In “Revisiting the High Tax Rates of the 1950s,” Arpit Gupta, a doctoral candidate in finance and economics at Columbia University and a regular contributor to The Agenda, delves into the historical findings of Thomas Piketty and Emmanuel Saez, two economists at the University of California at Berkeley who have observed that the tax burden on high-earners has declined dramatically over the past sixty years. Lawrence Mone of the Manhattan Institute summarizes Arpit’s core findings in a new Wall Street Journal op-ed. My hope is that Piketty and Saez will write a response to Arpit, as he raises a number of interesting issues.
Piketty and Saez observe that while average income-tax rates across income quintiles remained fairly stable from 1960 to 2004, the corporate income tax and estate tax burdens declined significantly over this period. The eye-catching 91 percent top marginal tax rate that was in effect at the start of that period only impacted households with income of $3 million or more in today’s dollars, a trivially small number of earners at the time, and so the average individual income-tax rate at the top of the income distribution was 31 percent — higher than the 24 percent average individual income-tax rate in 2004, but not dramatically so. Low rates on realized capital gains and deductions for interest payments and charitable deductions did a great deal to reduce taxes for high-earners in midcentury America. So the Piketty and Saez thesis that the tax burden on the high-earners has declined dramatically rests in large part on the notion that the entire burden of high corporate income taxes fell on the owners of capital.
Consider the prototypical American company of the 1950s, General Motors (subject of the famous 1953 remark by its chief executive, “What is good for the country is good for General Motors, and what’s good for General Motors is good for the country”). For GM, as for other major firms, taxable corporate earnings were substantial during the 1950s and 1960s (indeed, taxable corporate earnings averaged 9 percent of GDP in the 1960s). Therefore corporate taxes were a substantial stream of revenue for the federal government.
In accounting for the economic consequences of corporate taxation, Piketty and Saez assumed that the entire burden of these corporate taxes fell on stockholders in the form of lower returns. To calculate the era’s effective tax rates, they compute the total amount of corporate taxes and divide by all the income that shareholders made by selling shares—the realized capital gains in stock. Since stocks were predominantly held by wealthy individuals, Piketty and Saez estimate that the overall tax burden on the extremely rich was high. This is how they arrive at the 70 percent figure touted by Krugman and other advocates of higher taxes today.
And so a problem arises if we assume that at least some of the burden of high corporate income taxes falls on employees in the form of lower wages. Arpit makes a number of other points in his paper, e.g., the fact that high corporate earnings in the 1950s were to some extent a byproduct of a less competitive domestic and global economic environment, and so it is unlikely that we could painlessly raise corporate income taxes to 1950s levels. Achieving the effective tax burden on high earners that Piketty and Saez claim had been in place in the 1950s would instead require a sharp increase in taxes on ordinary income, an increase that wouldn’t necessarily yield hoped-for revenue gains.