Tuesday, October 11, 2011

I Guess Eisenhower Was A Socialist...

During the Eisenhower administration (1953 - 1961), the tax rate on the richest Americans was 91 percent. With tax rates high, the wealthy built factories and bought new equipment and hired workers. The economy boomed. High tax rates on the wealthy seem to have turned them into better job creators then than the low tax rates we have now.

Just to be clear:

Earned income is income made from a job.

Capital gains, in contrast, is money made from the appreciation in value of something one owns (assets such as stocks, property, art, ...), rather than money earned from a job.

Average families gets most of their income from their jobs, and thus the tax rate on earned income is most important to them. The wealthy get most of their income from the appreciation of assets, and thus the tax rate on capital gains is more important to them. (Side Note: salaries paid to managers of Venture Capital Funds, Hedge Funds, and Private Equity Funds are classified as "carried interest" and taxed at the lower capital gains rate. There is no justification for this and it amazes me. PS - a lot of corporations structure their executive compensation in ways that enable them to also pay tax at the lower rate or in tax deferred retirement accounts (neither of which are available to non-executive salaried employees).

It is considered to be almost gospel today that capital gains should be taxed at the far lower rate of 15%. This is why the middle and working class, who are dependant on earned income, effectively pay taxes at a higher rate than do the wealthy. By the way, a higher capital gains rate would encourage long term investment because capital gains tax is not paid until the sale of the asset.

In 1953 - 1961, capital gains were not treated differently from earned income, so the rich paid 91% tax on capital gains. Since then the rate has dropped from 91% to 15% - makes no sense - but if you earned most of your money from investment income - it sure is favorable to your personal pocketbook. If most of your income is from your job - it sure seems unfair that you pay a higher rate on your income than a wealthy person does on their income.


  1. Dear Rough Fractals, you make good arguments but you omit several points:

    1.  Capital gains taxes are, foremost, taxes on inflation.  Most asset prices rise over time with inflation.  If the price rise is equal to inflation, then any tax is really a tax on capital....a true wealth tax, not an income tax.  If there were a convenient way to do so, capital gains taxes should apply only to amounts above inflation; otherwise, you are not taxing a real economic "gain."  Thus, there is logic in having a low rate like 15%, as it allows most of the "gain," which really reflects inflation, to escape tax.

    2.  The Eisenhower administration inherited the income tax rates of the depression.  They were a continuation of "liberal" high tax rates, not an invention of the Right.  You would be correct to say that Eisenhower did not campaign against high income tax rates, but it's not correct to imply he approved or supported high income taxes in principle.  

    3.  Most economists believe the best taxes are on consumption, like sales and VAT taxes.  They prefer that investments bear lower tax rates in order to discourage current consumption (over-consumption, often, in the US) and encourage investment.

    3.  The high tax rates of the 50's and 60's--up to 91%--rarely applied to most people, and--as today--there were numerous loopholes in the tax code that enabled categories of taxpayers like oilmen to get very rich.  The high tax rates mainly hit entertainers and the top paid athletes.  With the inflation of the 1960's and 70's, however, high tax rates began to reach well into the middle class, and that's what led to their demise.  (When I was earning a base salary of $60,000 at ITT in the70's, I invested in oil and gas leases and real estate syndicates as a way to get accelerated write-off's.  Needless to say, these deals were aimed at suckers, and I lost money, even taking account of the tax losses.  Lowering rates generally thus contributed to economic efficiency, as these kind of tax-oriented investments  greatly declined.

    I agree with you that the Right Wing's tax mantra has been bad for the country and the economy.  However, what is needed is comprehensive tax reform, eliminating politically motivated loopholes, and  relying more on consumption taxes, and less on taxes on investment. 

  2. "In 1953 - 1961, capital gains were not treated differently from earned income, so the rich paid 91% tax on capital gains." Rough Fractals

    The facts do not support your argument here.

    According to the Tax Policy Center and Gov't records, the capital gains tax never exceeded 25% during this time frame.

    One wonders if you had a deliberate intent to deceive and perpetuate a fallacy.

  3. You are right, I should have said the tax rate on dividends was thevsamevas ordinary income - 91%. The point is high taxes on income did not reduce job creation,



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