Defining Rich VI: 1936 tax tables

Today we are continuing to look at the historical tax tables to see how we viewed and possibly defined rich. I introduced this idea with my post: Defining Rich III.
 
I found a source for all sorts of historical data from the Census Bureau. You can down load it or the better way is to click on the PDF file which brings up the Intro and then click on any of the listings of the table of contents which takes you to that set of PDF data.  For this posting regarding income data I am using this section.
 
The average weekly income for all manufacturing was $22.82 per week on 39.1 hours work. The highest paid was printing/publishing newspapers/periodicals at $35.15 per week on 37 hours work. The lowest was cotton goods at $13.80 per week on 37.5 hours of work.
 
In the non-manufacturing sector the I calculated the average weekly income to be $23.76 on 40.28 hours of work. The highest earnings were electric power/lights manufactured gas at $31.70 per week on 40.2 hours work. The lowest was hotels at $13.97 per week on 48.3 hours of work. For the Walmart greeter retail trade-general merchandising it was $17.51 per week on 40.8 hours work.
 
There were regional differences also. The most glaring is the north/south difference. The hourly wage ranges from 12.5 cents to 19 cents less if you worked in the south. The greatest differences being between the East South Central and the Pacific North.
The data uses an average of 1923 to 1925 to equal 100% for comparisons. Thus, 1936 weekly earnings were 89.7 % of that standard however they were 109.9 % adjusted for cost of living. Things were looking up having hit their lows in 1933.
 
Using my favorite money converter and to not let the numbers become to many and thus cause one’s mind to go blank, I converted the average hourly wage for the four categories listed:
 
 
Thus we have an annual income ranging from a high of $1827.80 per year for the newspaper worker to $717.60 per year for the cotton goods worker. These are the numbers you need to keep in mind as we look at the 1936 tax tables. These are the numbers that let us start to understand what we used to
consider rich.
 
The lowest tax rate in 1936 is 4% on incomes up to $4000. This $4000 appears to capture the income of the vast majority of workers in the nation in 1936. Remember, this income that is taxed is already adjusted for any deductions. Thus, if after all your deductions you had $4000 left over, you paid 4% of that in federal income tax. You paid $160 in taxes. Today, using the converted average income a person would be paying up to 15% of their adjusted income for federal income taxes. They would be paying 25% if they were receiving the equivalent share of GDP/capita.
 
The highest rate in 1936 is 79% on income over $5,000,000. OH MY GOD! Don’t panic folks. Converted as unskilled labor, this is $188,000,000 of adjusted gross income. That is a freakn’ pile of money after all deductions are taken. Still, I’m sure some are thinking I must be a real soak the rich kind of guy to brush off 79%. Here’s the thing. It’s a very big thing.  VERY BIG THING. This person is only paying that 79% on any money above the $5,000,000 after all deductions. They spent all the money they believed their business (s) needed, they gave all they wanted to charity, they took the housing credits, subtracted any losses on capital gains, gave to their children and any other activity that would subtract money from their gross income. When it was all done, that person still had $5,000,000 left over to be taxed at 79% and it is only that $1 (ONE DOLLAR) which put their income at $5,000,000 that will be taxed at 79%.
 
What we have forgotten, or have failed to honestly accept is that the old way of producing a tax schedule did not tax at a constant rate from the first dollar. Each time you broke into a new “tax bracket” only that money within that tax bracket was taxed at the brackets given rate. Thus, the higher up the tax rate ladder one was, the smaller their actual percentage of income paid for taxes became relative to the indexes specified rate. Frankly what this means is that the only person paying the full bracketed rate is the person at the bottom of the table. If you were in the 4% bracket, you paid a full 4% of your ADJUSTED gross income to the federal government. How convenient for those arguing to “simplify” the tax system that a huge portion of the tax paying public pays the full indexed rate and thus when you talk to them about a 79% tax rate they are prone to interpret that rate as being paid on all the money they earned. Ouch! How to move a populous made simple.
 
There were 33 brackets in 1936. When people talked about the “complexity” of the tax system they used to be talking about how many brackets there were. After all, the goal of the complainers is to get the “system” down to the lowest single rate they can buy. Interestingly enough, there is a flat rate in the 1936 table. You just had to be willing to really work hard to earn an income large enough to receive such a rate. It’s the top rate.
 
The following chart shows how this works. It is a chart of the percentages of the marginal rate verse the actual rate paid. Notice how there is a bulge in the middle. Those people got the biggest built in break from the marginal rate. I don’t know how to figure out how many people were within the bracket range of number 7 to 23, but it would be interesting to see if this was what we would consider the middle class.
 
 
 
What all this comes down to is a chart that looks as follows:
 
 
Notice that once we get to the 25th bracket the individual is paying more than 50% of their income in taxes. For shame people will say. How dare We the People take so much from that person. It’s stealing! NOT!
 
 
For out of this modern civilization economic royalists carved new dynasties. New kingdoms were built upon concentration of control over material things. Through new uses of corporations, banks and securities, new machinery of industry and agriculture, of labor and capital – all undreamed of by the Fathers – the whole structure of modern life was impressed into this royal service.
 
 
First, at the 25th bracket the adjusted gross income in today’s unskilled labor value is $9,420,000 per year. Remember, ADJUSTED GROSS INCOME. All deductions have been taken. There is nothing at this income that one could not have had at $7,540,000 (the converted income that taxes less than 50%) that is not just more of what they already have.
 
Second, at this level of income no one is doing it solely on their own. What we used to understand is that there is a point of income earning that stops being do to one’s labor and moves to being simply the capture of a greater share of the income earned off the commons. Haven’t hear that term “commons”. Ask a person from Massachusetts.  In the case of income, it is the money earned as a results of all the investments We the People have made.  In practice if you own a business and have employees, the road you used to get to your business is used by all the employees and thus you have received a share of their share of the use of the road. You have received a greater share of the road’s effect on economic activity without doing any extra work. You only had to pay your taxes…just like all your employees in order to have that road in place for your use. I believe this is why there was a point in the 1936 tax table at which your tax paid became greater than 50% and climbed steeply until you rang the income bell at which time your were rewarded with a flat rate on everything earned beyond the bell’s posted height.
 
Third, at this level of income the Constitution’s prime objective kicks in: equality of power. We are living the effects of having been taught away from this effect of money. I refer you back to my series looking at taxation from a justice perspective. Starting here going on here and finishing here.  I’ll just let what I ended that series with be my overall thoughts on why power and thus justice need to be part of the taxation discussion:
 
As a professional, I can understand the argument to separate the two issues via 2 professions. The concept of a profession is that it is specialized. As a thinking person and a citizen, the public discussion should not allow the issue of efficiency to dominate one profession’s focus while the issue of equity dominates another profession. We have to assure both equity and efficiency are discussed and decided upon in order to stay true to the preamble of the Constitution and minimize Thomas Jefferson’s observation of the citizens response.
 
There is one major point to learn from the charts above. If you want a progressive system, you need many tax brackets. The more steps there are the more fair and specifically addressed is any particular level of income. To compare the charts of 1936 to 2010, you can view the 2010 table here and the graph here.
 
Below is the chart constructed for the 1936 tax brackets. Next up is 1946.
 
 

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