https://www.aier.org/article/real-history-american-income-tax

By Phillip W. Magness

The 70 percent income tax scheme of Rep. Alexandria Ocasio-Cortez and the closely related wealth tax proposal of Sen. Elizabeth Warren would take federal taxation into historically unprecedented territory. You would not know that though from listening to the academic supporters of this newly fashionable cause of progressive taxation.

To advocates of these policies such as economists Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, they simply seek to restore an allegedly lost progressive legacy of high income taxation from the early and middle twentieth century.

Piketty made this argument in the Boston Globe earlier this week, suggesting that the Ocasio-Cortez and Warren proposals simply correct a “historical amnesia” in place since 1980 when a succession of Republican presidents allegedly “turned their backs” on the true origins of income taxation.

Part of Piketty’s narrative rests on misleading statistics. He points to the high statutory tax rates of the mid-20th century, averaging 81 percent on the top income bracket between 1930 and 1980. Yet as we’ve discussed before, nobody actually paid those rates or anywhere close to them. The effective tax rate — that is, the portion of total income earnings that individuals actually pay to the government — was much lower in this same period. Using the early 1960s as a benchmark, it hovered just over 40 percent for $1 million earners despite an average statutory rate, absent deductions, of nearly twice that and a top marginal rate in excess of 90 percent.

But Piketty’s history is faulty on another count. According to his telling, income taxation itself was the original answer to spiraling inequality in the late 19th century:

Between 1880 and 1910, while the concentration of industrial and financial wealth was gaining momentum in the United States and the country was threatening to become almost as unequal as old Europe, a powerful political movement in favor of an improved distribution in wealth was developing. This led to the creation of a federal tax on income in 1913 and on inheritances in 1916.

Even Piketty’s basic historical narrative, however, does not hold up to scrutiny.

The Forgotten Origins of the Federal Income Tax Read the rest of this entry »