According to a new Pew Research Center poll, roughly two-thirds (63%) of Americans support the idea of the government increasing taxes on large corporations and higher-income households.
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The disproportionate influence of billionaires and the growing chasm between them and the middle class are among many reasons why Americans have shifted their views on taxation. Furthermore, the obstinacy of both parties in Congress — their stubborn refusal to address this decades-long issue — has led to calls for broader structural reforms and a more aggressive tax policy on the wealthy, with some proposing a top marginal rate as high as 70%.
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A Look Back: When America Had a 70% Top Tax Rate
While younger readers may find it difficult to picture tax rates being this high, older Americans will remember living through decades of higher taxes years ago. Using data from the Tax Policy Center, we can see that from 1964 to 1980, the top marginal income tax rate stood at 70%, with some years even higher.
And before 1964, the highest marginal tax bracket stood at a staggering 91%. Interestingly, historians refer to this period with a variety of labels: postwar compromise, Fordism, and the golden age of capitalism, thanks to the uptick in living standards and favorable employment numbers made possible by comprehensive reforms of the New Deal.
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Understanding How Marginal Tax Rates Work
Before delving further into the article, it’s essential to note that a 70% tax rate does not mean that 70% of your income is taxed. The top marginal rate would only apply after one’s income exceeds a certain threshold.
The illustration below, taken from the Internal Revenue Service (IRS) website, illustrates how marginal tax rates apply to a single filer who earned $58,000 last year. Let’s call this person John. John’s first $11,600 of income was taxed at 10% — the amount from $11,600 to $47,150 was taxed at 12% — and the final amount, from $47,151 to $58,000, was taxed at 22%.
As exemplified in this case study, we can clearly see that John, whose income falls within the first three of seven brackets, would not be affected by a 70% top marginal tax rate. Also worth noting, the median personal income in the United States (as of 2023) was $42,220, according to Federal Reserve Economic Data. In other words, most Americans will not be taxed in the top bracket.
How Would a 70% Top Marginal Rate Affect the Economy and Personal Finances?
Now that we have a brief understanding of how marginal tax rates work, it raises an important question: If a future administration raised taxes to 70%, what would it mean for your personal finances and, more broadly, the economy?
Would a 70% Tax Rate Hurt the Economy?
Assuming no black swan event happens, there is no reason to believe the economy would not continue to grow. Historically, high taxes did not impede economic growth — in fact, some of the strongest periods of economic expansion happened after World War II, when rates were significantly higher than today.
Authors Jane Gravelle and Donald Marples, from the Congressional Research Service (a nonpartisan research group from the Library of Congress), corroborate this in their report titled “Tax Rates and Economic Growth,” which shows a 3.86% rate of growth in real GDP from 1950 to 1970 — compared to 2.94% between 1971 and 1986 — and 2.85% from 1987 to 2010.
That said, crucial events need to be acknowledged when analyzing history, such as the stagflation years of the mid-1970s, the dot-com bubble of the 1990s, and other subsequent events.
What Would It Mean for Your Wallet?
A considerable number of Americans stand to benefit from increased tax revenue. For instance, roughly 71 million Americans received Social Security benefits in 2023, according to the Social Security Administration (SSA). These recipients may see reduced benefits in the next decade if Congress fails to help the Social Security Trust Fund remain solvent (only the trust fund might become insolvent, not the entire Social Security program). Increasing taxes could very well close the funding gap, as noted in several studies, including the Committee for a Responsible Federal Budget.
Younger Americans also stand to benefit from improved public services and infrastructure, as critical investments in transportation, healthcare, and education may result in lower costs at the point of service. For example, there was a time when American students enjoyed affordable tuition rates, which were heavily subsidized by the federal government prior to the 1970s, according to an analysis by NPR. However, after that funding was taken away, fees skyrocketed in the decades that followed.
Potential Drawbacks to 70% Tax Rate
As Newton’s Third Law asserts, for every action, there is an opposite reaction. And despite the many potential benefits a 70% marginal tax rate could bring, there may be downsides to the economy and individuals’ wallets, too.
If current deficits continue without reforms, the Cato Institute warns that Americans can expect tax increases across the board, with the average worker paying a similar share of their income, comparable to what the average worker in the European Union (EU) pays. This paradigm shift, Cato argues, might disincentivize labor as evidenced by EU employees working ten fewer days annually compared to their American counterparts.
Additionally, entrepreneurship and investments could lag, since higher taxes reduce the financial rewards tied to risk.
As the public continues to debate taxation, one thing is clear: a 70% top marginal rate is not as crazy as it seems; in fact, the idea is as American as apple pie. What is less clear, however, are deeper questions about the role of government and how taxes should be distributed. In any case, these questions will be pivotal in upcoming elections, making a vigorous debate about taxation all the more necessary. Fortunately, Americans have plenty of time to consider these contentious issues before casting their next vote.
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Sources:
Pew Research Center, “Most Americans Continue to Favor Raising Taxes on Corporations, Higher-Income Households”
Internal Revenue Service, “Federal Income Tax Rates and Brackets”
FRED Economic Data, “Median Personal Income in the United States”
Social Security Administration, “Fast Facts & Figures About Social Security, 2024“
Congressional Research Service, “Tax Rates and Economic Growth”
Cato Institute, “A Bigger Government Means Giving Up Almost Half Your Paycheck“
NPR, “How The Cost Of College Went From Affordable To Sky-High”
This article originally appeared on GOBankingRates.com: What If Taxes Went to 70%?
