Why Not a 100% Tax Rate — It’s Not Unprecedented

“We have got to confiscate wealth,” Rep. John Nance Garner of Texas said in 1917. ¹ Garner, who served as vice president during Franklin D. Roosevelt’s first two terms, was talking about how to finance World War I. But some Democrats miss those good ol' days, and the Biden crowd is proposing ferocious tax increases that could rival or exceed Roosevelt’s.

The top federal income-tax rate rose to 77% in 1918 from 7% in 1913. Following World War I, the top rate came down, reaching just 25% from 1925-31. Rates were raised during the Great Depression to 64% in 1932 and 79% in 1936. In April 1942, Roosevelt proposed a top individual tax rate of 100%, declaring that amid “grave national danger, when all excess income should go to win the war, no American citizen ought to have a net income, after he has paid his taxes, of more than $25,000” (the equivalent of a bit more than $400,000 in 2021 dollars). The Treasury Department said this top rate would only affect 11,000 taxpayers. ²

Democrats in Congress pronounced it dead on arrival. Undeterred, Roosevelt issued an executive order under authority of the Price Control Act, requiring that “no salary shall be authorized...to the extent that it exceeds $25,000 after the payment of taxes.”³

Still, the top World War II rate reached 94%. But generous deductions and easier conversion of ordinary income into capital gains helped high-income taxpayers avoid paying that rate. ⁴

Top individual tax rates remained at 91% until 1964, when Congress passed John F. Kennedy’s tax reduction proposal and set the top rate at 70%. Richard Nixon carved out a 50% top rate on salary and self-employment (known as “earned income”) in 1969. Then Ronald Reagan pushed the rate on other income down to 50% too, and finally down to 28% in 1988. These reductions were accompanied by removing or altering deductions that had previously helped taxpayers avoid paying the top rate. Today’s Democrats aspire to raise rates to the skies while also limiting such offsetting exclusions.

We have come a long way from 1909, when the top corporate income-tax rate was a flat 1%, rising to 53% during World War II, and settling at 34% under Reagan. Thereafter, individual rates rose until Donald Trump brought rates down to 37% (plus the 3.8% Medicare tax) for individuals and 21% for corporations.

The Biden administration proposes to raise the top individual rate to 39.6% (plus 3.8%) and to 28% for corporations. From a historical perspective, these rates aren't unprecedented. But accounting for state and local income taxes and stacking on additional crushing Democratic tax proposals would push the rates far higher.

Some of the most burdensome proposals include imposing the 12.4% Social Security tax on earned income over $400,000 and nearly doubling the top rate on long-term capital gains, to 39.6%. Including the 3.8% Obamacare net investment income tax results in a top rate of 54.9% on earned income and 43.4% on income from investment and savings.

Add 13.3% state tax in California or 14.776% in New York City, and the marginal tax can hit somewhere between 56.7% and 69.8%. Additional proposals to limit the value of itemized deductions, including charitable contributions, would raise effective taxes even higher. Unless indexed for inflation, these high tax rates would over time ensnare an ever larger proportion of taxpayers.

But there are even more onerous taxes being proposed. ProPublica’s recent story, based on tax returns of wealthy individuals illegally leaked from the Internal Revenue Service, showed that some of the ultra-rich pay little income tax. ⁵ This feeds the belief that tax evasion by wealthy people is pervasive, but ProPublica deceptively treated unrealized asset appreciation as if it were income in an effort to drum up support for a wealth tax. This feeds the belief that tax evasion by wealthy people is pervasive. It energizes the proposal to increase the IRS budget by $80 billion which is premised on the questionable assumption that this could raise an eye-popping $700 billion from more tax audits. ⁶

Respected tax academics have proposed alternate remedies. The “supplemental expenditure tax” (SET) would raise more revenue, without the problems of valuation or lack of cash to pay posed by a wealth tax. SET would tax spending over $100,000 per person at graduated rates, up 50%. ⁷

Another academic has suggested that $1 trillion could be raised quickly in one year merely with a new regulation requiring just Apple, Amazon, Microsoft, and Google to capitalize intangible investments. How could they pay, given that their combined retained earnings total just $424 billion? ⁸

