In 1958, an 81% marginal tax rate applied to incomes above $1.08 million, and the 91% rate kicked in at $3.08 million. These figures are in unadjusted 1958 dollars and correspond today to nominal income levels that are at least 10 times higher. That year, according to Internal Revenue Service records, just 236 of the nation’s 45.6 million tax filers had any income that was taxed at 81% or higher. (The published IRS data do not reveal how many of these were subject to the 91% rate.)
1958, approximately 28,600 filers (0.06% of all taxpayers) earned the $93,168 or more needed to face marginal rates as high as 30%. These Americans—genuinely wealthy by the standards of the day—paid 5.9% of all income taxes. And now? In 2010, 3.9 million taxpayers (2.75% of all taxpayers) were subjected to rates that were 33% or higher. These Americans—many of whom would hardly call themselves wealthy—reported an adjusted gross income of $209,000 or higher, and they paid 49.7% of all income taxes….
The tax code of the 1950s allowed upper-income Americans to take exemptions and deductions that are unheard of today. Tax shelters were widespread, and not just for the superrich. The working wealthy—including doctors, lawyers, business owners and executives—were versed in the art of creating losses to lower their tax exposure.
For instance, a doctor who earned $50,000 through his medical practice could reduce his taxable income to zero with $50,000 in paper losses or depreciation from property he owned through a real-estate investment partnership. Huge numbers of professionals signed up for all kinds of money-losing schemes. Today, a corresponding doctor earning $500,000 can deduct a maximum of $3,000 from his taxable income, no matter how large the loss.
Those 1950s gambits lowered tax liabilities but dissuaded individuals from engaging in the more beneficial activities of increasing their incomes and expanding their businesses. As a result, they were a net drag on the economy. When Ronald Reagan finally lowered rates in the 1980s, he did so in exchange for scrapping uneconomical deductions. When business owners stopped trying to figure out how to lose money, the economy boomed….