Everyone loves the party game “Two Truths and a Lie,” where among three statements, you have to guess which one is false.
Tax Day is coming up soon: Can you guess which of these 3 statements about taxes is not true?
A. Lower tax refund amounts in 2019 compared to 2018 should be good news for taxpayers.
B. Effective tax rates on the very rich have dropped by more than half from the ninety percent tax rate imposed in the mid-1950s to the upper thirty percent effective tax rate today.
C. The high marginal tax rates of the 1950s applied only to a very few families as compared to the top marginal rate today.
Let’s see how you did!
A. TRUTH! Unless you are receiving a refundable tax credit, a tax refund at the end of the year means that you’ve loaned the federal government interest-free money. According to CNBC, had the withholding amount been calculated properly, you would have been able to save, pay down debt, or use it for emergencies. After the Tax Cuts and Jobs Act, the IRS recalculated the withholding tables, meaning that individuals got more income in their monthly checks from their employers—instead of loaning that money to the federal government for free.
B. LIE! According to a paper by none other than Thomas Piketty, between 1950 and 1959, under the 90 percent marginal tax rate (what the tax rate looked like on paper), the highest-earning 1 percent of Americans paid an effective tax rate (what people actually paid) of 42 percent. In 2014, the effective rate was 36.4 percent. There are several reasons for the discrepancy between the 90 percent tax rate and 42 percent effective tax rate for the top 1 percent of 1950s-era earners. For one thing, there were many more deductions and loopholes back then, and the tax impacted only a small proportion of taxpayers. For another, a high tax rate, like 90 percent, leads to tax avoidance (or the manipulation of income to shield it from taxation).
C. TRUTH! The over-90 percent marginal tax rate only took effect for incomes over $200,000—the equivalent of $2 million today—and impacted only about 10,000 families. Today’s top marginal tax rate of 37 percent applies much more broadly to families making over $612,351 a year.
As Americans consider various proposals to help working families, we need to have all the facts. The best tax proposals will aim to offer families the greatest degree of choice in how they save and spend their hard-earned income.