How the Rich Avoided Paying a 70% Top Tax Rate
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What is the main topic discussed in this episode?
With your money briefing, I'm J.R. Whalen at The Wall Street Journal in New York.
What prompted discussion of a 70% top tax rate and who proposed it?
When Congresswoman Alexandria Ocasio-Cortez suggested a 70% top tax rate could raise revenue, it garnered laughs and criticism. But it wasn't all that long ago when the top tax rate was 70%. But the rich found a way to get around it. We'll explain in a moment. First, these money and market stories you should know. The government shutdown cut into Americans' confidence in the U.S. economy in January. The chief economist behind the Survey of Americans' Confidence in the Economy says that trade tensions also affected consumer confidence, as well as volatile markets, a cooling global economy, and uncertainty over what the Federal Reserve will do next. He added that since consumer spending accounts for two-thirds of the U.S.
economy, a pullback could contribute to slowing growth in the first quarter. Furthermore, a Federal Reserve report last week found that many companies were less hopeful about their prospects this year, with some deciding to hold off on making investments.
When did the U.S. historically have top tax rates near 70% or higher?
Many business owners will see significant savings under a new tax deduction that was finalized late last week. The new 20% deduction for so-called pass-through businesses lowers the top rate on business income that qualifies for the break to 29.6%, down from the 37% top tax that applies to individuals' wage income. The 2017 tax law reduced the top corporate tax rate to 21% from 35%. And we told you last week that CVS and Walmart were battling over the cost of filling prescriptions, and it could result in Walmart leaving CVS's pharmacy networks. Well, the two sides reached an agreement late last week, and Walmart will remain part of the CVS pharmacy system. The companies didn't disclose terms of their agreement, but said it covered multiple years.
When newly elected New York Congresswoman Alexandria Ocasio-Cortez recently suggested a top tax rate of 70% on the highest earners to raise revenue, that 70% level wasn't all that far-fetched. In fact, we've had top rates of 70% before and even higher.
What strategies did celebrities and wealthy people use to convert wages into capital gains?
Wall Street Journal tax reporter Laura Saunders is here to spell it all out for us. So Laura, as recently as 1980, the top income tax rate was 70%, and it was more than double the current top rate of 37%. But even then, rich folks found a way to get around all that.
yes what people often don't know is that from a lot of the income taxes history we've had really high top rates the high was like 94 during world war ii but even in the 1950s um it was mostly 91 and that was the great one of the great decades of american growth and things like that the the thing also people don't understand is that all the time that you had these really sky-high rates that rich and wealthy people were not paying them.
How much did wealthy Americans actually pay when top rates were as high as 90%?
We have data on this. At the time that the top rate was maybe 92%, the normal average rate paid by rich people was more like 32%.
So when you say, just to catch everybody up, the top rate being 92% of the time, that means that income above a certain level is taxed at 92%.
Yes, actually, we know what that was. It was income above $400,000, which is equal to more than $3 million today adjusted for inflation.
And you point out in your story a little piece about President Dwight Eisenhower's proceeds from a book he wrote were treated as capital gains, and that was significant.
We were curious about all the ways that people avoided these taxes.
How did corporations and 'personal corporations' help stars like Bing Crosby shelter income?
How did they get out of them? Well, the big one is always then and now to move ordinary income like wages into capital gains, investment income. And the rules were looser then. Dwight Eisenhower was able to take his memoir, Earnings, and save about $400,000 by turning it into capital gains. You couldn't do that now. Jack Benny was paid $2 million to bring his TV show to CBS. Now I think that would be ordinary income, but for him, he argued it was a capital gain, and he won, and he saved about $800,000. So this brings those tax rates way down.
And celebrities like Bing Crosby, as you say, set up corporations to create some sort of shelter?
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Chapters
8 chapters
1
What is the main topic discussed in this episode?
0:05–0:09
2
What prompted discussion of a 70% top tax rate and who proposed it?
0:09–1:03
3
When did the U.S. historically have top tax rates near 70% or higher?
1:03–2:14
4
What strategies did celebrities and wealthy people use to convert wages into capital gains?
2:14–2:56
5
How much did wealthy Americans actually pay when top rates were as high as 90%?
2:56–3:36
6
How did corporations and 'personal corporations' help stars like Bing Crosby shelter income?
3:36–4:18
7
What major tax reforms reduced top rates and changed loopholes (e.g., Reagan's Tax Reform Act of 1986)?
4:18–4:56
8
How should taxpayers think about average vs. statutory top tax rates today?
4:56–7:14
Speakers
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