The Obsession with Nominal Tax Rates or the Twinkie Romanticism

It has become a Don Quixote like quest for certain economists to romanticize the higher tax rates on the wealthy.  No less than Nobel Prize winners Paul Krugman has written that:

The best estimates suggest that circa 1960 the top 0.01 percent of American paid an effective federal tax rate of more than 70 percent, twice what they pay today.

The assertion that the top tax rate  paid an effective tax rate of more than 70% seems more than bit odd owing solely to the fact that the top nominal rate was 91% from 1960-1963 and then 70-77% the rest of the decade.  In other words, Nobel Prize winning economist Paul Krugman is claiming that the average top tax payer was paying an effective tax rate that in some years was higher than the nominal rate.

The average effective tax rate of an average tax payer in the top 1% is presented below.

 

The data itself tells an entirely different story from the idealized 91% tax rate.  According to Internal Revenue Service data, presented below on a graph, from 1966 to 1970 the effective tax rate of an average tax payer in the top 1% was 30.85%.  Throughout the time period in question, the effective tax rate of the average top 1% never exceeded 35%.

Discuss.

Addendum: This figure is calculated from Internal Revenue Service Personal User Files.  The Effective Tax Rate is the total federal income tax paid by a tax payer in the top 1% over the adjusted gross income (AGI).

7 thoughts on “The Obsession with Nominal Tax Rates or the Twinkie Romanticism

  1. Pingback: Worthy of further investigation — what were tax rates in the 1960s?

  2. Pingback: The Obsession with Nominal Tax Rates or the Twinkie Romanticism | Balding's World | Featured Articles | Scoop.it

  3. Pingback: The Obsession with Nominal Tax Rates or the Twinkie Romanticism | Balding’s World « I Was Misinformed

  4. Prof. Balding, could you do us a favor and address Krugman’s claim head on? What was the effective tax rate of the average earner in the top 0.01% (not the top 1%), and in the year 1960 (not 1966 and later, after the 91% tax rate had been phased out).

    • I can’t do that for two very simple reasons. First, I am using something called IRS Public Use File data. This data only goes back to 1966. Consequently, I cannot conduct calculations for earlier years. Let me emphasize it is not because I don’t want to or won’t but simply because the data does not extend past 1966. Second, without going into a lot of technical detail about the PUF data, the short version is that the sample size of filers in the top 0.01% would be too small to provide a useful number. In other words, the total IRS PUF dataset does not provide enough observations of the 1% of the 1% to make reliable population statements about their tax rates. In short, I am as interested as you are, but unfortunately I can’t make a direct comparison.

  5. From a quick search, it looks like the top 0.01% (about 15,000 tax units) earned about 5% of all income in 2008, with an average income of over $27M. Assuming they’re currently taxed at a rate of effective rate of 20%, then taxing them at an effective rate of 70% would raise over 200 billion per year. That’s assuming no shifting or hiding of income, which is obviously a huge assumption.

  6. Obviously the picture looks different when you include the carried interest/dividend/capital gains taxes, to which the wealthy have shifted a bulk of their income.

    They’re still undertaxed.