Tax Update 4: Rates Vs. Taxes Paid

April 8, 2019Evergreen Q1 2019, News

Woodstock Quarterly Newsletter / Q2 2019

Déjà vu on Marginal Tax Rates?

From 1940 to 1980 the United States highest individual marginal tax rate never went below 70%.[1]  We have been there before.

“When top rates were high there was always a large gap between the stated rates and what the highest earners actually paid as a percentage of their income.”
From 1980 when the top rate was 70% and the average rate on the top 1% of earners was 23%, to 2018, the average rate has ranged from 19% to 25%, in spite of the top rate varying from 28% to 39.7%.  Individual taxpayers adapt to changing rates.

This adaption describes what people pay, the other side of the coin, meaning what the government receives, is even more tightly range bound.  As described by Hauser’s Law the percentage of US GDP paid by individual taxpayers has a mean of 7.6% with a standard deviation of .8% from 1946 to 2018.[2]

Historically, both individuals’ reactions to higher tax rates and the practical “take” by the government, support the statement that a “large and growing literature continues to support the claim that high marginal tax rates and big tax hikes are harmful to economic well-being”[3] and, practically, may not have much tax collection effect, as individuals scramble to pay what they think they should.

On another subject, beneficiary forms accurately filled out by clients are important both for inherited IRA accounts and for individually management accounts at Woodstock.  Clear instructions on how to handle these accounts by clients avoid “tax, legal and financial advisors trying to figure out how to preserve and distribute the funds” when the principal is no longer around.[4]  Our request to review your beneficiary form or your investment management agreement is part of the service array that we hope you will understand and appreciate.

If you or any of your other advisors have questions about the issues raised here, please contact your investment manager or one of us.

William H. Darling, CPA – Chairman & President
Jeanne M. FitzGerald, CPA – Tax Manager

[1] WSJ 1/19-20/2019
[2] Townhall Finance, 1/16/19
[3] WSJ 1/9/2019
[4] Financial Planning, November 2018