If the 1980-2014 graph was staggering, the 1946-1980 one is even more so. It shows that the uneven distribution of economic growth in recent decades is not the way things have always been.
In the 1950s and ’60s, poor and middle-income Americans actually saw greater income growth than rich ones. The big fat spike at the end of the chart doesn’t exist in that period. The richest of the rich got rather muted increases in income. And everyone’s income rose a great deal faster from 1946 to 1980 than the bottom 95 percent’s did from 1980 to 2014. The rich saw incomes rise more slowly then, but their incomes were still growing much faster than those of today’s middle class.
What explains this dramatic change? That part is much less well-known. But one theory, which Saez, Piketty, and Harvard economist Stefanie Stantcheva have floated, holds that very high marginal tax rates (the top rate on wages was 91 percent for most of the 1950s) discouraged the rich from making very large salaries. In particular, it prevented them from bargaining with their employers to divert money from shareholders or lower-ranked staffers into higher executive compensation.
Think of it this way. In 2017, the top federal income tax rate is 39.6 percent. So if a CEO convinces his company to raise his pay from $5 million to $6 million, he’ll get to keep $604,000 of that raise (I’m ignoring state and payroll taxes for the sake of simplicity). That’s a really healthy after-tax raise, so that CEO has a very big incentive to lobby for pay hikes like that. But in 1955, the top federal income tax rate was 91 percent. So that same pay raise would only net him $90,000. Not nothing, but a way, way smaller windfall. So back then, executives had less reason to try to fight to earn more, which kept down inequality.
Saez, Piketty, and Stantcheva argue that the main effect was to deter wage bargaining — that is, high earners used to be much less aggressive about fighting for raises. They don’t think the high tax rates actually stopped high earners from engaging in useful economic activity, or did much to harm economic growth.
Conservative and libertarian economists, naturally, disagree, and contend that rates that high have massive economic costs. The actual average tax rate that the richest Americans paid in the 1950s was only slightly higher than the average rate today (42 percent then versus 36.4 percent now); because there was less inequality, very few people were rich enough to pay the top rates, and there were many more deductions and loopholes. That also limited the amount of revenue the tax rates could raise for social programs.
But if nothing else, the Saez, Piketty, and Zucman research confirms that something really did change in the 1970s and ’80s, to make the economy less rewarding to the middle-class and poor and more rewarding to the rich. That’s an important finding, and given how careful their latest work is to include all sources of income, it’s going to be a hard one to rebut.
