Thursday, April 15, 2010

Tax Rates Might Start Low, But Never Stay Low

The highest marginal income tax rate in 1913 was only 7% (IRS data here), but it only took Congress five years to raise the highest rate to 77% in 1918, and eventually to rates above 90% in the 1940s and 1950s (see chart above).

As I wrote today on the
Enterprise Blog:

As we now consider imposing a European-style value-added tax (VAT) on Americans, we should remember the lesson of U.S. income tax rates—they started low but then rose quickly as income taxes became an attractive source of new revenue for spending-hungry politicians. As today’s Wall Street Journal editorial points out, the lesson from Europe’s record of VATs is very clear: the rates might start low initially, but “they rarely stay that way.”

12 Comments:

At 4/15/2010 12:12 PM, Anonymous gettingrational said...

Support the VAT. "Opposing it because it is too good is like breaking with your girlfriend because she is too beautiful".

This according to conservative Bruce Bartlett writing in Forbes magazine. Mr. Bartlett further states that conservatives should fight to lower government spending and not oppose a better way to fund the government.

U.S. producers face a major cost disadvantage with foreign producers by the U.S. not having a VAT. Most of our foreign trade competitors have a VAT in their country. If an exporter can show the taxes collected on a product then international trade laws allow a rebate of those taxes. U.S. taxes are inputed. Thus, attributable taxes (ie. corp income tax), added to the product, are not rebated to the producer upon export.

 
At 4/15/2010 1:40 PM, Anonymous Lyle said...

Of course the first major rise was caused by a little thing called World War I, the second major rise started with another little thing called the great depression followed by the minor unplesantness called World War II. Recall that during the US civil war the federal government taxed everthing that it could also. In fact the major fallacy and source of our current problem was GWBush deciding that he could have a war and not pay for it. (He could have easily said, that due to 9/11 he was asking that his tax cuts be postponed until the situation became more clear, and would have gotten it approved in late 2001 overwhealmingly. )

 
At 4/15/2010 2:21 PM, Blogger Ironman said...

The VAT might be a good idea, if and only if it entirely replaces the income tax. If that's not the case, a VAT will not be such a great idea.

As for the changing maximum income tax rate over time, if you don't mind wading through a long post on the topic, this one goes a long way to explaining the timing and magnitude of the changes (shown a bit differently from the way most people show it on this chart.)

 
At 4/15/2010 4:12 PM, Anonymous Anonymous said...

Just put an 10% goods and services tax on everything so that every consumer pays it and no one escapes it. The economy adjusts to it over time.The tax is not levied on manufacturers, primary producers,or the local auto repairer who purchases parts for a customers repair job.His customer pays the gst when he picks up his vehicle. You can then eliminate a lot of current taxes and simplify the tax system. Success lies in keeping politicians and lobbyists out of its implementation and operation forever.I.R.S. collects it.

 
At 4/15/2010 5:35 PM, Blogger Benjamin said...

What is interesting is that the US economy grew with low inflation during the periods of very high tax rates (1940-60s). And we were paying down the national debt, responsibly.

I do not want to go back to those tax rates. But, progressive consumption taxes have a lot of merits.

 
At 4/15/2010 11:45 PM, Anonymous Anonymous said...

"Lyle", "Benny" and "gettingirrational", all pushing for higher taxes. Go figure. I guess that everyone elese was at a local Tea Party.

 
At 4/16/2010 10:24 AM, Anonymous gettingrational said...

Anon., I am not pushing for higher taxes at all. You have stated a bogus word byte that is meant to scare people because. Is this because you are a beneficiary of the current system?

 
At 4/16/2010 12:24 PM, Anonymous Anonymous said...

I am not pushing for higher taxes at all. You have stated a bogus word byte that is meant to scare people because. Is this because you are a beneficiary of the current system?

Yeah, I "benefit" by carrying a bunch left-wing deadbeats through life. And unless you, or Bartlett, are advocating that we first repeal the 16th Amendment before instituting a VAT, then yes, you are pushing for higher taxes. Reducing compliance costs may be laudable, but doing so doesn't require the imposition of a VAT.

 
At 4/16/2010 12:53 PM, Anonymous Anonymous said...

He also warned that politicians and economists should not envision an "idealized" VAT tax as a clean, simple system.

"If we were to adopt a VAT tax in this country, it would be subject to many of the same (tax) preferences the income tax is subject to." he said. "The VAT tax itself could become very complicated."

Congressional Budget Office Director Douglas Elmendorf

 
At 4/16/2010 1:03 PM, Blogger Publius said...

Anything that makes everyone pay taxes is a good thing. A flat income tax comes close. A VAT is closer in some respects.

However there are some differences:

With an income tax I can adjust my future planning right now, as the tax rates change.

With a sales tax (VAT or otherwise), my savings plans are disrupted by a tax increase at a time in my life when there's nothing I can do about it (I am no longer working).

Any discussion of taxes being "progressive" or "regressive" or hurting certain groups, of course comes from the fact that arbitrary, coercive taxation is an act of violence against people. If we're more honest about that when we talk about taxes, we will all be better off.

 
At 4/16/2010 3:46 PM, Anonymous Ralph Short said...

The single merit of a VAT tax is the abolition of the income tax. Currently, almost half of the filers do not pay a federal income tax. In fact, a sizable number of them receive an "unearned tax rebate". So, under this "progressive" system people who pay nothing get money back. I would guarantee that many of these "citizens" will spend a lifetime not paying one cent and get "rebates" from those who pay taxes every year.

As a person who worked for 50 years and paid a federal income tax every year I find this a totally outrageous and immoral situation. Therefore, if the VAT tax is a complete replacement for the current extortion system from the few, that would be a good thing.

 
At 4/17/2010 9:15 AM, Blogger juandos said...

"The single merit of a VAT tax is the abolition of the income tax"...

Well Ralph Short I'm not disagreeing with your comment but I do need to ask, 'is there any indication that the income tax would go away with the advent of a VAT?'...

Call me a pessimist I see both in our collective future...

In an NRO commentary Charles Krauthammer points out: "As a substitute for the income tax, the VAT would be a splendid idea. Taxing consumption makes infinitely more sense than taxing work. But to feed the liberal social-democratic project, the VAT must be added on top of the income tax"...

 

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