And presumably the lower income tax rates combined with the lower estate tax rates
to produce the wealth inequality that’s even more skewed than the income distribution.

I’m not saying that you don’t have a point, but my intuition on this issue has long been that the driver for income inequality has been the decline of the labor movement. Paying workers less means there is more of the pie to be divided among those at the top: executives and large stockholders. That’s income. However, low tax rates on income (including capital gains and dividends) contributes to a greater accumulation of wealth for the highly compensated. That’s power.

NOTE: When the top rate was 70%, no one paid it. The tax code then was full of loopholes such that many very highly compensated executives paid no income tax at all. Henry Ford is one example. He once said that if you paid any income tax, then you should fire your accountant.

I think you are on target. And no doubt there are some flies on the wall in executive compensation meetings who could validate this.

A clarification to my last post. The quote was by Henry Ford II.

I think you are likely both right. And both pressures argued for growing the company. Since 1980, companies have been downsizing and merging and downsizing. And de-capitalizing and leveraging even as executive compensation has exploded.

NOTE: When the top rate was 70%, no one paid it. The tax code then was full of loopholes such that many very highly compensated executives paid no income tax at all. Henry Ford is one example. He once said that if you paid any income tax, then you should fire your accountant.

Not true. See this for the chart showing how much the top 20%, 10%, 1%, and 0.01 % actually paid. It was over 70 % for the top income group up until 1970.

Now it probably *IS* true that as the 1970s progressed, more loopholes were added so that the top effective rate fell to 59 % by 1980.

-stewartm

.

…so it’s time to take more out of their companies in the form of compensation.

That may be true. Alternatively it may be that they wanted more of the compensation on the check and less in untaxed benefits or deferred compensation. When tax rates are high untaxed benefits and deferred compensation are more attractive. It would be nice to have some numbers that can indicate to what degree either of the two explanations is correct.

The fact is that Americans paid the lowest tax rate in 30 years to the federal government in 2009. So executives get the signal very strongly – the top rates have been slashed, so it’s time to take more out of their companies in the form of compensation. When top marginal rates were high, it made more sense to grow the company, rather than give yourself more money, large sums of which would just revert to the federal government.

What I’ve been saying for years. It’s little wonder that the CEO-to-worker pay ratio shot up like a roman candle starting in the 1980s.

-stewartm

I’m not saying that you don’t have a point, but my intuition on this issue has long been that the driver for income inequality has been the decline of the labor movement. Paying workers less means there is more of the pie to be divided among those at the top: executives and large stockholders.

And having lower taxes on yourself if you got said loot is an incentive to pay workers less and bust unions.

It’s not an either/or scenario, it’s an “and/both” one.

-stewartm

It’s clear that something happened in corporate boardrooms around the 1970s and through to today, where they decided to give their CEOs massive amounts of money through salary and stock options.

Moreover, look at how the bulk of executive compensation is usually structured. It’s not in wage pay (taxed at 35 %) but the bulk is in *stock options* (if held for merely one year, taxed at 15 %).

Seems a slam dunk to me.

-stewartm

Government revenue follows almost the same line, plot this out:

Year… Income Taxes -total
……. $ billion
1979… 332.58
1980… 364.07
1981… 407.62
1982… 412.77
1983… 395.35
1984… 436.98
1985… 485.12
1986… 506.47
1987… 582.84
1988… 607.7
1989… 672.98
1990… 689.6
1991… 697.5
1992… 715.67
1993… 777.01
1994… 840.57
1995… 916.58
1996… 1007.09
1997… 1112.65
1998… 1227.3
1999… 1287.39
2000… 1459.47
2001… 1406.9
2002… 1237.37
2003… 1156.06
2004… 1247.26
2005… 1491.03
2006… 1719.57
2007… 1884.62

Without adjusting for inflation, GDP, and population size those numbers are meaningless, Alan.

