How do we explain the fiscal puzzle of the 1950s? High taxes paired with high growth. Go figure.
That historical puzzle has important contemporary implications, because both liberals and conservatives like to invoke the 1950s to justify their current policy preferences. Liberals insist that the 1950s show that rates don't matter, at least not for growth. As Timothy Noah wrote in The New Republic last year:
The top marginal income-tax rate was 70 percent -- that's twice the current top rate -- when Ronald Reagan came into office in 1981, and from 1950 through 1963 the top marginal rate never fell below 91 percent. The top capital-gains rate was 25 percent during the 1950s and 1960s, and 35 percent during the 1970s. (Today it's 15 percent.) Yet the country prospered.
Conservatives are generally unimpressed by such observations. As Noah writes, they usually begin by pointing out that marginal rates aren't the same as effective rates. In other words, those high rates from the 1950s weren't so destructive because they weren't really so high.
Setting aside whether average or marginal rates are more important to growth over the long run, Noah challenges the accuracy of the conservative objection on its own terms:
There is some mythology abroad that when tax rates were very, very high, the super-rich paid about the same in taxes that they pay today because they exploited many loopholes. I'm sure they did exploit lots of loopholes, but it wasn't enough to keep their effective tax rates from being a lot higher than they are today.
Noah is not wrong on that point. As the Congressional Research Service reported last year (which, incidentally, drew a powerful attack from conservatives), average rates for the top 0.01 percent of taxpayers dropped from over 60 percent just after World War II to the mid-20-percent range in recent years.
But in comparing 1950s rates with contemporary rates, Noah is answering a different question than the one he originally asked. His initial point -- that the economy prospered in the '50s despite high statutory tax rates -- is purely historical. It puts front and center the puzzle at the beginning of this article: How can we reconcile high growth with high tax rates?
By contrast, Noah's second point is really contemporary in its focus. By noting that effective or average rates were in fact higher in the '50s than they are today, he's really just trying to silence conservative complaints that the 1950s are being misrepresented.
One complainer is David Brooks of The New York Times. In a March 18 column, Brooks challenged the high-tax characterization of the 1950s:
There have been times, like, say, the Eisenhower administration, when top tax rates were very high. But the total tax burden was lower because so few people paid the top rate and there were so many ways to avoid it. Government was smaller.
Brooks is trying to undermine the liberal lesson of the 1950s -- that high tax rates don't really impair growth -- by questioning the existence of high rates (or at least redefining them, because he can't very well challenge the statutory rates that liberals tend to cite). Brooks seems to suggest that because effective rates were low, the prosperity of the 1950s is not so inexplicable.
Noah correctly identifies some crucial ambiguities in Brooks's statement, especially regarding the notion of a total tax burden. It's not clear what Brooks means by that wording. What is certain, however, is that it's vague enough to vitiate the didactic value of the entire statement.
Noah wants to defend the high-tax characterization of the 1950s. But his insistence on comparing rates back then to rates now takes him well beyond his original historical point, implicitly suggesting still more comparisons between growth rates in the 1950s and growth rates now, not to mention a range of other factors.
That is what happens when a presentist agenda overwhelms historical analysis. You end up asking the wrong questions, which in turn makes the presentist project impossible to complete. For past policy to provide any guidance for today's problems, we must first understand the past on its own terms.
I don't want to be too hard on Noah. In trying to meld history and policy, he's doing the Lord's work. But it's a tricky business. And he ultimately follows his own logic to a problematic place. Like many liberals, he seems complacent about the dangers of high rates. In challenging the contention that effective rates were low (because the tax base was so imperfect), Noah seems to question the entire premise of traditional tax reform.
"In general, total deductions, as a share of adjusted gross income, were considerably lower in the high-tax 'bad old days' of the 1950s and 1960s than they are today," he wrote. "Remember that next time somebody tells you that we need to lower rates further in order to get rid of tax loopholes."
Like many liberals, Noah seems entranced by the symbolic value of high statutory rates. In the process, he soft-pedals the negative effects that flow from those rates. After all, the tax system of the Eisenhower era was not a very good one: It paired notionally sky-high rates with a deeply flawed tax base and created distortions both coming and going.
I understand that progressives like Noah are fighting a different battle: They are trying to beat back the rate-cutting mania that often serves as a definition of tax reform these days. But I think we might take a lesson from the tax experts of the 1950s, who understood the problems bedeviling their own tax system. As economist Harold Groves said at the time, "The impression is widely shared that the Congress deliberately throws a high-rate scale to the public as a demagogic bone and then as deliberately allows escapes from taxes that makes these rates specious."
Still a Puzzle
In the end, the Noah-Brooks fracas (which is representative of a broader liberal-conservative tussle over the lessons of the Eisenhower era) doesn't tell us much about the 1950s. We still don't know if high statutory rates and (relatively) high average rates were a drag on growth. And we can't know, because we also can't know what growth might have been in a different tax climate.
Moreover, a range of nontax factors were probably more important in shaping growth patterns in the 1950s. In particular, the economic disruptions of World War II had left the United States in a uniquely dominant position; by one estimate, U.S. manufacturing output constituted 60 percent of the world's total in 1950.
And to complicate matters even further, growth in the '50s was not as brisk as sometimes advertised. To be sure, it was not bad: It averaged 4.2 percent annually over the decade, which is better than the country's postwar average of 2.9 percent. But the average in the 1950s is skewed by the Korean War, which boosted growth for the first few years. From 1953 through 1959, growth averaged 3.1 percent -- not so much high as typical.
So ultimately, the 1950s can't settle arguments about the growth effects of high tax rates. Historical comparisons like the one undertaken by the CRS last year provide some clues but no definitive answer.
When ransacking the past for policy lessons, then, the key is to be modest in your claims. Did tax rates impair growth in the 1950s? We don't know, and we probably can't know. But did those rates make reasonable growth impossible? Clearly not.
Not exactly an earth-shattering take-home. But it's the best lesson responsible history can provide.