Proponents of tax increases argue that the top tax rate in the U.S. and other countries used to be much higher in the past — in the U.S., in 1961, it was 91% — and yet the economy still did fine. How much truth is there to this argument?
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Left-wing politicians who demand higher taxes on the rich argue that the U.S. had previously prospered when tax rates were very high, proving that high taxes do not harm the economy. And it is true: In the 1950s and early 1960s, the top federal personal income tax rate in the U.S. was a horrendous 91%, after which it was lowered to 70%. Under former President Ronald Reagan, it was then successively reduced to 28% by 1988 .
Even when the top tax rate was lowered to 70%, not much changed. Only 3,626 out of 75 million taxpayers actually paid taxes up to 70%. Interestingly, the actual percentage paid by the top 1% of earners in the U.S. was only 16.1% in 1962, when the top marginal rate was 91%. However, in 1988, when the top rate was only 28%, the percentage paid by the top 1% of earners had risen to 21.
The Reagan era tax cuts boosted economic growth rates. During the Reagan years, economic growth averaged 3.2% per year, compared to 2.8% during the Carter–Ford years and 2.1% during the Bush–Clinton years. The growth rate for the Reagan years includes the recession of the early 1980s, a side effect of reversing Carter’s high-inflation policies. From 1983 to 1989, gross domestic product grew by 3.8% a year, and by the end of Reagan’s second term, the U.S.
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