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FreeMarkets (91.80)

Were taxes higher in 1948?

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May 04, 2012 – Comments (15)

Math is hard.  To make it simple, talking heads like Krugman like to say things like (yes, I'm putting words in his mouth) "The tax rate in 1948 was 82% on the richest Americans and only 33% today.  For people with taxable income up to $4,000 it was 16%.  Today your first $12,000 of taxable income is only 10%."

See how easy that is!  I've just convinced you that rich people payed a lot more than they do today, and the average Joe contributed far more than you do today.  So get off the "TEA Party Express" and pay your fair share.  And please do NOT look into these numbers, because if you do you'll discover some problems.

For one, the average income in 1948 was $3,120 (SOURCE).  There was a standard 10% deduction for those not itemizing (those itemizing could subtract union dues, high health care costs, work clothes, etc.).  Lets assume you took the 10% because if you itemized lower than 10%, you would be an idiot not to take the 10%.  Your taxable income dropped $312 to $2,808.  Now we get to the tricky part - each family is different, and you were allowed a standard deduction was $600 per person.  A signle person would only deduct $600, but lets assume a "Beaver" home (stay at home Mom and two kids).  So a family of four, being supported on the average income automatically removed another $2,400 from their taxable income.  This now drops their Federal taxable income to $408.  At 16% they paid $65.28 (or 2.09% of their gross wages).

Fast forward to 2010.  The average wage was $26,364 (SOURCE). File a tax form as married, with two children, and you get a standard deduction of $16,200.  Your taxable income is $10,164.  At 10% you pay $1,016 in Federal taxable income, or 3.85%.

"So what?", Krugman responds hypothetically.  "The Federal government is taken a larger bite out of the average wage earners pocket, but 2% versus 4% isn't going to break the average Joe.  Plus he gets to drive on all those nicely paved Eisenhower freeways that didn't even exist in 1948!"

Let's forget the Krugman is a believer in global warming and just argued that driving from New York to California is a great societal leap, he loves to ignore inflation.  That average 1948 family had $3054.72 left over after Federal Taxes.  In 2010 money, assuming the gov't inflation numbers are correct (and they're NOT), $3,054.72 is worth $27,639 (SOURCE).  That means that an average wage earner in 1948 is left with $2,021 MORE than his current counterpart.

We haven't even TOUCHED the fact that the average worker today pays considerably higher sales taxes, state and local taxes, property taxes (passed on to renters in the form of higher rent) and car registration fees, etc.  We'll stick with just the Federal Income tax for Mr. Krugman's benefit.

"But wait?", you say "Haven't there been EXTREME productivity increases in worker output in the past 60+ years?  And if so, don't those translate into a LOWER cost of living?  How can it be that the average American worker has LESS today than his post WWII counterpart? "  You may want to read this blog for the answer.

We'll tackle the "Rich Question" posed above in our next blog.

15 Comments – Post Your Own

#1) On May 04, 2012 at 11:09 AM, CluckChicken (27.21) wrote:

"And please do NOT look into these numbers, because if you do you'll discover some problems."

Why are you not including all federal taxes?  Am I looking to close for your argument?

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#2) On May 04, 2012 at 1:11 PM, leohaas (32.01) wrote:

First, you imagine what Krugman would say. Then you argue, using incomparable and mislabeled data, that Krugman was wrong. Then you imagine some more about how Krugman would have defended himself against your allegation.

Using this line of attack, you can "prove" anybody wrong on just about any issue.

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#3) On May 04, 2012 at 1:15 PM, TMFMorgan (< 20) wrote:

Rather than make up what you assume he might say, why not actually quote from him? He talks a lot. There's plenty of material. 

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#4) On May 04, 2012 at 1:17 PM, FreeMarkets (91.80) wrote:

I'm not trying to beat Krugman in a hypothetical debate, just using him as an example of the whining he did when Ron Paul wiped him in their 13 minute debate on Bloomberg on April 30.  He wrote "everything Paul said about growth after World War II was wrong, but who will ever call him on it?"

Paul said we lowered taxes - which I proved in my last blog.  Now I'm comparing taxes today to what they were when taxes were higher, using Krugman as a voice.  But if you don't approve of this line of attack, why not disprove what I wrote?  Do you think taxes were higher in 1948 for the average wage earner or not?  If so, I'd like to see your data.

