Reader Mail

A reader sent me this by email, rather than simply commenting on the post, and I usually throw those out. However, this one seemed a bit interesting to me, so here we go:

JFK had a top income tax rate of 90% and this was the period of highest growth in our economy.  Perhaps you need to check your assumptions.

Obviously, he knew what he was doing.  Back then, in figuring out your income, you could deduct things like starting factories and doing research on consumer products.  In short. doing things that benefited other people allowed the brainiac to pay less tax.  

Even though top marginal tax rates were 70%–91% in the 1950s–1970s, the actual effective tax rates paid by high-income individuals were dramatically lower. Almost nobody really paid 91% — or anything close to it.

In the 1950s and early 1960s:

The top marginal rate was 91%, but it applied only to taxable income above about $400,000 (over $4 million in today’s dollars), and “taxable income” was drastically reduced by:

• Unlimited business expense deductions
• Oil & gas depletion allowances
• Real-estate depreciation
• Investment tax preferences
• Income shifting to corporations
• Trust structures
• Foundations
• Tax-exempt municipal bonds
• Deferral strategies

Thus, almost nobody actually reported enough taxable income for the 91% bracket to matter. Economists often say the 91% rate existed mostly on paper. Congressional and Treasury studies from the era showed that the average effective tax rate for high-income earners was typically 30–40%, but many wealthy individuals paid 15–25% after shelters while some paid near zero using aggressive loopholes (especially in real estate and oil).

President Kennedy even complained publicly that: “A millionaire may pay less taxes than his secretary.”

Sound familiar? This wasn’t a new phenomenon.

The 1986 Tax Reform Act (Reagan) slashed rates by 50% to 28% but eliminated many shelters — and ironically, many high-income individuals paid more tax after the reform, despite the lower rates. Because the tax code back then allowed:

• Unlimited itemized deductions
• Very generous depreciation schedules
• Income averaging
• Tax-free corporate perks (cars, housing, travel)
• Tax-exempt investments
• Turning salary into capital gains
• Family foundations and trusts
• Personal holding companies
• Business losses used to offset income
• The famous “oil depletion allowance”

In short, the rich could make most of their income disappear for tax purposes. This is why economists say the old system was “high rate / high avoidance,” whereas today’s system is more “lower rate / broader base.”

The other part of this was the minimum tax rate of 20%, which applied to everyone up to $2,000 per year ($20,000 per year in today’s dollar). Picture this- a person making $20,000 a year would owe $4,000 of it in taxes, and the poor didn’t have loopholes to exploit.

So don’t tell me how they were so good at taxing the rich back in the 60’s. It was JFK who advocated for a cut in tax rates and the elimination of many tax loopholes. The Revenue act of 1964 was passed after his death, and cut the top rate from 91% to 70%, but eliminated many tax loopholes. Still, there were many of them left, and most weren’t eliminated until Reagan lowered the tax rate even further while eliminating many tax write-offs. See the Laffer curve on how lowering taxes actually increases revenue.