It’s an election year, so politicians talk a lot about taxes. Most candidates tell the middle class and poor they pay way too much in federal income taxes. Class warriors on the left go further. They argue the “fat cat” 1 percent got the bulk of tax cuts enacted over the decades. Some even pine for the halcyon days when the top nominal rate was 92 percent.
There are a zillion ways to parse tax data over time. Perhaps the most instructive is to compare representative low-end and high-end taxpayers. Exhibit 1: a single mom with two kids earning 125 percent above the poverty line. In 2013, she had adjusted gross earnings of $24,412. Backtracking to 1953, the inflation-adjusted equivalent earnings are $2,718 (a Coke cost a nickel). Exhibit 2: a two-child couple with adjusted gross earnings of $350,000 in 2013. This places them at the lower threshold of the top 1 percent of income earners. Inflation-adjusted 1953 earnings would be $38,974.
A lot has changed since 1953, but the salient question is, how did the federal income tax treat the two earners in 1953 and 2013? We’ll assume both households take deductions based on the averages for similar income earners and also use all available tax credits.
In 1953, the low-earning single mom paid $144 to Uncle Sam, or 5 percent of her adjusted gross income. In 2013, she received a tax refund of $4,594, or 19 percent of her gross income. At the low end, the Earned Income Tax Credit today acts as a “negative income tax.” And this doesn’t include benefits such as free school lunches, food stamps, housing vouchers and government-provided health insurance available to her in 2013 that weren’t around in 1953. Easily another $12,000 or more.
Our top-earner family paid $10,611, or 27 percent of gross income, to Uncle Sam back in 1953. In 2013, it paid $67,412, or 19 percent.
So it’s true that high earners benefited from the top marginal tax rate falling from 92 percent to 39.6 percent. But it’s also true that the lowest earners have benefited because the bottom marginal tax rate has fallen from 22.2 percent to 10 percent. Moreover, the EITC transformed the working poor from taxpayers into tax receivers.
The low earner went from paying 5 percent of income to getting 19 percent of income in refunds. The high earner went from paying 27 percent to paying 19 percent. We’ll leave it to the reader to decide if this is fair.•
Bohanon is a professor of economics at Ball State University. Styring is an economist and independent researcher. Both also blog at INforefront.com. Send comments to firstname.lastname@example.org.