Mad High Tax Rates

On this week’s season premiere of the popular AMC show “Mad Men” viewers were reminded about the punitive high tax rates in the 1960s:
[youtube]http://www.youtube.com/watch?v=tx8bQ-hqIUY[/youtube]
This episode of Mad Men takes place in 1963, when the top income tax rate was 91 percent on incomes over $200,000 ($400,000 for married couples). That translates to about $1.4 million in 2009 dollars. The top rate today is 35 percent on incomes over $372,950. In 1963, by comparison, incomes over $10,000 (about $70,000 in 2009 dollars) paid 38 percent.

As the scene from Mad Men makes clear, high tax rates in the 1960s discouraged working harder to get ahead because a large portion of the worker’s additional income went to paying taxes.

Discouraging work lowers economic growth. When this happens we all suffer because lower economic growth means fewer jobs and lower wages across the economy.

Tax rates have fallen significantly from the 1960s. The top rate today is 56 percentage points lower than it was in 1963, so the incentive to work hard and get ahead is a lot bigger now.

But if President Obama’s plan to raise the top two marginal income tax rates to Clinton-era levels and the House’s plan to slap a 5.6 percent surtax on top of that to partially fund a nationalization of the health care system become law, the top average tax rate in the U.S. will climb to 52 percent- higher than in France, Italy, Germany and Spain.

Many workers faced with a marginal tax rate that takes over half of their additional income will decide the extra effort just is not worth it- just like workers in the 1960s did. This will impede economic growth at the worst possible time as the economy suffers through its most severe contraction since World War II.

Mad Men has brought retro-1960s clothing and decor back into style. Let’s not bring back the economically stifling tax policy with it.