Thinking about taxes..................................

A recent Megan McArdle post, highlighting our likely disappointment with the latest governmental "big ideas," includes this:

One sort of suspects that the reason everyone is suddenly so gung-ho for universal preschool is that we haven't tried it yet, so it's at least plausible to claim that it will work. Republicans, meanwhile, are still talking about marginal tax cuts as if they could improve everything that is wrong with the economy when they demonstrably did not under George W. Bush.

While I will never claim to be a fan of higher taxes, it is important to note why the tax cuts of John F. Kennedy and Ronald Reagan were so successful in boosting the economy.  The rates were really high back then.  A marginal rate of 90% for the top bracket in 1960 for Kennedy to work with.  A marginal rate of  70% for the top bracket for Reagan to work with.  When George W, wanted to cut rates in 2000, the marginal rate for the top bracket was 40%.  Not much room for maneuvering. The following chart of the top bracket rates through 2008 paints the picture (a larger version can be found here).

Lest you think that all this lowering of tax rates has starved "the beast,"  governmental revenues have never been higher.  Of course, governmental spending has never been higher.

From practical experience, I can tell you that may of the high income earners in the 1970's avoided the 70% tax bite by participating in "tax shelter" investments.  I saw smart people invest in bad real estate deals simply because they would rather do that than write the check to Uncle Sam.  The best outcome of the more reasonable rates for the top brackets is that more people seem willing to just pay the tax and skip the "tax shelters."  At least that's been my experience.  Yours may vary.