How was taxation when America was “Great”?
By: Bryan Maloney
Tags: Trump, Taxes, History, Analytics, Data Visualization

Photo courtesy New York Public Library public domain collection

Understanding taxes and history

Remember how some guy said he was going to “make America great again”. So, when was America great before? That’s been cleared up. It was the late 1940s and the 1950s. Whether or not one agrees with that assessment, that’s the era he referred to. Let’s go with it. So, if we are to talk about “greatness” for America, we’d also need to consider how America’s government ran things, and one thing that was very different from the current day was the structure of income taxes. Now, taxation is a big deal for the “make America great again” crowd, as we’ve heard, so it’d be useful to see what taxation was like when they thought America was “great”.

Yes, it’s another reason to analyze data. Don’t grab your barf bag. This is one of those times I’m going to show you how you can come to interesting conclusions with very simple methods. I also show how you can come to very different conclusions depending on how you apply simple methods to the same starting data. That’s the interesting part. It’s my opinion that 100% of any published document (and most unpublished) that address any political or politically-touched subject has an agenda. Numbers are usually only trotted out to support the agenda. That doesn’t mean the numbers are lies, what it does mean is that you have to think to know if the numbers are sensible.

It just so happens that the people at the Tax Foundation have published all US tax brackets from 1913 to 2013, and those from 2014 to 2019 can be looked up from multiple sources. So, I can just post the highest tax rate for each year and call it a day!

HOOOOOOWEEEE! Lookathat! Wowsie wowsie woo! DANG! Them thar taxes was REEEEEEL high way back yonder! Case closed, dang!

No.

Total income taxes assessed in the USA is not the same thing as highest tax bracket. Instead, we have incremental taxing. Example: A tax system where the first $10,000 is subject to a zero percent rate. Up to $50,000 is subject to a 5% rate, and over $50,000 is hit with a 10% rate. How much would $100,000 be taxed? Is it $10,000? Nope. It is $0 (10% × $10,000) plus $2000 (5% × ($50,000 — $10,000)) plus $5,000 (10% × ($100,000 — %50,000)) = $7,000. That’s 30% less than just applying the top rate to the total income. Citing only the top marginal bracket rate is just plain stupid — or dishonest.

So, to get an idea of actual taxes assessed, you need incomes. I downloaded “Table F-1. Income Limits for Each Fifth and Top 5 Percent of Families” from the US Census. This table summarizes boundaries for each quintile of US family incomes and the bottom income of the top 5% from 1947 to 2019 (so far). I wish I could have used “household income” instead of “family”, but information available to me doesn’t go back all that far for households. Why households? A “family” has a Census definition that excludes quite a few people. But I had to go with what I could get.

Then I calculated total federal income taxes assessed for that year by each income level, including the standardized exemption. I used the rates and exemptions that would have been used each year by married couples filing jointly, no children. If someone wants to pay me my consulting rate, I’ll be happy to make it more complicated. Given lack of specific available data (that I could find), I had to accept and admit a gross oversimpification.

Anyway, when I do all that simple calculation (using Excel), what do I get for taxes assessed for 1947–2019?

Pretty colors! What the lines show is the limits for each of the income quintiles. WTF IS INCOME QUINTILE? Here’s how that works. Divide the US families into five equally sized groups, grouped by closest income levels. Five: Quint, get it? The 3rd quintile is a Very Important Quintile. It’s the quintile that contains the median. What’s a median? A median income would be the income that is in the middle — half of American families would make less, half would make more. So, the 3rd quintile is the best estimate of “average American family income” with a bit of wiggle room.

So, then, as is quite plain, taxes are going up and keep going up with a tiny dip once in a while, case closed, whar and garble, man the pitchforks, the 1950s was tax paradise wrapped in heaven on a unicorn popsicle stick.

No.

This graph is a trick used by dishonest shills and believed by idiots. A dollar in 1955 was worth a lot more than a dollar in 2019, so taxing a dollar meant a higher amount of value was taken. Fortunately, there are a lot of ways to adjust for changes in value per dollar over time, such as the consumer price index. Just take the “then dollars” and multiply by (CPI of 2019)/(CPI of whenever). The “real dollars” or “adjusted dollars” tax toll becomes:

Well, gee, then, okay, so it’s not quite as bad as it looked vs. the Great Old Days, but still, those taxes on the “producers” were still lower, right? Yes?

No.

Here’s the thing, even “inflation adjustment” doesn’t tell a complete story. Even inflation-adjusted incomes have changed over time. And if you’re dealing with populations, it’s possible that the composition of each quintile might shift around in ways that do not match inflation rates. Also, the CPI is an estimate, so it has problems innate to any estimate, that compound with estimating income levels. What could be another reasonable way to represent the bite that income taxes take?

I nominate percent of income. Just calculate the tax bill, divide by the total pre-tax income, and there you are: It’s the proportion of your income that gets claimed. This is independent of inflation and similar time effects. It also is very easy to understand: If something demands one tenth your income, we can all understand one tenth, no matter the era, the units, or the value. Of course, whether that percent is appropriately calculated is a different matter. Since I’m not unethical, I’ve tried to be open about how I do it and apply the appropriate method (see above).

So, what do we see? First, if we look at the 1st through 4th quintiles (since the 5th quintile could go all the way up to theoretically infinite income), the “time when America was Great” also saw the highest effective net tax rates on all Americans, not just the wealthiest! Needle scratch, saloon goes quiet, piano player closes the keyboard and hides. A big change since then is that the effective net rates have widened between the poorest and richest Americans since the 1950s. Thus, it’s apparent that the people who have “suffered” the most as taxes have changed have been the wealthiest. For 80% of Americans, nothing hit the high points of the 1950s. And that’s what I have to say for income taxes when America was Great.