The 92% tax rate that nobody ever paid

In 1954, Frank Sinatra was on top of the world. He’d just won the Academy Award for Best Supporting Actor in From Here to Eternity — a comeback role that rescued his career after years of decline and a voice hemorrhage that nearly ended it all.

Hollywood was paying him handsomely again. But there was a problem. The top marginal income tax rate was 92%, and Sinatra was about to watch most of his comeback earnings disappear before a single penny ever hit his bank account.

So Ol’ Blue Eyes did what every major Hollywood star at the time was doing: he set up what was known as a “collapsible corporation.”

The tactic was simple. Instead of collecting his fee personally — where it would be taxed at 92% — Sinatra had the studio pay his corporation, which was taxed at roughly 50%. He’d take a modest salary out of the company. Then, when the picture wrapped, he’d sell the corporation’s stock and pay the 25% capital gains rate on the proceeds.

The 92% rate was the law. But in practice, it was a fiction.

Back in the 1950s, fewer than 10,000 households in the entire country — out of 57 million tax returns — earned enough to even reach the top bracket. And those who did had so many deductions and shelters available that the top 1% paid an effective federal income tax rate of just 16.9%.

I think this is important to point out because, just last week, TIME Magazine published an article titled “Tax the Rich. They’re Not Going Anywhere”. They argued that wealthy Americans are too “sticky” to flee, so cities and states should feel free to squeeze them.

New York’s mayor Zohran Mamdani wants an additional 2% tax on incomes over $1 million. California voters are expected to vote on a “one-time” 5% wealth tax on billionaires. TIME cheers them all on.

In Britain, the Labour government already abolished the “non-dom” regime — a 110-year-old policy that let wealthy foreigners shield overseas income from UK taxes. As a result of changing this program, Britain drove over 10,000 millionaires out of the country.

But rather than eat their humble pie and admit a policy failure, the left wing of their party is pushing for a new wealth tax. On top of that, they continue gaslight people and insisting, just like TIME magazine, that wealthy people don’t leave when tax rates rise.

Across the pond in America, Bernie Sanders, AOC, and Elizabeth Warren have been beating this drum for years— demanding that the wealthy pay their “fair share.”

What IS the fair share? They never say. They never commit to a number.

So let’s look at the numbers they keep ignoring.

In 2022, the top 1% of American taxpayers paid 40.4% of all federal income taxes, according to the Tax Foundation. The top 10% paid 72%. The bottom 50% paid 3%.

And the top 1% doesn’t just pay a large share — they pay a share wildly disproportionate to their income. They earned 22.4% of all adjusted gross income but shouldered 40.4% of the tax bill. That’s nearly double their proportional share.

This isn’t new. It’s been the trend for decades — and it runs in exactly the opposite direction from what the “fair share” crowd implies.

In 1980 (when the top marginal tax rate was 70%), the wealthiest taxpayers (the top 1%) paid 19% of all federal income taxes. Today, again, the top 1% pay 40.4% of the taxes, even though the highest marginal tax rate is much lower.

How? Because the Tax Reform Act of 1986 — a bipartisan deal signed by Ronald Reagan — made a simple trade: dramatically lower rates in exchange for closing the loopholes. No more passive loss write-offs zeroing out taxable income. No more converting salary into capital gains through shell corporations. No more Frank Sinatra deals.

The rates were lower, but there were fewer places to hide. And these changes to the tax code resulted in the wealthy paying MORE tax, not less.

Even if you go back to the days of 92% rates (which the Left loves to bring up), the effective rate for the top 0.1% was only 21%.

But even setting all of that aside — even if you could squeeze a few more percentage points out of the top 1% — it wouldn’t fix anything. The federal government is running $2 trillion annual deficits. Higher taxes are not the solution.

Cutting the deficit requires spending restraint. And economic growth.

Given Congress’s intransigence in cutting spending, growth is the easier option. But it a stable, predictable business environment with minimal bureaucracy.

Instead, we get an environment that changes every four years — sometimes every four weeks. One administration’s regulations get undone by the next. Businesses get sued over rules that didn’t exist two years ago.

Take the infamous Corporate Transparency Act.

Congress passed this law in 2021 requiring roughly 32 million small businesses to file “beneficial ownership” reports with FinCEN. The penalties for failure to do so were $500 per day in fines and up to two years in prison.

Never mind that the government already collects this information through K-1s, 1099-DIVs, and existing bank regulations. Never mind that large banks and publicly traded corporations were conveniently exempted.

The onus fell on small, family-owned businesses: the restaurant owner figuring out how to keep waitstaff from quitting, the small shop already buried in paperwork. Well, Congress gave them yet another form to fill out under threats of penalties and imprisonment.

But then the regulations changed— SEVEN TIMES in four months. A federal judge blocked the law. Three days later, an appeals court reversed him. Three days after that, a different panel reversed the reversal. Then the Supreme Court weighed in.

The Treasury Department kept issuing new deadlines to comply, and no business owner had any idea from one week to the next whether they were in compliance.

In the end, the White House simply canceled it— which was the right thing to do. But the next President might very well put it back in place.

The whole ethos was that every small business owner is a potential money launderer. Never mind the money laundering rules already on the books — rather than fix what wasn’t working, Congress just piled on more. That’s how you end up with a Code of Federal Regulations over 188,000 pages long.

That’s the real problem. Not that the wealthy aren’t paying enough. That the business environment in America is so needlessly complex, so maddeningly unstable, that it chokes the growth that would actually generate the revenue politicians claim to want.

If they spent as much energy making it easier to build a business as they do dreaming up new ways to “soak the rich,” the tax base would take care of itself.

Source

Simon Black is an international investor, entrepreneur and permanent traveler. His daily letter is both educational and entertaining, and we suggest that those who want unbiased, actionable information about global opportunities sign up for Sovereign Man’s free, actionable newsletter at http://www.SovereignMan.com.

From Simon Black of SovereignMan.com

Source: https://www.schiffsovereign.com/trends/the-92-tax-rate-that-nobody-ever-paid-154446/