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What We Learned About 70% Tax Rates 50 Years Ago

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Milton Friedman explains what happened when federal tax rates actually reached seventy percent over fifty years ago. As tax rates go up, taxpayers have more of a reason to avoid paying those taxes. Loopholes go hand-in-hand with higher tax rates, which is why lower rates on a broader base of income leads to a more equitable system.

Discussion Questions

  1. What are the advantages of flat tax rate?
  2. How can a flat tax rate system improve the economy?

Additional Resources

  • Watch as Milton Friedman makes a case for the flat tax in “Firing Line with William F. Buckley Jr.: The Economic Crisis. Available here.
  • In “Capitalism and Freedom,” Milton Friedman provides the definitive statement of his immensely influential economic philosophy—one in which competitive capitalism serves as both a device for achieving economic freedom and a necessary condition for political freedom. Available here.
  • In “A View from the Hoover Archives: Milton Friedman on a Guaranteed Annual Income”, Jennifer Burns taps into the Hoover Library & Archives’ extensive Milton Friedman collection and brings the Nobel Prize-winning Hoover fellow’s work to bear on current policy debates about a universal basic income. Available here.
View Transcript

The people who say, we are in favor of graduated taxation have to go to the next step and say, do we now have it?

But if you look at the situation now, the graduated rates are a fake. The rates go from 14% to 70% at the top, but very few people pay the higher rates, because the income tax law is so full of loopholes. There are so many, uh, loopholes that very few people pay it.

If you look at the average rate paid by people in different income classes, that rate is higher in the middle-income classes than it is in the very highest income classes because the middle-income classes tend to be, have a much larger fraction of their income from wages and it’s harder to avoid taxes on wages. 

The higher income groups tend to have a larger fraction of their income from property, and therefore they can use capital gains, they can use state and local securities, etc.

Let’s suppose you made no change in the law, except you put a flat 19% rate in (all income) instead of 14 to 70, but left all the definitions. In fact you would raise a good deal more money than you do now. The reason for that is it wouldn’t pay people to get around the tax so much. Here’s a man who, hires an expensive accountant, sets up a trust, makes gifts in order to get out of a 50, or 60, or 70 percent rate. For 19 percent it wouldn’t be worth his while.