics and the mainstream media are stoking it every day. Solutions are what we need, not lectures on how everyone earns or pays relative to each other.

    • +1 Vote -1 Vote +1rj
      November 23, 2010 at 11:20 am

      Liam, superficial by your defination, what I ( as a working adult who is not “rich” and has worked for a living since I was 13 yrs old) understands is this, I do not care if someone is “richer” than me, my labor, the sweat of my brow Is mine, I can willingly give to charity for the benefit of those less fortunate than I, I am willing to pay a share for the good of all, and expect everyone else to pay the same share of their toil, no more no less.
      What I see it this, as my personal improvement leads to higher wages a greater percentage is taken. How can any rational adult think that taking more of someone elses product of labor will lead to their being more benefitted is the result of selfish thinking.
      You have more so it is only fair if some is taken and given to me to make us more equal instead of
      You have more so I need to improve myself so that I too can have more.

  6. +3 Vote -1 Vote +1Steve Wright
    November 23, 2010 at 8:00 am

    Focusing on tax RATES is completely misleading. When tax rates were far higher, so were the number and value of tax preferenced items that were deductible or credits against taxes owed. Effective tax rates have gone almost nowhere over the past 50 years.

    The relevant statistic is who pays how much of the total tax collected by the IRS under the current tax law. Some may be surprised at the facts.

    “The result is a tax system that exempts almost half the country from paying for programs that benefit everyone, including national defense, public safety, infrastructure and education. It is a system in which the top 10 percent of earners — households making an average of $366,400 in 2006 — paid about 73 percent of the income taxes collected by the federal government.

    The bottom 40 percent, on average, make a profit from the federal income tax, meaning they get more money in tax credits than they would otherwise owe in taxes. For those people, the government sends them a payment.”

    Source: http://finance.yahoo.com/news/Nearly-half-of-US-households-apf-1105567323.html?x=0&.v=1

  7. +2 Vote -1 Vote +1Steve Wright
    November 23, 2010 at 8:28 am

    For those interested, here’s a spreadsheet of the EFFECTIVE tax rate paid by quintile. You can see that over the 20 year period shown, ALL effective tax rates have fallen but the top quintile’s effective tax rate has fallen the LEAST, not the most. For the definition of “effective tax rate” as defined by the Center for Tax Policy (same source used by the author) see the footnotes on the spreadsheet:

    http://www.taxpolicycenter.org/taxfacts/Content/PDF/effective_rate_historical_all.pdf