The highest marginal tax rate was over 90%, but very very few people paid it. The tax code was loaded up with deductions, only direct compensation was taxed, and you could still easily convert wages into capital gains, which even in that time were significantly lower than wage rates.
The highest marginal tax rate was over 90%, but very very few people paid it.
More precisely, that was the marginal rate on income over $1 million/year. That would be about $5-6 million in today's dollars. Given much lower CEO compensation at the time, very few people encountered it. (And given those taxes, CEOs had less incentive to increase their salaries.)
The tax code was loaded up with deductions
Deductions have a tendency to accumulate over time. There were a bunch of deductions, but fewer than today.
only direct compensation was taxed, and you could still easily convert wages into capital gains
Theoretically true, but historically stock options were a much smaller portion of executive compensation than is the case today. See http://faculty.chicagobooth.edu/workshops/AppliedEcon/archiv... for a reference. (Incidentally their estimate is that only about 30% of the raise in CEO compensation is due to shifts in taxation policy.)
which even in that time were significantly lower than wage rates.
Massively so. If your ordinary taxes were over 50%, you could opt a 25% capital gains rate.
> (And given those taxes, CEOs had less incentive to increase their salaries.)
Of course. So they just gave themselves company cars and executive washrooms and million dollar desks.
> Deductions have a tendency to accumulate over time. There were a bunch of deductions, but fewer than today.
We got rid of a bunch in the early 80's. As a simple example, all interest (not just interest on primary housing) was deductible before then.
> but historically stock options were a much smaller portion of executive compensation than is the case today
I wasn't suggesting stock options. You don't have to rely on stock options to convert your salary into capital gains. If you were a doctor or a lawyer pulling down a lot of money, you just formed a company and left the money you weren't consuming immediately in the company's bank account.
Few people paid the 90% rate because the income bracket was so high that few people actually made enough money to fall into that bracket. The tax code had fewer deductions in the 1950s then it does now. All compensation was taxed back then, not just direct compensation. And it was much harder to convert wages into capital gains because they defined compensation much more strictly than they do now.
Capital gains rates were not lower than ordinary income rates, however, they used an "exclusion" system (similar to a deduction) that lowered the effective rates to what would be today's ordinary income rates.
Actually capital gains rates were actually lower for top income individuals.
More precisely, you could exclude half your capital gains income, or opt to have all of your capital gains taxed at an alternative rate of 25%. Most people would choose the former, but top earners could benefit from choosing the latter instead.
All compensation was taxed back then, not just direct compensation. And it was much harder to convert wages into capital gains because they defined compensation much more strictly than they do now.
This just isn't right. It was a significant change when, for example, the company car became a taxable benefit. Now employers can't pay for your schooling without paying taxes on it.
Almost everything (except for health insurance) gets taxed today.
