The Twinkie Economist Looks at the 1950s

In his November 18 New York Times column, "The Twinkie Manifesto," progressive economist Paul Krugman compares and contrasts the 1950s with today: "Yet in the 1950s incomes in the top bracket faced a marginal tax rate of 91, that's right, 91 percent..."

Mr. Krugman could have made an even starker comparison, because in 1952 and 1953 the top marginal tax rate was actually 92 percent. To get hit by that rate, one needed a nominal income of just $200,000. For 1953, that's $1,680,746 adjusted for inflation. (That data and that to follow are from Tax Foundation.)

Since we're on the subject of top marginal tax rates, let's take a quick look at the high points of that rate since the inception of the income tax in 1913:

The top marginal rate for the Individual Income Tax in 1913 was 7 percent; in 1916 it was 15 percent; in 1917, 67 percent; 1918 (77%); 1925 (25%); 1932 (63%); 1936 (79%); 1941 (81%); 1942 (88%); and in 1944 and 1945 the top rate was 94 percent. In 1946 it went down to 91 percent, where it stayed (except for 1952 and '53, see above) until 1964 when it was 77 percent. In 1965 the top rate settled at 70 percent, where it remained until 1982 when, thanks to Reagan, the rate went to 50 percent. In 1988 the top rate descended to 28 percent, the lowest top rate since 1931.The highest top rate since 1987 was 39.6 percent, and the current top rate, set in 2003, is 35 percent (see chart).

So, for 57 of the 65 years from 1917 to Reagan in 1982, the top income tax rates were well above 50 percent. And those 57 years spanned good economies and economies that were very, very bad.

A big problem with Krugman's "analysis" of the 1950s is that he leaves so many variables out of it. For example, he fails to say what the bottom rates were. In 1952 and '53, the bottom rate was 22.2 percent and it hit nominal incomes between $0 and $2,000. Today's bottom rate is 10 percent. Krugman also doesn't say how many folks paid income taxes in the 1950s. Today it's only 53 percent.

There were 24 tax rate brackets in 1953, whereas today there are just 6 brackets. But it wasn't just taxes that were different back in the '50s; government spending was quite different. Although Big Government already had a toehold on America, entitlements were tiny back in the '50s. Today, entitlements are huge and getting huger.

One stark difference between the two eras is the federal balance sheet. From 1951 through 1960 the feds ran four budget surpluses, while over the last four years alone Congress has run four trillion-dollar deficits. The $35 billion run-up in the Gross Federal Debt over the entire 10 years of the 1950s (Table 7.1) would equal about 10 days of deficit spending today. And Krugman will have a difficult time making a case for higher top tax rates when the largest surpluses ever produced (1998-2001) were done with atop statutoryrate that was 52.4 percent lower than the top rate in the 1950s.

Another reason that the feds could have such onerous tax rates back in the '50s is because America was the only game in town. Europe and Japan had just been devastated by the war and China was still a backwater. So the current phenomena of globalism, offshoring and such weren't a factor; there was nowhere else to go. But that all began to change in the '60s, when Americans started driving VWs and Toyotas and American manufacturers had to start competing with foreign labor working at near-slave wages.The lower tax rates (and wages) of today are a response to an increasingly competitive world.

At least Krugman brought up effective tax rates: "The best estimates suggest that circa 1960 the top 0.01 percent of Americans paid an effective federal tax rate of more than 70 percent, twice what they pay today."But doesn't Krugman err here? Assuming that the 70 percent effective rate is correct, surely it isn't "twice what they pay today." Krugman seems to be comparing an effective rate to a statutory rate.

Krugman's position on the 1950s seems rather schizoid. Sometimes he's praising the era, and other times he damning it. Early in his column he demeans the decade by calling it the "Twinkie Era." But if middle-class Americans were willing to put up with a 91 percent tax rate on their fellow Americans, including the owners of the businesses that employed them, then maybe it really was the Twinkie Era. At least Americans in the 1950s weren't suffering from the Twinkie Economy of today.

When Krugman writes about "economic justice," he's talking about high tax rates. But what kind of "economic justice" is it to have a lousy economy? The data above show that we had high statutory tax taxes during the Great Depression. Krugman writes that "the success of the postwar American economy demonstrates that, contrary to today's conservative orthodoxy, you can have prosperity without... coddling the rich." (Is "coddling the rich" when the government takes less of their money?)

Just think about it: there was a protracted period in America's history when the central government confiscated more than half of one's income. In Krugman's example of 1960 the feds took 70 percent, which left 30 percent for state and local governments, and the poor taxpayer who earned the money -- and we weren't even at war.

The lowest sentence in Krugman's silly column is this: "We are, morally, a much better nation than we were." Americans of the 1950s were well acquainted with sacrifice and deprivation, and they would have found it morally repugnant to pile trillions in debt onto their children, something Krugman has urged since November 2006. America doesn't need to be instructed on morality by old Paulie Boy.

See also: Krugman's Howdy Doody Time by Randall Hoven.

Jon N. Hall is a programmer/analyst from Kansas City. 

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