Throughout the
late-1940s and 1950s, the top marginal tax rate was typically above 90%; today
it is 35%. Additionally, the top capital gains tax rate was 25% in the 1950s
and 1960s, 35% in the 1970s; today it is 15%. The real GDP growth rate averaged
4.2% and real per capita GDP increased annually by 2.4% in the 1950s. In the
2000s, the average real GDP growth rate was 1.7% and real per capita GDP
increased annually by less than 1%. There is not conclusive evidence, however,
to substantiate a clear relationship between the 65-year steady reduction in
the top tax rates and economic growth. Analysis of such data suggests the
reduction in the top tax rates have had little association with saving,
investment, or productivity growth. However, the top tax rate reductions appear
to be associated with the increasing concentration of income at the top of the
income distribution. The share of income accruing to the top 0.1% of U.S.
families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due
to the 2007-2009 recession. The evidence does not suggest necessarily a
relationship between tax policy with regard to the top tax rates and the size
of the economic pie, but there may be a relationship to how the economic pie is
sliced.
Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945
Thomas L. Hungerford
Specialist in Public Finance
September 14, 2012
