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James P. de Bree Jr.: Setting the tax record straight

Posted: June 19, 2014 2:00 a.m.
Updated: June 19, 2014 2:00 a.m.
 

I am responding to the op-ed article that Gary Horton wrote (“Oh, the places our tax money goes”) that was published in the June 11 edition of The Signal.

In his article, Mr. Horton stated, “Decades ago, top personal and corporate income tax rates exceeded 80 percent. ... Then came Reagan, then Bush ...”

I am a CPA who has practiced for nearly 40 years, and I am very familiar with the history of the Internal Revenue Code. I believe that there are issues with Mr. Horton’s premise.

First, Mr. Horton refers to top personal tax rates. While it is true that the highest marginal tax rates have been as high as 90 percent, virtually nobody paid taxes at those rates.

When I started my career, I was earning less than $20,000 a year, but I paid more in taxes than most of my clients who earned mid- to high-six-figures.

In those days, it was easy to shelter and defer income.

While today’s top marginal rates are considerably lower than they were 60 years ago, the effective rate (i.e., the percentage of total income that is paid in tax) is considerably higher because tax shelters have been shut down and a myriad Byzantine rules have increased the amount of income that is subject to tax.

Second, Mr. Horton refers to rates exceeding 80 percent and then infers Reagan and Bush undid all of that.

Drafting the tax law has historically been a bipartisan endeavor. In fact, the highest marginal tax rates ever imposed on individuals was 90 percent.

As part of financing the war effort, in 1943 Congress increased the income tax rate to 90 percent on income in excess of $100,000.

That rate remained in effect until 1962, when a Democratic Congress at the urging of John Kennedy reduced the top rate to 70 percent.

A Democratic Congress encouraged by Richard Nixon dropped the rate to 50 percent on earned income in 1969 but retained the 70 percent rate on investment income.

So the rate-cutting did not start with Reagan or Bush.

Now let’s get to Reagan and Congress in 1981. The Senate was controlled by Republicans, but the House was controlled by Democrats.

At the time, the United States was in a terrible recession and the maximum tax rates were lowered to 50 percent on all income.

Because the government was spending at absurd levels resulting in record deficits, tax increases were passed in 1982, 1984, 1986, and 1988 (all Reagan years).

The Tax Reform Act of 1986 lowered tax rates significantly and reduced the highest rate of tax to 28 percent. But more importantly, it established a draconian system that increased the portion of a taxpayer’s income that is subject to tax.

Except for the 2003 “Bush” tax cuts, the subsequent tax rate changes have all been increases in the tax rate, yet the accounting methods for computing the income on which the tax is based remain unchanged.

So the bottom line is that today’s high-income individuals are paying tax at a much higher effective rate than they did when the “top individual rate exceeded 80 percent.”

But that point probably would not fit in nicely with the theme of Mr. Horton’s article.

James P. de Bree Jr. is a Valencia resident.

 

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