Current Tax Brackets and Top Marginal Tax Rates vs.

Those of the 1960s

The number of tax brackets in the United States never fell below 21 in between

1917 and 1978 while even soaring above 50 at various years in the 20s and 30s. In striking

contrast, the United States had 7 brackets in 2016, and Donald J. Trumps tax plan aims to

dwindle the number down to 3. These days, discussion about tax policy inevitably leads to

simplifying the tax code, and for most Republican politicians, the concept of simplification

is latched to the reduction of tax brackets; Republican candidates of the 2016 presidential

election are no different. Donald Trump, Chris Christie, Jeb Bush, and John Kasich each

promoted 3 brackets, Marco Rubio advocated for 2 brackets, and Ted Cruz, Ben Carson,

and Rand Paul all favored 1 bracket: a flat tax. Meanwhile, Hillary Clintons tax plan

supported 8 brackets, and Bernie Sanders plan proposed 9. There exists a glaring

dissonance between the tax platforms of Republicans and Democrats; however, its not only

between the number of tax brackets but also how they are laid out. But before delving into

numbers, its important to know how tax brackets work. Consider a fictional tax system of

three brackets with the first bracket ($0 - $50,000) taxing 10%, second bracket ($50,000 -

$150,000) taxing 50%, and third bracket ($150,000 +) taxing 80%. A person whose yearly

income is $225,000 would not pay an 80% tax for his entire income but would only have to

pay an 80% tax on the income exceeding $150,000, which in this case is $75,000. His first

$50,000, which falls under the first bracket, would only be taxed by 10%, and his next

$100,000, which falls under the second bracket, would be taxed by 50%. In the 2016

presidential election, Trumps highest tax rate was 33%, Clintons was 43.6%, and Sanders

was 52%. While Sanders plan might seem extreme compared to those of other candidates,
a quick glance at historical statistics demonstrates just how conservative the United States

has shifted in recent times. In the year 1960, the United States had 26 tax brackets, with a

top marginal tax rate of 91% for income exceeding $2,326,966 in 2013 dollars. Currently,

with 7 tax brackets and a top marginal tax rate of 39.6%, wealth inequality is one of the

most major dilemmas discussed in American politics and is the cause of much social

turmoil. The United States should implement more tax brackets and tax those at the

top at a higher rate to stimulate GDP and job growth, precisely redirecting the flow of

money by providing a more fair distribution among all citizens, and increase

government revenue without inflicting significant damage to the economy.

A common argument against raising the highest marginal income tax rate is that it

will dwindle GDP and job growth by breeding unproductivity and discouraging innovation.

Many claim that high taxes and high economic growth are mutually exclusive, but a closer

examination at statistics suggests that they can co-exist. While the 1960s had a top marginal

tax rate of 91%, which eventually dwindled down to 70% towards the end of the decade,

average GDP growth during that time period was the largest recorded growth in the past

century at a staggering 4.36%, with growth above 7.5% during many years (Real Gross

Domestic Product). Contrasted with the 2000s, when the highest top marginal tax rate was

35% for the majority of the decade and with an average GDP growth of 1.72%, it becomes

evident that reducing the highest top marginal tax rate does not equate to a healthier

economy and may in fact actually cause it harm. Not only does historical data suggest that

high economic growth is caused by a high marginal income tax but also by an increased

number of tax brackets. Ever since Reagan cut the number of tax brackets down from 15 to
5 in 1987 and to merely 2 in 1988, with a highest top marginal tax rate of 38.5% and 28%

respectively, the United States economy tanked and never experience a GDP growth of

more than 5% again, with the exception of the year 2000 during an economic expansion.

Job growth follows a similar trend as GDP growth. While proponents of low top marginal

tax rates argue that increasing the top marginal tax rate will lead to a reduction in job

creation, their stance is baseless and lacks evidence. Since 1950, when the highest top

marginal tax rate was over 50%, annual job growth averaged 2.3 percent; below 50%, job

creation averaged less than half that. Additionally, the 5 years with the highest job growth

since 1950 all had top marginal tax rates of at least 50%; in comparison, the two worst

years since 1950, 2008 and 2009, had a top marginal tax rate of 35% (All Employees:

Total Nonfarm Payrolls) . While many of those who are opposed to raising the top

marginal tax rate argue that it will harm the United States economy, historical data simply

does not support their claim at all; in fact, it seemingly supports the opposite.

With the United States debt quickly approaching 20 million, the country is not only

divided by how government spending should be appropriated but also by how government

revenue is collected. While some argue that reforming the tax system by including more tax

brackets and increasing the top marginal tax income will damage the economy, as

aforementioned, the historical evidence is simply not there to support their claim. While

increasing the taxes of the top 1% may not seem like it will significantly impact

government revenue, playing with the numbers suggests otherwise. If the top 1% were

taxed at 40% of their entire income instead of the current approximately 33%, it would

generate $157 billion in revenue, and if it was 45%, over $276 billion in revenue would be
raised. Even if only the top .1% contributed 40% of their income as taxes, a 40% tax results

in $55 billion more revenue, while a 45% tax generates $109 billion in revenue (Cohen,

What Could Raising Taxes on the 1% Do? Surprisingly Amounts). To grasp how much

money this really is, Bernie Sanders college tuition plan was estimated to cost $47 billion a

year, and it is estimated that the Federal Highway Administration uses $170 billion a year

to improve conditions on highways. If the government has excess revenue left over, it could

use the money to chip away at the federal deficit.

