Historical Tax Rates Op-ed

A relevant op-ed in the New York Times discusses the era of higher tax rates and mentions some of the inequality seen today. The top marginal tax rate of 91% isn’t the entire story of why people in the U.S. generally did better economically, but that rate did create much less incentive to chase exorbitant pay packages. To some degree, that meant workers were taken advantage of less for ridiculous executive pay bonuses.

A half-century ago, a top automobile executive named George Romney — yes, Mitt’s father — turned down several big annual bonuses. He did so, he told his company’s board, because he believed that no executive should make more than $225,000 a year (which translates into almost $2 million today).

He worried that “the temptations of success” could distract people from more important matters, as he said to a biographer, T. George Harris. This belief seems to have stemmed from both Romney’s Mormon faith and a culture of financial restraint that was once commonplace in this country.

Romney didn’t try to make every dollar he could, or anywhere close to it. The same was true among many of his corporate peers. In the early 1960s, the typical chief executive at a large American company made only 20 times as much as the average worker, rather than the current 271-to-1 ratio. Today, some C.E.O.s make $2 million in a single month.

The old culture of restraint had multiple causes, but one of them was the tax code. When Romney was saying no to bonuses, the top marginal tax rate was 91 percent. Even if he had accepted the bonuses, he would have kept only a sliver of them.

The high tax rates, in other words, didn’t affect only the post-tax incomes of the wealthy. The tax code also affected pretax incomes. As the economist Gabriel Zucman says, “It’s not worth it to try to earn $50 million in income when 90 cents out of an extra dollar goes to the I.R.S.”

The tax rates helped create a culture in which Americans found gargantuan incomes to be bizarre.

A few years after Romney turned down his bonuses from the American Motors Corporation, Lyndon B. Johnson signed legislation that lowered the top marginal tax rate to 70 percent. Under Ronald Reagan, it dropped to 50 percent and kept falling. Since 1987, the top rate has hovered between 30 percent and 40 percent.

For more than 30 years now, the United States has lived with a top tax rate less than half as high as in George Romney’s day. And during those same three-plus decades, the pay of affluent Americans has soared. That’s not a coincidence. Corporate executives and others now have much more reason to fight for every last dollar.


What would be the right top tax rate today? I don’t know the precise answer. A top rate of 90 percent clearly has the potential to drive away entrepreneurs. But I am convinced that the current top tax rate, 39.6 percent, is too low.

It has contributed to soaring inequality, with the affluent having received both the biggest pretax raises and the biggest tax cuts. Plus, there is no evidence that a modestly higher rate would hurt the economy. The recent president with the strongest economic record, Bill Clinton, increased the rate, while the one with the weakest economic record, George W. Bush, cut it.

This week, President Trump and Congress will turn their attention to tax policy. After the failure of their health care bill, they are desperate for a legislative win and hope to pass a bill by year’s end. Of course, they are not considering a higher top tax rate.

The question is whether their plan will further cut taxes on the wealthy. The early evidence is that it will — enormously — while Trump pretends otherwise. If so, the tax bill will deserve the same fate as the health care plan: energetic and organized opposition, followed by defeat.