This year, we are celebrating our 75th Anniversary. Lots of things have changed since our founding, but some things have not. In 1959 the Tax Foundation conducted a detailed analysis of the federal income tax, considering its effective rates, along with recommendations for reform. Their ultimate conclusion was that “the rate and bracket structure of the federal individual income tax needs to be revised in order to reduce inequities, to minimize distorting effects on economic decisions, and to promote economic growth”. The tax structure of the 1950s was complex and over-burdensome, with a top marginal rate of 91 percent.
Thankfully we have managed to move away from such a high marginal rate, yet many of the other issues mentioned persist, and in many ways our contemporary tax code is even more inefficient and stifling than it was in the late 1950s. Our concern over the growing “distorting effects” of taxation was well-founded; today, federal, state and local governments implement a host of taxes that exist primarily to alter individual and family behavior, often to the detriment of taxpayers.
The study also warned of the perverse incentives created by a 91 percent top marginal income tax rate, arguing that “the tax rates clearly leave little room at the top of the income scale for monetary inducements to guide the direction of individual efforts and investments”. That concern is as pertinent today as it was in the 1950s, as we continue to effectively double tax savings and investments in the form of capital gains and dividends. This highly progressive taxation regime may be well-received in some political circles, but as a matter of tax policy it does little to promote neutrality, simplicity, or long-term growth.
“The function of economic incentives at the top of the income scale should not be almost completely eliminated by a marginal rate of 91 percent on additional income. Considerations of equity, revenue and economic effects, all lead to the conclusion that the highest bracket rates of the present structure should be reduced. A reduction of the highest bracket rates would promote economic growth and involve little, if any, revenue loss. It would reduce the distorting effects of the income tax, lessen pressures to provide "escape valves," and mitigate inequities under the present tax."
The conclusions we reached over half a century ago were bold; moving toward a flatter income tax code often requires a nuanced explanation of economic concepts, but it was, and still is the proper course to take to promote growth and prudent investment in our economy.
Though our tax code has changed since the 1950s, systemic issues persist. To remedy these entrenched flaws in our code, we would do well to heed the advice given in 1959--a tax system should be broadly applied, neutral in preference, and low in effective rates.
For a list of our historical studies, click here.
For more on high-income earners, click here.
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