US taxation trends in post war era | Macroeconomics | Khan Academy

Summary

The video discusses the historical relationship between per capita GDP growth and the after-tax income of the bottom 90% of earners since 1947. Initially, both metrics tracked closely, but a divergence began in the late '70s, with GDP growing faster than the income of lower earners. The video attributes this shift to changing tax policies, highlighting how effective tax rates for the highest earners have decreased significantly over time, particularly since the 1980s. Factors such as tax shelters and differing taxation on capital gains contribute to this trend, resulting in the highest earners paying lower effective tax rates than many lower-income groups.

Takeaways

• 📈 The growth in per capita GDP and after-tax income for the bottom 90% was closely aligned from 1947 until the late 1960s.
• 🔍 In the late 1970s, the trend shifted, showing a significant divergence where per capita GDP continued to grow faster than after-tax income for the bottom 90%.
• 💡 Tax policy changes are theorized to play a crucial role in the observed income trends over the decades.
• 🗓️ In 1950, the effective tax rate for the bottom 10% was about 16-17%, while the top 1% faced rates nearing 30%.
• 💰 By 1983, the top 400 earners were paying lower effective tax rates than those in the 99.99th percentile, marking a significant shift in tax burdens.
• 📊 Effective tax rates for higher income groups have generally decreased since the 1960s, exacerbating income inequality.
• 📉 As of 2018, the highest income earners paid lower effective tax rates than almost all other groups, reflecting changing income sources and tax strategies.
• 🏛️ The reduction in taxes on capital gains and corporate profits disproportionately benefits higher earners, contributing to income disparity.
• 🔑 The use of tax shelters by high-income earners indicates an increasing sophistication in tax avoidance strategies.
• ⚖️ Overall, the data suggests a correlation between decreasing tax rates for the wealthy and the stagnation of after-tax income growth for the bottom 90%.

Q & A

What is the primary focus of the video discussed in the transcript?

The primary focus is the relationship between per capita GDP growth and the after-tax income of the bottom 90% of earners since 1947, particularly how tax policy may have influenced this trend.

How did the after-tax income of the bottom 90% compare to per capita GDP from 1947 to the late 1960s?

From 1947 until the late 1960s, the after-tax income of the bottom 90% tracked closely with per capita GDP, sometimes growing even faster than it.

What significant trend occurred in the late 1970s regarding income growth?

In the late 1970s, the trend shifted, with per capita GDP continuing to grow at a higher rate than the after-tax income of the bottom 90%.

What data source does the instructor refer to when discussing changes in tax rates?

The instructor refers to data from a New York Times article that shows how the total tax rate, including federal, state, and local taxes, has changed over time for different income groups.

What were the effective tax rates for the bottom 10% and the top 400 earners in 1950?

In 1950, the bottom 10% had an effective tax rate of about 16-17%, while the top 400 earners had an effective tax rate exceeding 70%.

How did the effective tax rates for higher income groups change from 1980 onward?

From 1980 onward, effective tax rates for higher income groups continued to decline, with significant decreases observed by 1983.

By 2018, how did the tax rate of the top 400 compare to other income groups?

By 2018, the top 400 earners not only paid a lower effective tax rate than the bottom 90% but also lower than nearly all other income groups.

What factors contributed to the declining tax rates for the wealthiest earners?

Contributing factors include the ability of high-income earners to utilize tax shelters, the nature of their income from capital gains and corporate profits, which are taxed differently, and changes in estate tax laws.

What is the overall implication of the trends discussed in the video?

The overall implication is that tax policy changes may have contributed to increasing income inequality over the decades.

What was the effective tax rate for the 99.99th percentile earners in 1950 compared to 2018?

In 1950, the 99.99th percentile had an effective tax rate slightly above 50%, while by 2018, even the top 400 earners were paying a lower effective tax rate than nearly all income groups, indicating a significant reduction over time.