Mad Men and Taxes (No Spoilers!)

October 18, 2010

If you haven't watched last night's season four finale of Mad Men (buy the DVD here), I won't give anything away other than something you already knew: Don Draper is selling his Ossining, NY house where he's been letting his ex-wife and her new husband live. His accountant helps him figure out the sale, to which Don grouches, "What's the capital gains tax, 48%?"

Not quite, Don, although the comment should make viewers aware of the higher tax rates of 1965 compared to today. Don's probably got income taxes in his head: the federal income tax in 1965 topped out at 70% on income over $100,000, having been reduced from 90% by the Kennedy-Johnson tax cut of 1964. (Today it's 35%, and scheduled to go to 39.6% on January 1, 2011.) Don Draper is probably in that top tax bracket, since he has the cash on hand to lend the firm $150,000 as he just did. (Not a loss, an investment!)

Today, the long-term capital gains tax is 15% (scheduled to go to 20% on January 1, 2011); Don's probably paying about twice that. Since 1997, much of one's capital gain from the sale of a home is excluded from tax. (This change has been suggested as a contributing factor to the home-flipping phenomenon and the housing crash.) Before 1997, the exclusion was much smaller and you had to buy another home within a certain timeframe. This generous provision didn't exist for Don Draper; it didn't come about until 1978.

Back in 1965, figuring out capital gains tax was more complicated. This Congressional Research Service paper (PDF) summarizes the fiddling with capital gains tax, beginning in 1921 when they were taxed at a flat 12.5% rate. In 1938, a big change occurred where you either excluded half of your gain but paid full tax on the other half, or you paid a flat 15% on the whole thing. After 1942 (until 1969), the rule was the same but the flat rate was 25%. So Don could either pay 35% (70% on half of the gain) or 25%. Plus New York taxes of 10%, with some of that deductible. I'm sure that's what his accountant told him after his "48%" line.

Don has good timing, though. In 1969, the alternative flat 25% was eliminated for high-earners, bringing the capital gains rate to 35%. The new alternative minimum tax (AMT) limited the value of deductions, capital losses were limited, and a war surtax was enacted. The long-term capital gains tax began to fall again in the late 1970s and again under Reagan, rose in the 1986 tax reform (as a separate, flat rate), then was cut in 1997 and again as part of the Bush tax cuts. It currently stands at a flat 15% rate. The Heritage Foundation has a good chart on its rise and fall since 1960:

More on capital gains here. More on the Bush tax cuts here. For individual income tax rates from 1913 to today, click here.

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