When the Top Tax Rate Was 91 Percent, and Who Actually Paid It

Picture a tax return from 1955, filed by a married couple with an enormous income. The form is short by modern standards, a few pages. Somewhere on the rate schedule printed in the instructions is a number that has become a kind of legend: 91 percent, the marginal rate on every dollar of taxable income above $400,000 for a couple filing jointly. Dwight Eisenhower, a Republican and a former general, was president. The economy was growing fast, unions were strong, and the gap between the top and everyone else was narrower than it had been in the Gilded Age or would be again. For progressives, the 91 percent rate has become shorthand for a time when the rich paid their share and the country prospered anyway. The real story is more complicated, more interesting and, in the end, more useful.

In short: In the 1950s, the top federal income tax rate was 91 or 92 percent, but it applied only to income above very high thresholds, and few households had much taxable income in that range once deductions, capital-gains treatment and shelters were counted. The rich still paid more in total tax than they do now in some estimates, largely through the corporate income tax and the estate tax. The lesson is not about a single rate; it is about how the whole system is built.

The rate that was real

The high rates were not a myth. They began as wartime measures. During the Second World War, the top marginal rate reached 94 percent, and after the war it settled at about 91 percent, with a short stretch at 92 percent in the early 1950s during the Korean War. It stayed in that range until the Revenue Act of 1964, passed after President Kennedy's assassination and signed by Lyndon Johnson, lowered it in steps to 70 percent.

A marginal rate applies only to the slice of income above a threshold, not to all income. In the 1950s, the top bracket started at $200,000 of taxable income for a single filer and $400,000 for a married couple filing jointly. Adjusted for inflation, those thresholds correspond to several million dollars in today's terms. A professional earning a comfortable living, a doctor or a successful shopkeeper, was nowhere near the top bracket. The 91 percent rate touched a very small number of households.

So the first correction to the legend is simple. The 91 percent rate was not a tax on the upper middle class or even the merely rich. It was aimed at the very top of the income ladder, at the kind of income produced by large fortunes and the highest-paid executives.

How the rates got so high

The 91 percent figure was a product of war, and of a political fight over who should pay for it. Before 1940, the federal income tax was paid by a small share of Americans. The Revenue Act of 1942 changed that, lowering exemptions so far that the income tax became a mass tax for the first time, reaching most working families. The next year, the Current Tax Payment Act of 1943 introduced withholding from paychecks, the system most workers still live under.

Franklin Roosevelt argued that if ordinary families were going to pay income tax and send their sons to fight, the very rich should give up something in proportion. In 1942 he proposed, in effect, a cap on individual income of $25,000 after taxes, with anything above it taxed away for the duration of the war. Congress refused. But the steep top rates that followed reflected the same principle: in a national emergency, the largest incomes would be asked to carry the heaviest share.

After the war, the rates came down only a little. The Cold War, the Korean War and the interstate highway program kept federal spending high, and both parties were wary of deficits. The high top rate survived in large part because it raised the question nobody wanted to answer in public: if not the top, then who?

That history matters for how we read the number. The 91 percent rate was not designed in a seminar on optimal taxation. It was the residue of a wartime bargain in which working families accepted a broad income tax and the richest accepted a steep one. Once the war ended, the bargain persisted for two decades out of habit, fiscal need and a sense of fairness that the war had made common.

How the very rich avoided the top rate

The second correction is that even those households rarely paid 91 percent on much of their money. The code of the 1950s was full of ways to keep income out of the top bracket.

Capital gains. Profits from selling assets held long enough, such as stock or real estate, were taxed at a maximum rate of 25 percent. For people whose wealth came from owning businesses and investments, the most important income was often capital gains, not wages.

Income splitting. Starting in 1948, married couples could file jointly and effectively split their income, which pushed more of it into lower brackets.

Shelters and deductions. Oil and gas investors could deduct intangible drilling costs and claim the depletion allowance. Real estate offered generous depreciation. Municipal bond interest was tax-exempt. Executives could receive compensation in forms taxed at lower rates or deferred to later years. Many of these preferences existed precisely because the top rates were so high; they were pressure valves.

Retained earnings. The owner of a closely held corporation could leave profits inside the company, where they were taxed at the corporate rate, rather than paying them out as dividends taxed at personal rates.

Economists who have studied the tax data of the period agree that the share of top-bracket income actually taxed at 91 percent was small. The average federal income tax rate paid by the highest earners was far below the headline rate.

Where the real money came from

That might suggest the rich paid little in the 1950s, but the picture changes when you look at the whole tax system rather than one line of the income tax.

The corporate income tax was much more important than it is now. The corporate rate was 52 percent for most of the decade, and corporate profits were taxed heavily before any money reached shareholders. Because ownership of stock was concentrated among the wealthy, a large share of the corporate tax ultimately came out of their pockets. The corporate tax also raised a much larger share of federal revenue than it does now.

The estate tax reached more large fortunes, with a top rate of 77 percent and less elaborate planning to avoid it than exists today.

