Tax rates were high in the 1950s, we often hear, yet economic growth boomed. So why should we fear higher taxes today?
One answer is that taxes in the 50s weren’t really high. Yes, the top marginal tax rate was 90%, but it applied to almost no one. What matters more is the average marginal tax rate – that is, the average rate paid on the next dollar of earned income. That figure tells you more about the incentives facing individuals working in the economy.
And based on data from a 2009 study by Robert Barro and Charles Redlick, the good old days in terms of economic growth were also pretty good in terms of taxes. Barro and Redlick calculated average marginal tax rates inclusive of federal income taxes, Social Security taxes, and state income taxes. In the 1950s, the average marginal rates equaled just 25%, versus 37% in the 2000s.
Moreover, even these data have several limitations.
• First, they consider only the gross social security payroll tax. But workers in the 1950s received significantly more in Social Security benefits than they paid in taxes; thus, the true net Social Security payroll tax was negative. Today, most workers will receive less in Social Security benefits than they pay in taxes.
• Second, the deadweight loss of taxes rises with the square of the tax rate. So the economic costs of taxation today are roughly 20% larger than in the 50s. Raising taxes hurts the economy more when taxes are already high.
• Third, the overall tax burden has shifted toward high earners, who are in general more responsive to tax rates.
Are taxes today lower than in the prosperous 1950s? No, not at all.