-stewartm

Agree with this post (thanks) and most comments. I don’t see it as either/or. It’s the LOT: 1) the deliberate decline of organized labor (as pushed by the PTB, of course, but imo with some compliance by the Union honchos who are bought off and doing, mostly, a lousy job these days, esp in terms of reaching out to & educating non-unionized labor), 2) sky-rocketing corp top-dog salaries/perks/benefits/stock options (something I’ve talked about for a couple of decades, as it was so OBVIOUS that this was out of control), and 3) lowered marginal tax rates, as well as lowered capital gains tax rates, etc.

We can talk about how the 1% maybe can find enough loopholes to NEVER EVER pay taxes, but that misses the point. I get tired of hearing that EXCUSE for why it’s not a “good idea” to raise the marginal tax rates on income, to raise the SS income tax rate, and/or to raise Cap gains. That argument doesn’t do a thing for me. Raise all those rates, and let the filthy crooks find ways to get out of paying taxes. Sure, they’ll do it some, but not all of it. Gimme a break.

I’ve owned stock for quite a long time, and I’ve read a lot of corp annual reports over the years. Income, etc, for corp CEOs is quite simply ridiculous. And it’s just led to these greed-heads becoming ever more greedy, nasty, conniving, sociopathic, shitty, treasonous jerks. There’s no downside to increasing the tax rates, imo.

Excellent article, Dave.

But stewart is right, too. More and more executive compensation being tied to stock options and other non-wage categories (apparently Romney hasn’t received salary or wages in a long time) are certainly the primary cause.

But, let’s not forget greed. The BOD’s deliver enormous compensation and the executives gladly accept it in amounts one can only describe as outrageous. And lastly, stockholders seem to put up with it.

And it’s just led to these greed-heads becoming ever more greedy, nasty, conniving, sociopathic, shitty, treasonous jerks.

Bravo!!!!Bravo!!!
That’s it in a nutshell.

And what’s worse, now the greedy bastards have accumulates so much money they can actually buy the government they want.
Footnote: See Koch Brothers, despicable, nasty, conniving, sociopathic treasonous jerky brothers

We will soon learn if money can buy the presidency. Coming in November to a nation near you.

Why Progressives Lose and Keep Losing? we think the game has rules. It does not.

Obama = Romney

Obamacare = RomneyCare
Obama Tax Cuts = Romney Tax Cuts
Obama loves War = Romney Loves War

Obama always knew he was a Republican, the PTB knew OBAMA was more GOP than FDR.

One day some Progressives and Liberals will learn the game has no rules, and we will all see, Progressives act like Tea Party Morons to get elected, sort of like what Obama done to get elected.

“Obama acted like a Progressives to get elected in 08 only to become Bush 3″ this was not a complicated plan at, it was simple and effective.

Greed has always gave birth to more Greed!

Thus the reason 1% of the USA pop has 90% of the USA wealth.

The Elites must laugh their heads off, at the concept of a Presidential Election where 50% of the people think the guy is for them? when they both work for the 1%

the Only way to conquer deception is with deception.

For those Conservatives who seem to be always referencing those good old, edenic days of the Greatest Generation and Eisenhower, the top marginal tax rate in those upstanding, hard-working, real-American years before the US supposedly went to hell in a handbasket in their declensionist mythology was 91-92%. (JFK and LBJ later hacked it down by 20% followed by another 20% by Reagan.)

http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=213

We are disrespecting people like Eisenhower, by calling today’s conservatives, Conservatives, Eisenhower would have had all of these tea bag nuts locked up for Treason.

The Tea Bag Gang has done tremendous damage to the USA!

Every Real American dead or alive should be outrage, that the current USA has this Cancer call Tea Bag

History will say the Tea Bag Cancer destroyed the USA.

Thank you, put it says the figures include imputed corporate tax rates, so that muddles it some.

It’s not an either/or scenario, it’s an “and/both” one.

I can go along with that, but the “war on the middle class” started with the horrible Taft-Hartley Act passed in 1947. That gave states the right to effectively end collective bargaining rights with right-to-work-for-less laws. Without unions setting wage standards and making sure workers also benefited from increases in productivity (increases that really took off starting in the 1980′s), those at the top were able ensure that they got all the gains.

