Tax Rates & Tax Reform: Read It And Weep

According to the Internal Revenue Service, a family earning $14,289 in 1950 would have needed $45,000 in 1980 to have the same purchasing power. However, the 1950 family would have paid an average federal income tax of 18 per cent, compared to 23 per cent for the 1980 family. And—an even more important point—each additional dollar earned by the 1950 family would have been taxed at 26 per cent, whereas each additional dollar earned by the 1980 family would have been taxed at 43 per cent.

Many economists now believe that these high marginal tax rates—the tax on each additional dollar earned—are responsible for the low rates of saving, investment, and productivity growth in the United States. They point out that in 1961 only 12 per cent of all taxpayers paid marginal tax rates above 22 per cent. By 1979, 65 per cent of all taxpayers paid marginal tax rates above 20 per cent and 18 per cent paid marginal rates above 31 per cent. This means that the incentive to work was substantially reduced, because Uncle Sam got a higher and higher proportion of any additional income. During this same period, U.S. productivity growth, investment, and competitiveness all declined. By contrast, Japan, which has the lowest rate of taxation of any industrialized country, has continued to grow at a rapid rate.

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Bruce Bartlett

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According to the Internal Revenue Service, a family earning $14,289 in 1950 would have needed $45,000 in 1980 to have the same purchasing power. However, the 1950 family would have paid an average federal income tax of 18 per cent, compared to 23 per cent for the 1980 family. And—an even more important point—each additional dollar earned by the 1950 family would have been taxed at 26 per cent, whereas each additional dollar earned by the 1980 family would have been taxed at 43 per cent.

Many economists now believe that these high marginal tax rates—the tax on each additional dollar earned—are responsible for the low rates of saving, investment, and productivity growth in the United States. They point out that in 1961 only 12 per cent of all taxpayers paid marginal tax rates above 22 per cent. By 1979, 65 per cent of all taxpayers paid marginal tax rates above 20 per cent and 18 per cent paid marginal rates above 31 per cent. This means that the incentive to work was substantially reduced, because Uncle Sam got a higher and higher proportion of any additional income. During this same period, U.S. productivity growth, investment, and competitiveness all declined. By contrast, Japan, which has the lowest rate of taxation of any industrialized country, has continued to grow at a rapid rate.