Friday, March 20, 2009

90% AIG Tax Rate: Back to the 1950s

Dave Prychitko: The latest move to tax the bonuses at AIG is an attempt to bring about, essentially, a new marginal tax rate of 90%. We haven't seen that since the 1950s and early 1960s in the U.S. (see chart above, data here). The difference here between today's proposal and that of the past is that it is targeted not toward a general class of income earners in general, but to bonus-earners (non-earners?) at a particular corporation.

MP: In the chart above, notice the huge increases in marginal tax rates during the 1930s, from 25% in 1931, to 63% in 1932, to 79% in 1936.


At 3/20/2009 11:09 AM, Anonymous Anonymous said...

While it may appear (and may actually be) reactionary and conspiracy-oriented, I fear that the move to "claw back" this money could be the a sort of desenitizing of the country to regress back to those taxes of the 50's---for all of us.
I'm not an economist (obviously) but I do have a functioning pair of BS detectors and the hype by the Congress and the administration over this "issue" has more the flavor of stoking populist group-think than any real concern.
As with all snake-oil shows, one must always watch the hand not engaged in the spectacular trick.

At 3/20/2009 12:08 PM, Anonymous Anonymous said...

Rich Head for the Caymans When Tax Rates Go Up

Marginal tax rates have been all over the lot in the last 50 years: from 90 percent in the 1950s to 28 percent in the late 1980s to 39.6 percent in the 1990s to 35 percent today. Even with all the volatility in the top tax rate, the effective tax rate for the top 1 percent of earners has barely budged, Laffer says.

What’s more, as tax rates have come down, the share paid by the rich has gone up. In 1981, when the top tax rate was 70 percent (50 percent on earned income), the top 1 percent of taxpayers accounted for 17.6 percent of the income tax, or 1.5 percent of gross domestic product, according to Laffer. In 2006, with a top rate of 35 percent, the richest 1 percent paid 40 percent of the income tax, equal to 3.2 percent of GDP.

“All rates were cut a lot, but no other group saw an increase in the GDP share of taxes paid,” Laffer says.

The bottom 50 percent paid only 3 percent of the federal income tax in 2006.

Laffer readily admits that middle and lower-income folks lack the flexibility of the rich when it comes to changing behavior in response to changes in tax rates. Where the rich can shelter, defer and give away income, taxpayers at the bottom rung are like lambs going to the slaughter. Raise tax rates, and they fork it over to the government. Lower tax rates, and the government gets less revenue.

“Tax cuts in the lowest tax brackets and tax increases in the highest tax brackets tilt the economy toward revenue loss,” Laffer says. “It’s sad but true.”

If the government is truly interested in maximizing its revenue, not in redistributing income, it should cut taxes on the rich. Blasphemy, I know.


When Obama and the Democrats say they are just going to "tax the rich", it's a lie. Rich people are rich because they are adept at making money and avoiding taxes. The tax burden will fall on you.

At 3/20/2009 12:16 PM, Anonymous Anonymous said...

Liberals would argue that we had a strong economy and a healthy middle class when tax rates were at ~90% in the 50's. What say you?

At 3/20/2009 3:09 PM, Blogger juandos said...

"Liberals would argue that we had a strong economy and a healthy middle class when tax rates were at ~90% in the 50's. What say you?"...

You mean back when we as a nation were most like the Soviet Union?

Back when it was one car per family and all phones were black and from one company?

Back when wedding dresses were white because it was nice that the dishwasher had the same color as the stove and the refrigerator?

90% marginal tax rate was just another way of saying, "no good deed goes unpunished"...

The more we look into this mess laid at the feet of AIG, the messier the party in power looks...

Wyden-Snowe Executive-Pay Limits Sliced from Stimulus...

How about another round of applause for those who pushed the Community Reinvestment Act down our collective throats?

At 3/20/2009 3:31 PM, Anonymous Anonymous said...

It's Time For Atlas To Shrug

Members of Congress want to blame Edward Liddy, the former chief executive officer of Allstate Corp., who was recruited by former Treasury Secretary Hank Paulson in September to steer AIG away from the shoals.

Liddy is paid $1 a year for his efforts. “My only stake is my reputation,” Liddy said in a March 16 open letter to Treasury Secretary Timothy Geithner.


The government needs Liddy and Citigroup’s Vikram Pandit and Bank of America’s Ken Lewis to continue working to restore their firms to prosperity in the same way the looters in Rand’s novel need Hank Reardon and Francisco d’Anconia and Dagny Taggart, respectively, to run their steel mills, copper mines and railroad.

From their perches as chairmen of the House Financial Services Committee and Senate Banking Committee, respectively, Democrats Barney Frank and Chris Dodd fulminate about the lack of regulation and about inflated CEO compensation. For Dodd, it’s a good opportunity to deflect attention from his sweetheart mortgages from former Countrywide CEO Angelo Mozilo and his questionable real estate deal in Ireland.

All that’s left for life to imitate art completely is for these CEOs to quit. Let Barney Frank and Chris Dodd run AIG. Let’s see how they fare.

The government needs these companies to survive—and buy back the government’s ownership stake—more than they need the government.