Stewartm

I doubt that the chart to which you link takes into account the fact that the most important loophole to which nonpartisanliberal refers was an above the line deduction for passive losses. It is likely that the chart uses adjusted gross income (AGI) as its stating point to estimate actual economic income. In other words the tax shelter industry that flourished until the Tax Reform Act of 1986 allowed high-inocme tax payers to deduct accounting losses (for instance,depreciation dedcuctions on properties that in reality were appreciating in value) against there other income in computing AGI.

I am not certain about the period prior to 1970 but during the 1970s through 1986 high-end earners often paid no income tax at all as a result of the effectiveness of these tax shelters as the accounting losses often completely offset all economic income. The 1986 Tax Reform Act disallowed the deduction of passive losses in most cases and significantly reduced this practice. Though it is true that tax rates were lowereed as a result of this Act, a low percentage of something was and is still higher than a high percentage of zero.

Thanks for that important distinction, stevesv. Thus, someone like Henry Ford II and other high earners could declare an income of zero. So the high tax rates were only paid by those high earners (and it may have been a small minority of them) who didn’t employ aggressive tax accounting.

When Reagan passed his tax reforms in the 1980′s, one thing he did right was to get rid of a great number of loopholes in exchange for lowering the rates. Since then, many loopholes have crept back in. As a result, some very large corporations like GE are paying no income taxes.

I doubt that the chart to which you link takes into account the fact that the most important loophole to which nonpartisanliberal refers was an above the line deduction for passive losses. It is likely that the chart uses adjusted gross income (AGI) as its stating point to estimate actual economic income.

The chart was taken from a paper “How Progressive is the U.S. Federal Tax System? A Historical and International Perspective”, in the Journal of Economic Perspectives, by Thomas Piketty and Emmanuel Saez. The article doesn’t say whether it was AGI or simply gross income.

However, honestly, I don’t think much of your point. What you’re essentially claiming, if I understand you aright, is that high taxes on the wealthy force the wealthy to sink their money into *things* rather than *money* and then decrease their tax load by claiming depreciation. That is a good thing, not a bad, in my view. No less an economist than John Maynard Keynes was worried about rich making “investments” that weren’t really “investments” but loans, as they weren’t sunk into anything material or real.

Moreover, I still rather suspect that when all was said and done, the rich paid a LOT more than now. This is not the only article that made the claim that the uber-wealthy paid 70 % + taxes; among others, the Wall Street Journal, a very unlikely source, has admitted that to be so. I doubt that they have any incentive to lend credence to the effectiveness of truly progressive taxation.

-stewartm

When Reagan passed his tax reforms in the 1980′s, one thing he did right was to get rid of a great number of loopholes in exchange for lowering the rates.

That’s why progressives should never fall for or support such a deal. Because the loopholes always come back, while the rates don’t.

-stewartm

Thus, someone like Henry Ford II and other high earners could declare an income of zero

.

Who says Henry Ford never paid income taxes? He paid over $80,000,000 a year in total taxes, and half in Federal income taxes, according to this book.

This book claims about Ford:

. Roosevelt’s New Deal had almost doubled the national budget. Somebody had to pay for the new government programs for farmers, businessmen, veterans, silver miners, youth, the unemployed, and many others. First, Roosevelt hiked the income tax on the rich with a marginal rate of 79 percent (later 91 percent). Next he supported the first federal taxes on cars, tires, and gasoline. Then he promoted the Wealth Tax of 1935, which instituted an inheritance tax of 70 percent on large estates. The first of these taxes was hard on Ford; the second was hard on all car owners; the third made it impossible for Ford to give his company to his only child, Edsel, or to Edsel’s children. The wealth tax captured Ford’s attention, if not his wealth. He was 72 years old and refused to turn over two-thirds of his estate to the government. His lawyers advised him that one way out of his tax problems was to set up the Ford Foundation. Gifts to foundations were tax-deductible, so Ford could dump his fortune in the foundation, put Edsel in charge of it, and thereby save $321 million in inheritance taxes and keep his business in the family. Ford’s maneuver preserved family control of Ford Motors, but it took his capital out of investment, froze it in the foundation, and put it, after his death, in the hands of the bureaucratic types he had fought all his life. Raymond Moley, a New Dealer who turned conservative, scoffed at the “projectitis” of the Ford Foundation and its “big and expensive staff of busy people who think up and sort out innumerable projects, to be bestowed with plenty of money upon specially created agencies or upon professors hard pressed to live on their academic salaries.” As historian Allan Nevins observed, “In a real sense, Henry Ford’s factory, his fortune, his life-work, had been socialized.”

