Along the same lines, this morning I came across a report from The Society Pages detailing the relationship between the minimum wage and the nominal value of that wage. It compares a workers' actual hourly rate of pay versus the value of that dollar after many factors, including inflation, are taken into account, determined by the purchasing power of a dollar earned in 2010. It's a pretty dramatic look at how wage increases are not keeping up with inflation increases.
(http://thesocietypages.org/socimages/2012/01/07/the-minimum-wage-and-capitalism-2/)
If you look at the chart you'll see that a dollar's purchasing power appears to be greatest between from 1964-1980. If you match that up with the tax rates during those years you'll see some correlating numbers.
From 1950-1963, the 14 years prior to the highest purchasing power, the tax rate on income above $400,000 was 91%, with the exception of 1952-53 when it was actually 92%! The chart above shows a dramatic upturn in the purchasing power of a dollar during this 14 year time span. I believe the high point of purchasing power I highlighted early, 1964-1980, is a direct result of this sustained tax rate. It insured reinvestment into the infrastructure that facilitated the enormous growth of the United States. It also prevented wealthy Americans from reaping financial benefits on their climb toward wealth and then "cashing out" and denying that chance for the next generation. Without this continued reinvestment of tax dollars it would have been impossible to maintain the governmental investments and incentives for the creation of new businesses and opportunities.
The tax rates, for the lowest and highest income brackets, for those 17 years of high purchasing power are as follows:
Tax Rates | ||||
Bottom bracket
|
Top bracket
| |||
| Calendar Year |
Rate
(percent) |
Taxable Income Up to
|
Rate
(percent) |
Taxable
Income over |
| 1964 | 16 | 1,000 | 77 | 400,000 |
| 1965-67 | 14 | 1,000 | 70 | 200,000 |
| 1968 | 14 | 1,000 | 75.25 | 200,000 |
| 1969 | 14 | 1,000 | 77 | 200,000 |
| 1970 | 14 | 1,000 | 71.75 | 200,000 |
| 1971 | 14 | 1,000 | 70 | 200,000 |
| 1972-78 | 14 | 1,000 | 70 | 200,000 |
| 1979-80 | 14 | 2,100 | 70 | 212,000 |
| 1981 | 13.825 | 2,100 | 69.125 | 212,000 |
This appears to be a time of great prosperity for the American Dollar. So what happened to push it toward our current dysfunctional system?
Well, inflation rates were above 10% each year from 1979-81. That meant that, on average, goods cost 39% more at the end of 1981 than they did at the beginning of 1979. So to combat this our government surely sought to revert to our more prosperous techniques of the past, with respects to tax rates, by asking wealthy Americans to pay a little extra so that the people who needed money to afford things like food and shelter were able to keep a few more dollars each month, right?
They actually did the opposite. Here's the data from the same chart for the rest of the 1980s:
Tax Rates | ||||
Bottom bracket
|
Top bracket
| |||
| Calendar Year |
Rate
(percent) |
Taxable Income Up to
|
Rate
(percent) |
Taxable
Income over |
| 1982 | 12 | 2,100 | 50 | 106,000 |
| 1983 | 11 | 2,100 | 50 | 106,000 |
| 1984 | 11 | 2,100 | 50 | 159,000 |
| 1985 | 11 | 2,180 | 50 | 165,480 |
| 1986 | 11 | 2,270 | 50 | 171,580 |
| 1987 | 11 | 3,000 | 38.5 | 90,000 |
| 1988 | 15 | 29,750 | 28 | 29,750 |
| 1989 | 15 | 30,950 | 28 | 30,950 |
These charts show only the bottom tax bracket and the top tax bracket. Most years there are several brackets in between with gradual increases in rates but some years these represent the only two brackets.
So, let's try to make sense of this and compare apples to apples. Brace yourself. An abundance of numbers will be used. I will be using tax rates for a single man with no children from this chart.
Let's take a single man making $40,000 per year and assume he maintained this wage from 1981-1989 with no raise. His tax liability, not including deductions or credits, in 1981 would be $12,000, at a rate of 30%. That same man's tax liability in 1989 would be $11,200, at a rate of 28%.
Take-home pay 1981: $28,000.
Take-home pay 1989: $28,800.
Hey, way to go! This fortunate man got to keep $800 more of his money.
But keep in mind, the inflation rate over this nine year period works out to just over 50%. So if this man's monthly bills in 1981 were $1000, his same bills in 1989 would be $1500. Sorry, pal. It doesn't look like that $800 drop in annual tax liability is going to offset the extra $6000 ($500 * 12 months) you'll be paying on your bills. You actually come out $5200 worse. Let's hope you got annual raises enough to cover this.
IF(!) he got a 2% annual raise EVERY year, his 1989 wage would be $46,866. Factoring in inflation and tax rate changes, he comes out $1666 better in 1989, after bills and taxes, than he did in 1981. Assuming this guy has a generous employer, and hasn't added any expenses (like children), he's not doing too badly.
Now let's look at a man making $1,000,000 per year over this same period. His tax liability in 1981 would be $691,250, at a rate of 69.125%. The same man would pay taxes of $280,000 in 1989, at a rate of 28%.
Take-home pay 1981: $308,750.
Take-home pay 1989: $720,000.
Wow!
Let's say his bills are TEN times the previous man's bills. That means that monthly bills of $10,000 in 1981 would be roughly $15,000 in 1989, after factoring in inflation. Meaning he would pay $411,250 LESS in taxes and $60,000 ($5,000 * 12 months) more in expenses. With no raise at all, this man comes out $351,250 better in 1989.
If you factor in an annual 2% raise (new salary $1,171,659), this man comes out $522,909 better in 1989, after bills and taxes, than he did in 1981.
That's a lot of numbers but here's what it boils down to: After bills and taxes, the first man increased his yearly income by just over 4% while the millionaire increased his yearly income by just over 52% during the same time period.
Wait. 28% tax rate in 1989? Isn't that the same rate as the guy making $40,000? Yes, it was. The tax rates for the wealthy from 1988-92 and 2003-2011 were literally HALF what they were from 1936-1981. The rates from 93-2002 were merely 44% lower. AND, from 1988-90 anyone making over $19,450 paid the same tax rate. A person making $20,000 paid the same tax rate as a person making $20,000,000. That sounds absurd to me.
Fun Fact: Prior to 1987, the last time tax rates for the top bracket were below 50% was 1925-1931. Check those years, and their aftermath, if you need help figuring out what broken policy can create.
My point is this: Our current system is completely unsustainable. If we continue to allow inflation to rise much faster than wages we will end up with a country full of people completely dependent on their government for assistance. If we simultaneously allow millionaires and billionaires to hide their income and pay unbelievably, historically low tax rates, then the government will be in no position to offer any help to those who have slowly been robbed of their financial security, their buying power, their self-sufficiency, and eventually their dignity.
I don't want socialism. I don't want to rob from the rich and give to the poor. I want a country with sustainable policies. And we don't have that right now.