Us Marginal Tax Rates

Tom Perkins, a legendary partner of the investment firm of Kleiner, Perkins, Caufield & Byers, has been in the news lately for his comments concerning the taxation of the top 1%.  Mr. Perkins has asserted that the current environment of attacks on the successful in America will doom the top 1%.

I agree and disagree with Mr. Perkins.  I am a strong proponent of a fair and balanced tax system and feel the rhetoric has swung to a negative and nasty level.  Howeve,r I disagree with Mr. Perkins that the result will be the downfall of the 1%.

Most of the wealthy in this country got to that position not due to inheritance but rather through their our personal success.  What arena that success comes in is really irrelevant.  These people are decision makers and people who strive to get ahead.  While they will take action to minimize the impact of higher taxes, they realize that their personal drive will propel them to succeed.

Certainly we need only look to France, which recently enacted personal tax rates designed to penalize success, to understand some of the actions individuals can take in response to punitive taxation.  High profile taxpayers gave up their citizenship and moved to other countries to emphasize their feelings of injustice.  Not everyone can take those steps, and now we see that France is backing off of the socialist government’s policies which brought about the reaction.

The United States has historically had very high marginal tax rates.  In 1918, the top marginal rate was 77% on incomes over $1M.  Rates fell from that peak to 25% in 1925 and then popped back up to 63% in 1932 during the depression.  In 1936, the top marginal rate hit 79% where it remained until 1941 when the top rate jumped to 81% then to 88% in 1942 as WWII required so much from our citizens.  By 1944, the rate was 94% where it stayed until 1946, though that drop was just to 91%.  In 1952, during the first Eisenhower administration,n rates were nudged up to 92% for two years.  In 1962, JFK led the charge to lower top rates to 77% and in 1965 the LBJ administration dropped them to 70%.  President Reagan championed lowering the top rate in 1980 to 50% where the rate stood until the late 80’s.  In 1987 the marginal rate fell to 38.5% and it has stayed under 40% since.

While my tax expert friends can argue about the deductions and tax base, the point is that high marginal tax rates have a history in the US.  Historically we have penalized those who have succeeded through very high marginal tax rates.  The other significant point I should note is that until the late 80’s the lowest bracket of taxpayer was under $4,000 of annual income, so there were significantly more payers of income tax than today.

Mr. Perkins is right that taxing the top 1% cannot solve our economic troubles, but I don’t agree that it will cause the downfall of the wealthy in the US.  In my opinion, they are too smart to be taken down by the US tax system.

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