I’m not trying to be disagreeable, nonpartisanliberal, but if the rich could so easily evade paying federal income and other taxes *then why would they really then be so dead-set ag’in ‘em?* That doesn’t compute.

-stewartm

Marginal tax rates are irrelevent. The only amount that matters is the
amount left over after taxes. The current progessive code only applies
to working class people. The progressiveness stops at the point it should start (high $300,000′s).

Who says Henry Ford never paid income taxes?

Not Henry Ford; his grandson Henry Ford II.

If the effective tax rate is zero because of loopholes, then tax reform that closes them is worth taking. The loopholes are more likely to come back quickly if the top rate is extremely high. As far as “progressives” go, they are irrelevant because there are no such people in Congress and they have very slim chances of getting elected in our system of government to the highest bidders.

The personal income tax rates that existed in the 1990′s worked well. The top rate was 39.6% and the capital gains rate was 20%. Other rates were also higher. (What is now the 25% bracket used to be the 28% bracket, for example.) There were surpluses during the last years of Clinton’s presidency.

Now the top rate is 35% and the capital gains rate is 15%. Contributing to the deficits are a loss of revenue due to a depressed economy, the cost of war, other excessive spending on the military and “homeland security” (distinguishing the homeland from the rest of the far-flung empire) and those tax cuts.

We can’t resolve the issue without knowing the definition of “income” used by the economists who wrote the article and prepared the chart. All I can say is that I have worked in tax for a long time and I know for a fact that in the 1970s and especially in the early 1980s high-income earners often paid no income tax at all. As a result of the 1986 change mentioned above, it is usually no longer feasible for tax payers with inocmes of more than, say, $1 million to eliminate their tax liability entirely though it does occassionally still happern.

With regard to your idea that it was actually a good thing that the high marginal tax rates in effect until 1986, as you put it, “forced the wealthy to sink there money into thinge instead of money and then reduce their tax load by taking depreciation” almost all economists would argue that it is a bad thing to have investment decisions made as a result of their tax conseqences rather than the expected economic return of the investments.

If Eisenhower would have all the Tea Baggers locked up for treason then I suspect he would be behaving precisely like today’s Conservatives–and he would get no respect from me for such repressive, un-American efforts. Treason?! Shit, this whole nut house of a country was founded on treason.

Are the Tea Baggers not Real Scotsmen? Did they fall out of the sky or might they be a unique and organic expression of America? Certainly the US is capable of weathering the storm of a few malcontents? Are the Tea Baggers the “cancer” or are the Fascist authorities who not only manipulate them but also divide us up into fighting amongst ourselves instead of against the owning class?

All I can say is that I have worked in tax for a long time and I know for a fact that in the 1970s and especially in the early 1980s high-income earners often paid no income tax at all.

In some ways, I agree with that, though you also have to admit by that time the tax rate had been a) lowered, and b) loopholed in comparison to previous times.

With regard to your idea that it was actually a good thing that the high marginal tax rates in effect until 1986, as you put it, “forced the wealthy to sink there money into thinge instead of money and then reduce their tax load by taking depreciation” almost all economists would argue that it is a bad thing to have investment decisions made as a result of their tax conseqences rather than the expected economic return of the investments.

The same economists whose advice has landed us in this mess, I presume?