While taxes do raise government revenue, its not its only purpose; taxes are also

implemented to control the flow of money through the economy. Consider a typical large

company. With a tax system we experience today, almost nothing is stopping the CEO and

other top positions from acquiring most of the wealth of the company, at the expense of the

common workers of the company; however, with a tax system the 1960s embraced, there

would be little to no point paying the high positions of a company tens of millions of

dollars; the money would be more well spent paying those at the bottom of the income

ladder or even creating new jobs. A tax system with more tax brackets and a higher top

marginal tax rate will allow the United States to better and more efficiently redirect the

flow of money through the economy and combat wealth inequality, which has become an

increasingly heated discussion in American politics. The bottom 50% of families held

approximately 1 trillion dollars in family wealth in 1989; in 2013, the bottom 50% still hold

1 trillion dollars. In contrast, the top 10% of families held 20 trillion dollars in 1989 and a

staggering 51 trillion dollars in 2013. Over the past quarter of a century, virtually only the

top 25% of American families have added to their net worth, leaving the rest biting the dust
(Wealth Inequality) . Another study confirms this claim, asserting that while the average

real growth rate of wealth per family has been 1.9% between 1986 and 2012, the bottom

90% has not grown in wealth at all while the top .1% has grown in wealth by 5.3%, which

contributes for about half of the wealth accumulation. During the 1960s, where many tax

brackets were implemented in conjunction with an extremely high top marginal tax rate,

both income and wealth inequality was at one of its lowest points in U.S. history; however,

currently, while the top .1% of Americans hold the same amount of wealth as the bottom

90%, America is amidst gridlock and extreme division (Saez and Zucman, Wealth

Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data).

One of the major reasons why wealth inequality has surged is because of high share of

income earned by the top wealth holders; income equality has a snowballing effect on

wealth inequality, and as income equality has heightened over the past 30 years due to less

brackets and low top marginal tax rates, wealth inequality and distribution too has

dramatically shifted. With many more brackets, the United States could more accurately

distribute money to its citizens without taxing certain individuals too much or too little.

While a 50% top marginal tax rate may seem extreme in our current time, many

people have forgotten the United States prosperity during times of several dozen tax

brackets and 90% top marginal tax rates. Clear, consistent historical evidence dismisses the

claim that a higher top marginal tax rate will hurt the economy and job creation, and it

actually supports the idea that a reformed tax system similar to the 1960s may even

strengthen the United States economy. By raising the top marginal tax rate, the United

States government can increase its revenue to spend on useful programs or even to reduce
its yearly federal deficit. Yet, if a higher top marginal tax rate is implemented, it is crucial

for more tax brackets to be set in place as well. More tax brackets, contrary to popular

belief, will not complicate the tax code even more, and it will only ensure that individuals

are more fairly taxed based on their taxable income, ensuring that less people will be taxed

either too little or too much; however, taxes are implemented not just to raise government

revenue but also to control the flow of money in the economy, creating jobs and ensuring

that income inequality doesnt become too large. With a tax system similar to 1960s, the

United States economy will heal from the damages caused by tax policy since Reagan's

administration.

Annotated Bibliography
"All Employees: Total Nonfarm Payrolls." FRED Economic Data, Federal Reserve Bank of
St. Louis, 6 Jan. 2017, fred.stlouisfed.org/graph/?g=2hUs. Accessed 14 Jan. 2017.
Chart.

This chart will be helpful for my paper because it gives me data of job growth from
1948 to the present day.

Cohen, Patricia. "What Could Raising Taxes on the 1% Do? Surprising Amounts." New
York Times, New York Times Company, 16 Oct. 2015,
mobile.nytimes.com/2015/10/17/business/putting-numbers-to-a-tax-increase-for-
the-rich.html. Accessed 14 Jan. 2017.

This article focuses on the effectiveness on taxing the top 1% of Americans. It uses
many fictional scenarios to convey to the reader how much a small tax to the wealthiest
people of the nation could do; for example, increasing the tax of the top .1% by just 7%
could generate $55 million in revenue every year, which is more than enough to satisfy
Bernie Sander's free college tuition plan. The article also brings up the wealth inequality in
America currently, and why raising taxes on the rich makes even more sense giving
America's economical situation right now.

This article will be very helpful for my paper. It gives many in-depth examples of
how raising taxes on the rich could benefit the United States as a whole. It directly touches
upon two of my controls of my thesis: mediating the wealth inequality and the effectiveness
of taxing the rich.

"Real Gross Domestic Product." https://fred.stlouisfed.org/graph/?g=2i7f, Federal Reserve

Bank of St. Louis, 22 Dec. 2016, fred.stlouisfed.org/graph/?g=2i7f. Accessed 14
Jan. 2017. Chart.

This chart will be helpful for my paper because it shows me data on real GDP from
1948 to the present day.

Saez, Emmanual, and Gabriel Zucman. "Wealth Inequality in the United States since 1913:
Evidence from Capitalized Income Tax Data." Quarterly Journal of Economics.

This journal writes in great detail about the problem of both income and wealth
inequality. It uses many statistics to support its claim that almost all of the increased wealth
in the United States have been from the top 1%.

This journal will be extremely useful for me. I will be mostly looking at the
introduction of the journal, as it includes the most condensed and relevant information for
my paper. It also includes many helpful statistics which I could use in my paper to support
my thesis.
"Wealth Inequality." Inequality, Creative Commons 3.0 License,
inequality.org/wealth-inequality/. Accessed 14 Jan. 2016.

This website shows many graphs which supports the claim that wealth inequality
has been rapidly increasing in the US for the past three or four decades. It also offers short
paragraphs explaining the graphs and the increasing problem of wealth inequality.

This website will assist my paper because it offers many graphs that I could use for
my paper, including Wealth Shares, Median Household Net Worth, Share of Total Assets by
Asset category, and more.