This is where the economists diverge. Thomas Piketty, Emmanuel Saez and Gabriel Zucman, who built a well-known set of estimates of taxes paid across the income distribution, conclude that the effective total tax rate on the very richest Americans, counting corporate and estate taxes, was much higher in the 1950s than it is today. Other researchers, including Gerald Auten and David Splinter, have built alternative estimates that treat income and taxes differently and find a smaller decline over time. Their disagreement turns on technical choices: how to count income that never shows up on tax returns, how to assign the corporate tax, how to handle retirement savings.

Here is a fair reading of that debate. Both sides agree that the 91 percent rate was paid on far less income than its fame suggests. Both agree that the corporate tax was a much bigger part of the system. They disagree about how much the total burden on the top has fallen. The direction is not seriously disputed; the size is.

What the 1950s does not prove

Progressives sometimes use the 1950s as a simple argument: the top rate was 91 percent and the economy boomed, so high top rates do not hurt growth. That argument is too easy, and opponents are right to push back.

The postwar economy had advantages that had nothing to do with tax rates. The United States emerged from the war with its factories intact while much of Europe and Asia rebuilt. Pent-up demand, the G.I. Bill, the baby boom, cheap energy and the interstate highway system all drove growth. A country with that kind of tailwind could grow strongly under many tax regimes. The 1950s show that a high top rate is compatible with growth. They do not show that it causes growth.

The opposite argument, that the cut to 70 percent in 1964 and later to 28 percent in 1986 unleashed growth that the high rates had suppressed, runs into the same problem. Growth in the decades after the big cuts was not obviously faster than in the 1950s and 1960s, and the era of low top rates since 1980 has coincided with a sharp rise in the share of income going to the top. Correlation runs in both directions here, and neither side can claim the decade as proof.

The fair statement is this: the 1950s show that a much more progressive tax system was politically and economically possible in the United States, that a Republican president accepted it, and that it coexisted with broadly shared prosperity. That is a valuable fact. It is not a law of economics.

A reframe: rates are the wrong place to start

The fixation on the 91 percent figure can actually mislead progressives about what to fight for. A top rate on wages, by itself, does not reach most of the income of the very rich, who earn largely through the rising value of their assets. In the 1950s, as now, the people with the largest fortunes could arrange their affairs to avoid the top wage rate.

What made the 1950s system more progressive was the combination: a high corporate tax, a strong estate tax, fewer avenues for avoidance in some areas and a culture of executive pay that had not yet exploded. If the goal is for the very top to pay more, the questions that matter now are about the base, not the headline. How should unrealized gains be taxed when they pass to heirs, which today often escape income tax entirely through the step-up in basis? How strong should the estate tax be? What corporate rate, and how much enforcement? How much funding does the IRS need to audit complex returns?

Consider the step-up in basis as an example. When someone dies holding stock or real estate that has risen in value, the heirs inherit it at its current value, and the gain built up over the owner's lifetime is never taxed as income. For families whose wealth sits mostly in appreciated assets, that one rule can matter more than any top rate, because the income the rate would have reached is never realized at all.

Closing that gap would not require any new rate at all, only a decision that gains should be taxed once before they pass to the next generation. Those questions are less inspiring than a single dramatic number. They are also where the money is.

Progressives have sometimes made this harder for themselves by fighting over symbols. A proposal for a 70 or 90 percent top rate makes a headline, but it lets opponents argue about a rate that would raise relatively little if the base stays full of holes. A proposal to close the step-up in basis, raise the estate tax on the largest estates and fund enforcement raises more money and is harder to caricature.

The people behind the numbers

The 1950s were not a golden age for everyone. Black Americans were shut out of much of the prosperity by law and custom, women were channelled out of many jobs, and the safety net was thin. The progressive tax system of the period coexisted with deep exclusion. Any honest use of the era has to hold both facts.

What the decade does show is that the country once decided the very top should carry a heavy share of the cost of government, and that this was not a radical position. Eisenhower, who kept the top rates in place to pay for defense and the highways, was no socialist. The argument for asking more of the richest Americans today does not need to rest on nostalgia. It rests on the plain fact that wealth at the top has grown much faster than the incomes of most families, and that a fair system asks those with the most to pay a fair share.

What you can do

Tax policy is shaped by a few committees in Congress and the people who call them. Some places to start:

• Look at the numbers behind the argument. The inequality page shows the wealth shares of the top 1 percent and the bottom 50 percent, real wages and the minimum wage, so you can see how the distribution has changed since the high-rate era.
• Ask about the base, not just the rate. When you contact your representative and senators through the representatives lookup, ask specific questions: do they support taxing large unrealized gains at death, strengthening the estate tax and funding IRS enforcement on high-income returns?
• Follow tax bills as they move. The Congress page tracks bills and roll-call votes, so you can see how your members voted on tax legislation.
• Read deeper on the debate. The inequality and taxing the rich topic page collects analysis of wealth taxes, corporate rates and the distributional studies on both sides.