Sunday, December 2, 2012

Taxes and the Rich

There has been no end to the attacks on the anti-tax activist and founder of Americans for Tax Reform, Grover Norquist. The latest charge is that America once experienced an economic golden age where there was less disparity between rich and poor during the 1950s because at one stage the highest tax rate on the wealthiest income producers was 91%. Leftist columists like Paul Krugman, Ezra Klein, and billionaire Warren Buffett, have all done the rounds making the same charge that we could even up the wealth distribution in the US if only we taxed the wealthy a little more.

First off, Buffett argues as if higher taxes don't impede investment because making some money, even if only 9 cents in the dollar, is better than making nothing at all. But this is disingenuous. It is not as if money investment is a guaranteed earner and it is just a matter of deciding whether to make that money or not as if it were just dropped from the sky as a gift. Surely Buffett must know that there is significant risk in most investments and most people aren't going to take risks when the benefit in return is so lousy, especially when that loss can not be deducted from other income. It is just absurd to think people are going to go to the effort of investing their money and taking risks when the government is going to steal nearly the entire profit.

The most important question, however, is whether anyone actually paid those exorbitant tax rates. Klein admits early in his piece that there weren't that many, but it should be appreciated just how few there were. I'm taking these figures from Peter Schiff on his radio show last Thursday. In 1958, 236 out of 45.6 million tax returns filled payed the 91% tax rate! That's practically zero or 0.0000052% of all people! In fact only 8,549 people paid 35% tax (the current rate) out of 45.6 million. Today the amount of people who actually paid that percentage is around 2.5 million. Because the amount of people who paid the 35% in 1958 was so small, their share of total income tax was only around 3.5% where today those paying the same rate cover around 41.5% of all tax receipts.

This means that the working poor and middle class were paying a far higher percentage of tax in the golden era of the 1950s as compared to today. Of course this was because the rich were able to deduct far more from their taxable income and transfer their wealth into tax shelters, etc. The reason Reagan reduced taxes was to coax those avoiding paying taxes back into the tax paying fold.

What this means, of course, is that it can't be argued by leftist economists and investors that the economic growth was not retarded by high tax rates and that the supposed closer gap between rich and poor was not because of higher taxes because they effectively didn't exist! The de facto tax rate in the 1950s was much less than today, even if it looked a lot more on the books.

The last thing to note is that the 1950s were not such a great era of prosperity for those who actually had to live during that era. The working poor today can purchase more for their money today. Here are some facts and figure;

Lately, I’ve encountered with unusual frequency claims that the 1950s were a glorious economic time for America’s middle-class – a time so glorious, what with strong labor unions and high (above 90%!) marginal income-tax rates and all, that we middle-class Americans of today should look back with longing and envy on those marvelous years of six decades ago.

So on Saturday I bought on eBay this Fall/Winter 1956 Sears catalog.  I spent an extra $8-and-change to have it shipped to me overnight – a service that I could not have purchased in 1956.  My catalog arrived on my doorstep today.  I’m eager to explore it and to report my findings with some thoroughness.


But to give you a taste now, below is a sample of what I plan to do.


Having on hand information on the nominal average hourly earnings of nonsupervisory nonfarm private production workers in the U.S. in 2012 - that figure being $19.79 (as of October 2012) - I searched for the same earnings figure for 1956.  Thus far I’ve had no luck finding that number.  (Please feel free, I bleg of you, to help me find this figure, if you so desire.)  So, for 1956 I instead use average hourly manufacturing earnings of production workers, as reported in Table 1 here.  That figure is $1.89.


This nominal wage figure for 1956 isn’t exactly comparable to the nominal wage figure that I use for 2012, but it’s close enough, at least for this first-pass analysis. If the claim of many “Progressives” is true that manufacturing is the most princely sort of work that middle-class Americans can do, then presumably this figure of $1.89 is higher than the hourly earnings of all private, nonfarm nonsupervisory workers in 1956.  Anyway….


So let’s ask: how long did a typical American worker have to toil in 1956 to buy a particular sort of good compared to how long a similarly typical American worker today must toil to buy that same (or similar) sort of good?  Here are four familiar items: refrigerator-freezers; kitchen ranges; televisions; and automatic washers.


Refrigerator-freezers


Sears’s lowest-priced no-frost refrigerator-freezer in 1956 had 9.6 cubic feet, in total, of space.  It sold for $219.95 (in 1956-dollar prices).  (You can find a lovely black-and-white photograph of this mid-’50s fridge on page 1036 of the 1956 Sears catalog.)  Home Depot today sells a 10 cubic-foot no-frost refrigerator-freezer for $298.00 (in 2012-dollar prices).  (You can find it in color on line here.)


Therefore, the typical American worker in 1956 had to work a total of 219.95/1.89 hours to buy that 9.6 cubic-foot fridge – or a total of 116 hours.  (I round to the nearest whole number.)  Today, to buy a similar no-frost refrigerator-freezer, the typical American worker must work a total of 298.00/19.79 hours – or 15 hours.  That is, to buy basic household refrigeration and freezing, today’s worker must spend only 13 percent of the time that his counterpart in 1956 had to spend.


Kitchen ranges


Sears’s lowest-priced 30″ four-burner electric range, with bottom oven, was priced, in 1956, at $129.95.  (You can find this range on page 1049 of the 1956 Sears catalog.)  Home Depot sells a 30″ four-burner electric range, with bottom oven, today for $348.00.


The typical American manufacturing worker in 1956, therefore, had to work 129.95/1.89 – or 69 hours – to buy an ordinary kitchen range.  His or her counterpart today must work 348.00/19.79 – or 18 – hours to buy the same sized ordinary range.


Television sets


Sears’s lowest-priced television in 1956 was a black-and-white (of course) 17″ model.  (You can find it on page 1018 of the 1956 catalog.)  That t.v. set was priced at $114.95.  Sears today sells no 17″ t.v. sets.  The closest set I could find at Sears was this 19″ color (of course) model, which is priced at $194.00.


The typical American manufacturing worker in 1956, therefore, had to work 114.95/1.89 – or 61 hours – to buy this tiny black-and-white (with no remote!) television set.  His or her counterpart today must work 194.00/19.79 – or 10 – hours to buy a slightly larger, high-def, color (with remote!) television set.




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