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#5) On May 04, 2012 at 1:24 PM, wangchung9000 (< 20) wrote:

Employee's share of FICA was 1% in 1948, vs. 7.65% now.  How do you account for that 6.65 point discrepency?

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#6) On May 04, 2012 at 1:26 PM, FreeMarkets (91.80) wrote:

wangchung9000 - I don't account for it at all.  This was just comparing Federal income tax, not FICA.  But you make a good point that beyond state, sales tax, and other taxes, FICA took a much bigger chung of the average persons wealth.  Thanks.

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#7) On May 04, 2012 at 1:34 PM, wangchung9000 (< 20) wrote:

Well I admit I'm entirely sure what you're driving at, but you seemed to be suggesting that federal taxes were lower in 1948 for your hypothetical family than they are now.  When you include payroll taxes into the calculation, that assumption doesn't seem to make sense.

From my quick look at the numbers, the federal government collects less tax revenue as a percentage of GDP in 2012 than it did in 1948, but low income workers pay a higher percentage of their income now than they did then.  Would you disagree witht that?

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#8) On May 04, 2012 at 2:28 PM, Mega (99.96) wrote:

Apples to oranges. The first source is median family income, the second source is median individual wages.

I also wonder whether these two numbers use a similar valuation for healthcare and pension benefits.

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#9) On May 04, 2012 at 2:54 PM, FreeMarkets (91.80) wrote:

@MegaShort - nice catch as I misread that.  The average income for a sole head of household in 1948 was $2,900 (SOURCE).  Therefore the new breakdown is as follows:
$2,900 - 10% = $2,610 - $2,400 = $210.  Taxed at 16% = $33.60 or 1.15% of gross income.

That leaves $2,866.40, equivalent to $25,935, leaving the family in 1948 with $587 more when adjusted using the gov'ts incorrectly calculated inflation numbers.

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#10) On May 04, 2012 at 2:55 PM, FreeMarkets (91.80) wrote:

@wangchung9000 - "Would you disagree witht that?"

Wait for the next post.

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#11) On May 04, 2012 at 3:42 PM, Mega (99.96) wrote:

Still apples to oranges.  The average income for a sole head of household was significantly higher than the median income for all individuals in the work force (men and women). From page 11, the median male worker earned $2396 and the median female worker earned $1009.

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#12) On May 04, 2012 at 3:52 PM, leohaas (32.01) wrote:

I have no idea if taxes today are higher than in 1948. I am not claiming this (or the opposite), so there is no burden of proof on me. That burden is on you.

What I read is that you postulate it, and then use complete and utter nonsense to "prove" it. I am merely pointing out your nonsense. For instance:

 - The 1948 numbers in your source are median family income; the 2010 numbers are median wages. You cannot compare the two (MegaShort points that out correctly). They are not the same. If you want to use family income as your basis, that is fine, but then you must do that for both years. Alternatively, if you want to use wages as your basis, that is OK too, but you'd need to use it for both years.
 - Even though both the 1948 and the 2010 numbers are median numbers, you refer to them as "average". That is plain wrong.
 - You assume that if you come up with a calculation for the average family that supports your conclusion, that therefore your conclusion must be correct for the entire population. Not so.
 - You adjust dollars for inflation, but then you knock the inflation numbers as not correct. You cannot build your argument on numbers you do not consider correct. Make up your mind: if you acknowledge the official numbers as correct, you can use them; if you consider them incorrect, then you cannot use them.

Bottom line: your whole method is wrong. Therefore, your conclusion is unsubstantiated.

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#13) On May 04, 2012 at 6:40 PM, outoffocus (22.80) wrote:

Did you count the EITC?  A family of 4 making 26000 would most likely qualify for the max EITC.  Which means not only would they not pay any taxes, they would probably get a refund between $4000 to $5000.

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#14) On May 04, 2012 at 6:48 PM, outoffocus (22.80) wrote:

If you want to do an apples to apples comparison you must take into account the various deductions and credits available to people.  They ultimately contribute to a taxpayers final effective tax rate. 

Based on our current tax code, you have to either be really rich or really poor in order for the various loopholes in the tax code to have any real tangible effect on your effective tax rate.  So the rich and the poor get most of the tax breaks and the middle class gets screwed.

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#15) On May 07, 2012 at 5:48 AM, JakilaTheHun (99.93) wrote:

This is why I generally ignore tax rates when analyzing "tax burden."  It's better to look at government revenues as a % of GDP (or as a % of some other relevant statistic). 

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