High Taxes vs. Revenues

April 26, 1954

Seven years ago (in Newsweek of April 7, 1947) I ran an article containing a couple of tables to show, first, how much was actually left at various income levels for the income-tax payer himself out of every extra dollar he earned and, secondly, what had happened to the tax rates on and the revenues from personal incomes over $300,000 between 1926–28 and 1942. It seems to me that it throws additional light on the nature and effects of our present income-tax structure to bring such comparisons up to date.

The new tables presented here were compiled for me by the Tax Foundation.

Here is a table showing how much a married man with two children and legal deductions amounting to 10 percent of his gross income is allowed to keep out of each additional dollar of income at various income levels:

It should perhaps be pointed out that the married man in the table is assumed to have taken advantage of the split-income provisions which have provided a very marked tax relief since they have been in effect. A table showing what is left for the single man in the same income brackets out of each additional dollar would present a very different picture. The unmarried taxpayer is allowed to keep less than half of every dollar he earns over $18,000 net.

Putting aside all questions of “fairness,” we have looked at the principal practical effect of such tax rates in previous articles. That effect is to soak up the principal sources of investment funds—the funds that would otherwise go into improved machines and new factories to increase productivity, jobs, and wages.

But a hardly less important effect is to diminish the incentives to bring such earnings into existence in the first place. This means not merely a loss to the taxpayer who does not trouble to earn the money. It means a loss to the wealth of the whole nation and a loss even to the Treasury itself. Let me begin by reprinting the table from my 1947 article. (The dollar figures stand for millions of dollars.)

Let’s recall what this meant. During the same period that the total personal incomes in the nation increased 58 percent, total incomes over $300,000 fell 77 percent. If the aggregate of such incomes had risen no more than proportionately to the whole national income, the total would have reached $2,637 million—seven times greater than it actually was. And if this income had been taxed at the same schedule as in 1926–28, with a top rate of only 25 percent, the yield to the Treasury would have been $444 million, or 50 percent greater than the actual yield from the greatly reduced income total taxed at a top rate of 88 percent.

Now let’s take comparisons (again in millions of dollars) since 1947:

Though total personal incomes, to point to only one comparison, increased 148 percent between 1926–28 and 1947, incomes over $300,000 fell to about a third of their earlier total. Even if the aggregate of incomes over $300,000 had increased merely in proportion to the total of all incomes (though even per capita incomes increased 75 percent), it would have been more than seven times as great as it was. The most important reason for this fall was a top tax rate of 86 percent compared with a top tax rate of 25 percent. A sharp reduction in top tax rates below the present level of 91 percent would increase government revenues.