As we move toward some kind of resolution of the tax debate, I thought it might be worthwhile to put some things in context, particularly the question of the top marginal tax rate. That's the one conservatives are so desperate to keep low, and part of the reason liberals in Congress are rebelling against the compromise reached by President Obama and Mitch McConnell.
The American income tax was established via the 16th Amendment to the Constitution, which was ratified in 1913. Since then, the top rate has varied, but it has been falling pretty much since World War II. Let's look at a chart:
In 1944 and 1945, the top rate was an astounding 94 percent. Throughout the 1970s it was 70 percent. For most of the 1980s it was 50 percent. Today it's at 35 percent, and if there is no deal and the Bush tax cuts expire, it will rise back to 39.6 percent, where it was after Bill Clinton raised it in 1993.
But that's not all the story. The income level at which the top rate kicks in has varied hugely. That 94 percent in 1945 applied to incomes over $200,000 (or about $2.3 million of today's dollars). In 1936, when the top rate was 79 percent, the income threshold was $5 million, or over $78 million in today's dollars. For the last couple of decades the income level at which the top rate kicks in has been indexed to inflation; this year it's $373,650. Let's look at another chart (the underlying data can be found here; I converted everything to 2010 dollars using the BLS's inflation calculator):
So what are we left with? By historical standards, we have a relatively low top rate, combined with a relatively low threshold for that top rate. Which makes a fairly strong argument that we ought to have more rates, as Slate's Tim Noah has argued. There really isn't any reason someone making $400,000 a year ought to be paying the same rate as someone making $400 million a year, but that's how the system works now. And interestingly enough, every tax reform proposal I've seen calls for reducing the number of rates from the current six down to three or four. Which will mean that the super-rich will likely do even better.
-- Paul Waldman
