U.S. corporate and personal income tax reform is possibly upon us. As the White House and Congress negotiate, the media paints a polarized view, one way or another. Instead, let’s take a bigger perspective, and turn back the hands of time to the “good old days” of the 1950s, an era in the U.S. that still musters deep nostalgia. However, there’s one thing that most certainly was not better – tax rates.
Between 1950 and 1960, the highest marginal income tax rates ranged from 84.36% (1950) to 92% (1953). In fact, most of the decade was spent with the highest tax rate at 91% (Source: Tax Policy Center). These marginal income tax rates, or commonly referred to as tax brackets, show the percentage taken from your next dollar of taxable income above a specific threshold. Today, our highest marginal income tax rate sits at 39.60%, as it has since 2013.
If you used popular pundit rationale, you might think that there was devastating consequence for U.S. equity holders in the ‘50s due to these 90%+ tax rates. On the contrary, the S&P 500 Index had a price level return (for this article, we exclude stock dividend returns) of 260% (see Chart). Even more remarkably, there were not one, but two, economic recessions during this golden decade (seen in Chart as gray shaded areas). Regardless, stocks in the 1950’s performed very well.
During our most recent U.S. bull market, began in 2009, the S&P 500 price level is up only 184%. This is well behind the 1950’s decade performance, where top tax rates were twice as high with twice as many recessions. We could easily conclude that merely resetting to lower tax rates will hardly be a panacea for robust economic growth, as tax rates alone do not drive stock market prices.
The actual details on tax reform are far more important than the headlining rate. Higher tax rates with more freedom for expensing and gross income write-offs are a very good thing. Lower rates with fewer write-offs and flexibility would be an economic tragedy. So, the next time someone says that higher taxes are the death of an economy and business, remember the glorious 1950’s, and that the devil is in the tax reform details.
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