Some found false comfort that Mr. Biden’s tax proposals haven't yet mentioned estate and gift taxes, other than eliminating the “step-up basis” (untaxed capital gains at death) in excess of $1 million. But on the campaign trail, Mr. Biden proposed raising the top estate-tax rate to 45% from 40% while lowering the current $11.7 million per person exemption by some unstated amount, along with major exemption reductions to gift taxes. But Senator Bernie Sanders would go even further, drastically lowering the exclusion to $3.5 million with a top rate of 65%. ⁹

Proposals to tax “step-up basis” could result in a 68.9% combined capital gains rate plus estate tax on many successful investors, entrepreneurs and small-business owners. Estates of New York City residents would be subject to an additional 14.776% income and 16% estate tax, for a total tax of 80.7%.

Few small businesses or farms could survive these proposed taxes. Assets would need to be sold to raise the cash to pay the tax. Jobs would be lost to liquidations. Many retirement plans and family assets would have to be zeroed out. Tax is generally due in cash nine months after death, with installment provisions for large holdings in businesses and farms.

IRS statistics from 2018 show that the top 1% of taxpayers (over $540,000 in income) paid 40.1% of all individual income taxes; the top 5% (about $218,000 in income) paid 60.3%. The lowest 50% paid less than 3%. How much higher than 60% will satisfy calls for the rich to pay their “fair share”? ¹⁰

Many of the nation’s richest people say that they favor higher taxes on the wealthy. But they have their limits. “If I had to pay $20 billion, it's fine,” Bill Gates once quipped. “But when you say I should pay $100 billion, OK, then I’m starting to do a little math about what I have left over.”¹¹

¹ Bascom Timmons, Garner of Texas: A Personal History (NY: Harper & Brother Publishers, 1948), 85.

² "Franklin Roosevelt: Robert H. Jackson, That Man: An Insider’s Portrait of Franklin D. Roosevelt (NY: Oxford University Press: 2003), 132-133; Randolph Paul, Taxation in the United States, 294-295; “Treasury Drafts Profits ‘Ceiling’,” NYT, 26 Sep 1941. “Text of President’s Message to Congress,” NYT, 28 Apr 1942, 12; Paul, Taxation for Prosperity, 100-101, 105; Paul, Taxation in the United States, 301-302. Revisionists claim that Roosevelt wasn't serious, but Randolph Paul, the Treasury official responsible for presenting the $25,000 plan to Congress, writes in earnest detail how he gained a hearing on Capitol Hill to present the 100 percent supertax proposal.

³ Executive Order 9250 Establishing the Office of Economic Stabilization," issued on 3 October 1942.

⁴ Laura Saunders, How Wealthy Americans Like Jack Benny Avoided Paying a 70% Tax Rate, Wall Street Journal, 18 January 2019.

⁵ “The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income Tax,” ProPublica, 8 June 2021.

⁶ Martin A. Sullivan, “Can the IRS Raise an Extra $700 Billion From High-Income Tax Evaders?” Tax Notes Federal, Vol 171, 31 May 2021, p. 1357.

⁷ Victor Thuronyi, “All of the Above: How to Tax the Wealthy,” Tax Notes State, 19 April 2021. Victor Thuronyi was lead tax counsel for the IMF where he served from 1991 until 2014, and previously served at U.S. Treasury.

⁸ Calvin H. Johnson, “A Fair Income Tax on the Trillion-Dollar Behemoths,” Tax Notes Federal, Vol 171, 24 May 2021, p. 1199.

⁹ “S.994 - For the 99.5 Percent Act,” 117th Congress (2021-2022).

¹⁰ “Summary of the Latest Federal Income Tax Data, 2021 Update,” Tax Foundation, Fiscal Fact No. 743, February 2021.

¹¹ “Bill Gates Objects to Elizabeth Warren’s Wealth Tax, and She Offers to Explain,” NY Times, 7 November 2019.

END OF FOOTNOTES

A version of this article (without footnotes) was originally published in The Wall Street Journal on June 24, 2021, p. A17, with the title, “Biden Pushes for Wartime Tax Rates.”