What’s happened to America’s vast middle class?
A recently released study by a team of economists from the London School of Economics and U.C. Berkeley, shows that middle-class share of American Wealth has been shrinking for the better part of 30 plus years and fell to its lowest level since 1940. The following two charts illustrate this point.
So what’s happened? Is there a reason for this change? What was it that seemed to make things more equitable during those mid-20th century decades?
The answer may lie with the post Great-Depression tax rates instituted by a Democratic Party led Congress along with President Franklin Roosevelt.
The following chart tracks the highest marginal tax rate over roughly same time as the above charts. That’s the rate that wealthy earners pay after meeting a certain threshold usually around $250,000-$400,000 a year mark (the exact trigger point of the margin has been adjust over the years to reflect inflationary pressures). So after you make that much as a single earner, you will begin paying these higher rates.
Notice a pattern. The highest level of top marginal taxation tracks almost perfectly with the great middle class expansion of the mid-20th century.
How this is possible? Conservative economists tell us that if you tax too high and you inhibit growth. But here we can see plainly that the American middle-class benefited greatly during times of high marginal taxation.
The trick may be in the fact that few, if any, ever actually paid this rate.
What organization would pay an employee/executive an additional dollar in compensation if 90 percent of that dollar was going to end up in the federal coffers? Few did. So what happened to all the money that would have been spent on executive salaries during the Great Expansion? It was reinvested in the companies/organizations that had it to spend. They gave raises to workers, invested in marketing, R&D, and expanses operations.
Real economic growth, through proper, fair, progressive taxation. It really does work.