Tuesday, December 20, 2011

Taxes in Some Perspective

With the payroll tax cut shenanigans now provided to give us holiday entertainment, I thought I would add some perspective on taxes over a 50-year period. We’ll start with total revenues collected by the Internal Revenue Service in graphic form, showing various tax categories as percent of total IRS revenues in 1970, 1980, 1990, 2000, and 2010:



What I’m showing here is business and individual income taxes, the employment tax deducted from wages, estate taxes, and excise taxes. Excise taxes are levied on alcohol, tobacco, telephone services, and transportation fuels. Not shown are gift taxes; they’ve amounted to maximally 0.2 percent of total in each of these years, most recently, in 2010, 0.1 percent of total IRS revenues. These data are from Table 6 of the 2010 IRS Data Book.

Note here the importance of individual income taxes. They amount to more than half of all revenues right up to 2010, and in that year they represented 49.6 percent of total. Note that all categories show a drop in share of total except employment or payroll taxes. These have been climbing. The interesting aspect of that is that employment taxes are categorical. They constitute Social Security and Medicare Contributions.

Income tax totals, while they are interesting in showing their importance, do not show changes in tax rate. Therefore I next show the top marginal tax rate next, going back to 1960:



What this graphic shows is that the top tax rate has dropped from a 1960 peak of 91 percent to 35 percent. That last rate, in 2011, was levied on all income exceeding $379,150 for a married couple filing jointly. You might say that that number is where wealth really begins. Now some will say that a rate of 35 percent on income above $379,150 is not comparable to a rate of 91 percent in 1960—because of inflation. Indeed, that is true. That sum, in 1960, would have been $52,095. And the 1960 tax rate on that amount was 62 percent. I obtained the data shown from the Tax Foundation (link).

I am providing, below, a tabulation of the data used in this last graphic. Years not shown had the same rate as the last year actually shown. Thus in the period 1961-1963, the rate was also 91 percent on all income exceeding $400,000.


Year

%
On income of more than ($):

Year

%
On income of more than ($):
1960
91
400,000
1995
39.6
256,500
1964
77
400,000
1996
39.6
263,750
1965
70
200,000
1997
39.6
271,050
1970
70
200,000
1998
39.6
278,450
1977
70
203,200
1999
39.6
283,150
1979
70
215,400
2000
39.6
288,350
1980
70
215,400
2001
39.1
297,350
1982
50
85,600
2002
38.6
307,050
1983
50
109,400
2003
35
311,950
1984
50
162,400
2004
35
319,100
1985
50
169,020
2005
35
326,450
1986
50
175,250
2006
35
336,550
1987
38.5
90,000
2007
35
349,700
1988
28
29,750
2008
35
357,700
1990
28
32,450
2009
35
372,950
1991
31
82,150
2010
35
373,650
1992
31
86,500
2011
35
379,150
1993
39.6
250,000




My purpose in showing such data? I’m interested in looking at the proposition that cutting taxes on the wealthy increases jobs—because it is the rich who create jobs. Well, here are some early indicators. The following table shows increase in employment, December to December in four decades:

Decade
Tax rate change in %
Employment change %
1960-1970
-23.1
31.7
1970-1980
0.0
28.5
1980-1990
-60.0
20.0
1990-2000
41.4
21.4
2000-2010
-11.6
-1.7

Here the tax rate change is from the first to the last year. The employment change is from  December to December, thus in the first line, 12/1960 to 12/1970. What this tabulation tells me is that top tax rates may have nothing whatsoever to do with employment increase or decline. We’ve had the largest increase in employment in a period where the marginal rate went from 91 to 70 percent. In the 1970-1980 decade, when the top rate was at 70 percent, we still had high growth in jobs. When rates dropped from 70 to 28 percent, the biggest drop ever, we added the fewest jobs—but did much better in the next decade when taxes increased from 28 to 39.6 percent. And in the last decade, when our taxes dropped again, from 39.6 to 35 percent, we actually lost job in absolute count.

It feels better to know something than not to. In any case, the notion that giving the wealthy more dollars to spend will result in job creation is certainly a big canard.

1 comment:

  1. Very interesting chart here:

    http://visualizingeconomics.com/2011/04/29/taxable-income-and-taxes-paid-1950-2006/

    which shows despite the argument over the marginal tax rates, the real tax rate remained consistent over the last 60 years.

    Driving tax rates up does not appear generate more income, it just makes people hide it. 10%, 20%, or 90%, the average taxpayer pays 8% +/- 1% of their income in federal taxes.

    Want more revenues? Figure out how to make the pie bigger, so your 8% is bigger.

    ReplyDelete