Orders of Magnitude – The Top basis Point

Consider the following three graphs which seem to tell different stories. You have to read carefully to see that they don’t directly contradict each other:

 

 

from Baldings World - Twinkie Romanticism

 

Recently Annie Lowrey, blogging in the “debt Reckoning” section , posts the top graphic that is a bit disorientating to many of us who are familiar with mid-twentieth century taxation.  We know that in the ‘good old’ days professional could protect huge chunks of their income and paid relatively low income taxes.  We also know that the top 1% paid about the same amount of tax relative to their share of income as today, which is inconsistent with much higher average rates.  What gives?

  1. One reason the effective/average rates are so different is that the first graph shows taxes for the top 0.01% , not 1%.  Huge difference; small sample.  I can’t verify this, though, as the source document for all this tax-agenda punditry only looks at the top 0.1%, ten times as many.
  2. You can’t really make these comparisons over time.  The tax reforms in 1986 (andto some extent 1980) made huge changes in the tax code that served to increase reported AGI, the denominator in all these calculations.  Even if rates hadn’t changed, effective rates would have decreased around 1986.  Note the kinks in the graphs above and the artifact plunge in progressivity in 1987-1988.
  3. The series before 1966 can’t easily be verified. Furthermore, The IRS only publishes data back to 1966. If anyone has this data directly, there are many of us who would like to see it.
  4. The top nominal rate has been applied at very different levels of real income over time.

This all adds up to the misleading suggestion that the government wants to raise our taxes just a touch compared to the (good old?) past.  Don’t buy it.  It compares treatment of the 0.01% in the old days with the intent to hammer a population a few hundred times bigger (top 2-3% or so) today.  The past was both less wonderful and less taxing than implied in this sort of punditry.

 

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