During the Great Depression and the period leading up to it, the tax rate of the highest personal earned income tax bracket (“highest tax bracket rate”) was 25%, 10 percentage-points lower than the current highest tax bracket rate of 35%. From the period of Great Recovery through 1971, the highest tax bracket rate exceeded 60%, floating above 90% throughout the 1950s.
The current argument against restoring tax rates on the first and second highest tax brackets to 39.6% and 36% (only 4.6 and 3.0 percentage-points higher than the brackets’ current rates), respectively, is that not restoring the rates frees up cash for the highest income earners to reinvest into business.
For perspective, the highest effective federal tax rate on corporations is 35%. If business owners wanted to shelter their small business income from tax rate increases, they could do so by (a) not drawing from the corporation’s net income and (b) reinvesting income into the business. The latter applies regardless of the form of the entrepreneur’s business enterprise.
To encourage business development further, one contributor contends that a form of the dividends received deduction should be extended to controlling individual shareholders, as well.
As was demonstrated in the 1930s and 1950s, both considered to be periods of economic growth and increasing prosperity, and above, one could argue that increasing personal earned income tax rates has the effect of encouraging, and thereby stimulating, business investment and development. At the minimum, history has demonstrated an extra 3% to 4.6% of tax on income in excess of $250,000 (or $200,000 for individuals) will not make things worse.
Following is a mathematical example. According to a Sept. 29, 2010 article in The New York Times, a University of Chicago professor claimed he and his wife might have to lay off their housekeeper if tax rates on income in excess of $250,000 are restored. The couple earns over $300,000. If restored, the tax rate applying to their income over $250,000 increases by 3%, translating into additional tax of $1,500. How little are they paying their housekeeper?
Tax rate data derives from the IRS.
Originally published 03 October 2010