At 3/20/2009 4:32 PM, Blogger KO said...

Worse than the taxes is the cavalier attitude Congress and a couple Attorneys General have on disclosing names and addresses of people. They're exposing people's families to physical danger, and should anything happen, they can't be held accountable as public officials.

The fact that people have more choices about where to live and work compared to the 1950's means lots of the most talented/connected folks aren't going to stay with the most troubled banks. They'll be going to small firms or overseas.

And the TARP supported institutions are now going to be less likely to be able to repay the TARP.

At 3/20/2009 5:55 PM, Blogger solerso said...

Facsinating how the the years of the highest marginal rates correspond the the most prosperous era in the history of the western world.

At 3/20/2009 6:01 PM, Blogger QT said...

Chances are pretty good that the 90% stealth tax is unconstitutional. A little perspective on the issue

Who is more likely to actually solve this problem...Tim Geitner & those in the finance industry or the Chief Populist and his braying donkeys? So far, Obama's performance makes Jimmy Carter look like heaven.

At 3/20/2009 6:05 PM, Blogger Unknown said...

Not fascinating at all, Solerso.

Correlation is not causation and the vast number of tax loopholes and deductions during those periods reduced the effective tax rate to the mi-20's from the mid-90's. Those are but two of the reasons this is not fascinating.

At 3/20/2009 8:23 PM, Blogger PeakTrader said...


It's important to note the U.S. could afford to be inefficient after WWII, because competing countries were rebuilding.

Government Spending and Capital Destruction

If the private sector spends $1 to produce $1.20 in output, then it creates $0.20 of capital. If the public sector spends $1 to produce $0.80 in output, then it destroys $0.20 of capital. If both tax cuts and government spending generate similar multiplier effects, e.g. $1 into $1.50, a tax cut will create $0.30 in capital, while government spending destroys $0.10 in capital (i.e. $0.10 gain in private sector and $0.20 loss in public sector). So, government spending will cause both interest rates and inflation to rise.

At 3/20/2009 11:19 PM, Anonymous Anonymous said...

Facsinating how the the years of the highest marginal rates correspond the the most prosperous era in the history of the western world.

Fascinating how that isn't true.

At 3/21/2009 3:53 PM, Blogger bobble said...

wow, now we have conservative whiners.

relax, the 90% tax is *only* on bonus's paid to employees in firms that have received more than $5 billion of bailout money.

though everyone pretends it's not true, the government effectively owns these companies, and thus has a right to set pay as it pleases.

these are clearly badly managed companies. why pay bonus's for bad management? these bozos are fortunate to still have a job. if you or i had screwed up in our job, we'd be fired. but that's because we weren't able to hire our friends to be the board of directors.

the bailout recipients are the new welfare queens. if they didn't want to dance to the government's tune, they shouldn't have taken government money.

At 3/22/2009 12:04 AM, Blogger bobble said...

" notice the huge increases in marginal tax rates during the 1930s, from 25% in 1931, to 63% in 1932, "

these tax increases can clearly be blamed on HOOVER. FDR did not take office until 1933.

At 3/22/2009 10:48 AM, Anonymous Anonymous said...

90% tax rates on "only the companies that received taxpayer money" is a big problem for all of us as taxpayers for three reasons.

1. It suddenly makes the TARP frims less competitive. That is, if I am talented, then I have other options such as other financial services firms. So the TARP firms lose the most talented people and are left with those who cannot otherwise leave.

2. They must pay higher wages to attract people. Any time there is more risk to the income you receive, you will want more of it to make up for this risk. Given this government action it is clear, no wage is a given.

3. All contracts are now in question. As any outside firm looking to do business with a TARP firm, I will also look to charge more to make up for this new risk or simply choose not to work with these companies altogether.

So, as a taxpayer, I am more likely to face greater losses in my "investments" based on the decision to create this 90% tax rate.

At 3/23/2009 11:43 AM, Blogger juandos said...

bobble says: "these are clearly badly managed companies. why pay bonus's for bad management? these bozos are fortunate to still have a job"...

Hmmm, interesting point bobble but I wonder if the lovely Mrs. Dodd thinks the samething?

At 4/14/2011 5:43 PM, Blogger Mailman X said...

"What’s more, as tax rates have come down, the share paid by the rich has gone up." Go ahead, compare the marginal rates, the total tax, the % of GDP paid. These expressions are meaningless unless you also compare % of nation's total wealth. Yes, if you own an orchard, you will pay more for cultivation than each of those who own individual trees. You may believe the tax burden of the '50's and '60's was onerous and unfair, but it created the infrastructure that kept the U.S. on top for decades to come. The greed at the top has undermined that infrastructure, perhaps terminally.

At 4/17/2011 5:56 PM, Blogger The Phantom Realtor said...

Mailman; two things. One is that while the greed at the top is real and shortsighted, it is supported wholeheartedly by the greed of those at the bottom; figuring that when they too become billionaires, the Gument ain't gonna get their money. Second, the reduction in tax rates precedes economic disaster, the two largest such disasters being 1929 and 2008, but let's not forget the recession and housing collapse of 1988. Coincidence?


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