Taxing the Rich, 1957-Style

February 13, 2006

The new federal budget for fiscal 2007 released last week surprised no one. The Bush administration proposed, as expected, tax cuts for our nation's most fortunate — and program cuts for our least. Tax cuts for the rich have, of course, defined the Republican governing credo ever since Ronald Reagan. But once upon a time, we ought to remember, Republicanism in the White House didn't automatically translate into ever lower tax rates on our nation’s highest incomes.

Indeed, a half century ago, the White House hosted a GOP President — Dwight D. Eisenhower — who refused to push tax rate cuts for the high-income set. Throughout Ike's Presidency, the top tax rate on income over $400,000 stood at 91 percent. Our current top marginal rate: 35 percent.

What if Ike's spirit still set the tone? What if our federal revenues today reflected the tax rates on high incomes in place during the Eisenhower years? How much of a difference, in the budget for next year unveiled last week, would these Eisenhower rates make?

Let's crunch some numbers.

In 2007, according to the Brookings/Urban Institute Tax Policy Center, the 148,000 taxpayers with America’s top 0.1 percent of incomes will average $5,505,607 in take-home.

In 2003, the latest year with IRS statistics available, taxpayers who made at least $5 million — after taking advantage of all the tax loopholes they could find — actually paid 26.7 percent of their incomes in federal income taxes.

If Americans in the top 0.1 percent pay their income taxes at this same rate in 2007, a not unreasonable assumption since the Bush tax cuts in effect in 2003 remain in effect, the federal treasury would collect about $218 billion in 2007 from America’s most affluent 0.1 percent.

Now $218 billion certainly isn’t chump change. But let’s compare this $218 billion — the total income tax the IRS stands to collect next year from our very richest — to the total these rich would be paying if Eisenhower tax rates were still on the books.

Back 50 years ago, at the midpoint of the Eisenhower administration, far fewer Americans averaged incomes that would equal, after adjusting for inflation, today’s $5 million a year. Those taxpayers who did make the equivalent of over $5 million a year in 1957 actually paid taxes at nearly twice the rate of their deep-pocketed counterparts today.

Americans who earned over $750,000 in 1957 — the equivalent of $5.2 million today — paid 51.6 percent of their total incomes in federal income tax, according to IRS records, and that was after exploiting every loophole they could find.

If we were to apply this 51.6 percent rate to today’s top 0.1 percent of incomes, then the federal treasury would collect $420.5 billion from America’s super-rich in 2007, about $203 billion more than the U.S. Treasury will collect under our current tax rates.

How much is $203 billion? That’s nearly three times what the Bush administration is proposing to spend in 2007 on education and the environment. Or well over half the $354 billion federal budget deficit the Bush administration now predicts for 2007.

And that brings us to what may be the ultimate taxing irony of our times.

The federal government will fill that $354 billion deficit hole in the fiscal 2007 budget by borrowing. The government “borrows” by selling Treasury bills, notes, and bonds. The people who buy these Treasury securities, naturally, eventually get paid back — with interest.

And who buys these Treasury securities? Average American families don't buy Treasury securities. High-income people do.

Fifty years ago, in other words, Eisenhower-era America taxed the very rich. Today we borrow from them.

In the process, we have solidified our place as the most unequal society in the entire developed world.

A note on sources:

The most detailed rundown of mid 20th century tax rates in the United States appears in an IRS research paper authored by Janet McCubbin and Fritz Scheuren, Individual Tax Shares and Average Tax Rates, Tax Years 1951-1986 (Statistics of Income Bulletin, Volume 8, Number 4). From this paper’s Table 1 (Returns with Adjusted Gross Income: Number of Returns, Income, and Federal Income Tax, by Size of Adjusted Gross Income, Tax Years 1951-1986), we identified those Eisenhower-era taxpayers who took home at least $750,000 in 1957 dollars, the equivalent of $5.2 million in 2005 dollars, and computed from the table the tax rate these taxpayers paid on their adjusted gross incomes.

We computed the average tax rate on 2003 incomes over $5 million from the IRS table, Tax Rate and Size of Adjusted Gross Income, published as Individual Complete Report (Publication 1304), Table 3.5.

For the numbers on the highest 0.1 percent of incomes, we consulted a February 7, 2006 table published by the Brookings Institution/Urban Institute Tax Policy Center, T06-0039: Combined Effect of EGTRRA, JGTRRA, and WFTRA With Extension of 2005 AMT Relief, Distribution of Federal Tax Change by Cash Income Percentile, 2007. Please note that the tax rate for the top 0.1 percent that appears in this table covers all federal taxes, estate tax included, not just the federal income tax, the tax that concerns us here in this analysis.

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