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This gets parroted out frequently by people who think it's a cute quip. This article, however, explains why the situation was much more complicated than can be

This gets parroted out frequently by people who think it's a cute quip. This article, however, explains why the situation was much more complicated than can be explained in a one-liner.

SeanBoocock 8y ago
In what way was it more complicated? The top marginal tax rate was ~90% and high earners used a number of means to structure their income to avoid paying that, just as they do today with a far lower rate. I don't think anyone who makes this observation thinks that people were less motivated to lower their tax burden when it was substantially larger.
- WalterBright 8y ago
  What the article meant was that the 90% tax rate was on paper, but people didn't pay it because they structured their income into tax shelters to avoid paying it. Those tax shelters were removed by Reagan in 1986 as part of the deal to lower the marginal rates. Another tax shelter not mentioned in the article was the "3 martini lunch" where people charged their lunches off to the business, so it was taxed at the lower business rate. This tax shelter was removed as part of that deal. In England, with their high tax rates, it was common to have the businesses provide cars for the employees for the same reason - tax avoidance. Tax avoidance is also why in America today people prefer to pay for their health insurance as a business expense rather than a personal one.
  - dragonwriter 8y ago
    > What the article meant was that the 90% tax rate was on paper, but people didn't pay it because they structured their income into tax shelters to avoid paying it. This is also true with a 39.6% top marginal rate. The specific structuring methods have changed with tax policy (which has not all been closing loopholes; new favorable tax options available primarily to the rich have been opened up, as well), but “people, especially rich people, structure income for tax avoidance” didn't go away as maximum marginal rates dropped.
    - WalterBright 8y ago
      It was greatly reduced. Higher rates mean it becomes profitable to invest in crummier shelters. Lower rates means the shelters have to be much better. It goes back to do you want wealthier people to invest in improving the economy, or shuffling money around in marginal investments? I.e. do you want them investing in SpaceX, or some offshore shell game? Besides, something like half of the government tax money comes from very wealthy people.
      - XMPPwocky 8y ago
        But tax shelters aren't just manna sent down from Heaven to small island nations. They're products of the tax code- what we tax and how much. If "tax shelters" are nonproductive, that doesn't say much of anything about the tax rate directly- it's an orthogonal issue. If we're taxing things that we want more than things we don't want, that's the problem! The tax rate sets, among other things, how strong of an incentive folks have to do things that are taxed less. Right now, some unproductive and sometimes downright absurd things are taxed less. Playing with the tax rate just sets how big of a problem that is- to eliminate it, you need to do meaningful incentive engineering.
        WalterBright 8y ago
        Maximizing the tax rate on the most productive investments isn't good incentive engineering. But that's exactly what those high marginal tax rates are aimed at. Another way to look at it is look at the extremes. Nobody is going to spend much effort avoiding a 1% tax. They'll expend a heluva lot of effort avoiding a 99% tax.

This gets parroted out frequently by people who think it's a cute quip. This article, however, explains why the situation was much more complicated than can be explained in a one-liner.

SeanBoocock 8y ago

In what way was it more complicated? The top marginal tax rate was ~90% and high earners used a number of means to structure their income to avoid paying that, just as they do today with a far lower rate. I don't think anyone who makes this observation thinks that people were less motivated to lower their tax burden when it was substantially larger.

WalterBright 8y ago
What the article meant was that the 90% tax rate was on paper, but people didn't pay it because they structured their income into tax shelters to avoid paying it. Those tax shelters were removed by Reagan in 1986 as part of the deal to lower the marginal rates. Another tax shelter not mentioned in the article was the "3 martini lunch" where people charged their lunches off to the business, so it was taxed at the lower business rate. This tax shelter was removed as part of that deal. In England, with their high tax rates, it was common to have the businesses provide cars for the employees for the same reason - tax avoidance. Tax avoidance is also why in America today people prefer to pay for their health insurance as a business expense rather than a personal one.
- dragonwriter 8y ago
  > What the article meant was that the 90% tax rate was on paper, but people didn't pay it because they structured their income into tax shelters to avoid paying it. This is also true with a 39.6% top marginal rate. The specific structuring methods have changed with tax policy (which has not all been closing loopholes; new favorable tax options available primarily to the rich have been opened up, as well), but “people, especially rich people, structure income for tax avoidance” didn't go away as maximum marginal rates dropped.
  - WalterBright 8y ago
    It was greatly reduced. Higher rates mean it becomes profitable to invest in crummier shelters. Lower rates means the shelters have to be much better. It goes back to do you want wealthier people to invest in improving the economy, or shuffling money around in marginal investments? I.e. do you want them investing in SpaceX, or some offshore shell game? Besides, something like half of the government tax money comes from very wealthy people.
    - XMPPwocky 8y ago
      But tax shelters aren't just manna sent down from Heaven to small island nations. They're products of the tax code- what we tax and how much. If "tax shelters" are nonproductive, that doesn't say much of anything about the tax rate directly- it's an orthogonal issue. If we're taxing things that we want more than things we don't want, that's the problem! The tax rate sets, among other things, how strong of an incentive folks have to do things that are taxed less. Right now, some unproductive and sometimes downright absurd things are taxed less. Playing with the tax rate just sets how big of a problem that is- to eliminate it, you need to do meaningful incentive engineering.
      - WalterBright 8y ago
        Maximizing the tax rate on the most productive investments isn't good incentive engineering. But that's exactly what those high marginal tax rates are aimed at. Another way to look at it is look at the extremes. Nobody is going to spend much effort avoiding a 1% tax. They'll expend a heluva lot of effort avoiding a 99% tax.