I see an analogy to high corporate tax rates. It’s unquestioned that back when corporate tax rates were higher they paid more taxes and their tax burden was greater. It’s also true that during this time they “artificially” lowered their profits and made decisions to dodge taxes by a) plowing more money back into their company, b) giving employees more perks/benefits/pay, c) doing more research/development. Heck, companies like Kodak and Bell Labs *ran pure fundamental research facilities*, something that almost no business does nowadays,just because they had to do *something* with all that money.

The net result of this? A country with a technology which was the world’s wonder, a country with modern business infrastructure, a country that sent men to the moon.

Nowadays, after following what “most economists” advise, we’ve ended up with a business climate where literally NOTHING is replaced unless it’s broken. Companies are increasingly run like cash cows, with little or nothing plowed back into their future, just to churn out more cash for Wall Street speculators. Even when the companies are making profits *bigger* than they did in the 1950s and 60s.

The result of following the advice of “most economists” is a country that struggles now to build a decent toaster.

With individuals, dodging high tax rates led to the creation of foundations funded science, charities, humanities, and the arts. That’s a heckuva better result than them buying politicians, which is what they do now.

-stewartm

Not Henry Ford; his grandson Henry Ford II

And why would his grandson be able to dodge taxes if Henry was not? Until the 1960s, there wasn’t that much change in the tax rates or code.

As I said, all the published information I’ve seen says that the uber-rich paid 60-70 % plus or more on their incomes back then. I don’t deny that there was tax dodging going on, but a) it couldn’t completely eliminate their tax burden (it sure didn’t with Ford senior, who hired a small army of accountants to try, and I can’t see why Ford II would have done better) and b) where the money ended up flowing to avoid taxation often produced much social and economic good.

I’d rather have the rich funding, say, the arts than buying politicians or fueling the next bubble.

-stewartm

The personal income tax rates that existed in the 1990′s worked well. The top rate was 39.6% and the capital gains rate was 20%. Other rates were also higher.

No, the Clinton-era rates did NOT “work well”. The gutting of the US was well underway during the time of those rates and continued only slightly abated. They worked better than those of Reagan, and those of Dubya, but the rich still had too much money left over with which to bribe and corrupt politicians.

Let me put it this way, by way of personal observation. In the days of 88-91 % top marginal rates and higher corporate tax rates, the company I worked for:

a) always replaced its equipment every 10 years or so, whether or not the old stuff still worked or not;

b) gave the employess a bonus based on company performance; in most decent-to-good years this was enough for the average hourly employee to *buy an inexpensive new automobile*;

c) was very thorough in doing maintenance on its plant. I would ask “they painting that again? They painted it just three years previous” and I would be told it was all being done on a schedule.

d) Spent a lot of money on R&D, and I mean not ticky-tack R&D, but real R&D researching new technology platforms.

Doubtless a LOT of this was simply, as David Dayden says, the result of the tax code. The PTB of that time had to spend the money/unload the money just to avoid the taxes. Avoiding taxes isn’t necessarily a bad thing if it results in money flowing to things with positive social or economic results, and that’s exactly the behaviors which these high tax rates drove. The employees of that era could afford to buy new automobiles, they could easily save the 25 % downpayment for a home, and they didn’t have to max out on credit cards or use their homes as ATMs. All largely because the company/CEOs couldn’t just reward themselves with the loot. And even then, everything I have seen is that both corporations and rich individuals paid more and bore more of the tax burden than now.

Today, my company does far less of everything above. We now only replace instrumentation when it breaks, and as a result our technological infrastructure is older. The big employee bonuses were cut, then eliminated, then brought back as itsy-bitsy bonuses. (Management bonuses got fatter, of course).

Does this mean my company’s dying or unprofitable? Far from it. We’re producing RECORD profits, and have been for years. But that money is either flowing into the pockets of management or being handed over to Wall Street speculators. The company’s being run more and more as a cash cow. And that’s true of most other American companies I see.

All because our policies are being driven by the advice of Stevesv’s “most economists”.

-stewartm