Peter Schiff: Rewinding 2013 Tax Rates to 1950s Can’t Work

While some "liberal pundits" have suggested the United States set 2013 tax rates for the rich back to the high rates of the 1950s, renowned economist Peter Schiff says that would simply result in the rich paying less than they do now.

Such prominent figures as investing guru Warren Buffett and The New York Times columnist Paul Krugman recently have made the argument that since the U.S. economy of the 1950s was booming despite high tax rates on the rich, tackling the fiscal cliff by raising taxes on the wealthy in 2013 should do no harm - and could actually help the economy.

Schiff, the CEO and chief global strategist of Euro Pacific Capital, says those who think we should adopt anything like the high 1950s-style tax rates - the top marginal rate was 91%, nearly triple today's 35% - haven't studied the whole picture.

"There's a myth out there propagated by people like Warren Buffett that the rich used to pay much higher rates of tax than they do today. The truth is the opposite," Schiff said Friday in a Daily Ticker video interview.

The Tax Rate Truth

Schiff, who is best known for predicting the collapse of the housing bubble and the 2008 financial crisis in his 2007 book "Crash Proof," explained that differences in the tax code from the 1950s reach far beyond just the tax rates.

"Back in the 1950s there was only one kind of income; now there's three," Schiff said, noting that today income earned from work is treated differently than capital gains from stocks or passive income such as dividends.

"Back then income was income. You could deduct losses in one category from gains in another category. Today you cannot do that," Schiff said.

The rich were familiar with, and made use of, a wide variety of tax shelters in that era - many of which were eliminated in the 1980s.

As a result, the wealthy of the 1950s were not paying at the levels suggested by the stratospheric tax rates of the era, Schiff said.

"In fact, if we really were going to go back to the tax code of the 1950s, we'd have to have massive tax cuts for the millionaires and billionaires and big tax increases for everybody else," Schiff said.

Using 2013 Tax Changes to "Soak the Rich'

While Peter Schiff thinks trying to use the high taxes of the past as a model for 2013 tax rates is foolish, he does see one historic parallel.

"When they first created [the federal income tax], the top rate was only 7%. It was sold to the public as a tax that would only hit the rich. It was to soak the rich, very similar to the debate we're having today," Schiff said.

The top tax rate was raised to 67% in 1917 to help pay for World War I, while the bottom rate doubled from 1% to 2%. Rates were cut in the 1920s, but rose again during the Great Depression and World War II.

"Relatively soon, it was middle-class Americans that were drowning in an income tax with rates much higher than what was reserved for the rich," Schiff said, referring to the ability of the wealthy to reduce their tax burden with shelters.

Schiff also rejected the idea that higher tax rates for the rich benefit the economy.

"It wasn't that the economy did well because of high taxes. The economy did well because we could avoid those high taxes," he said.

What's more, Schiff said, higher taxes on the rich are not the solution to the nation's huge $16 trillion debt and chronic budget deficits.

"The problem is right now we have all this government, and nobody is paying for it. Sure, the rich are paying for it - they're already paying more than their fair share - but unfortunately the middle class and working poor are getting a lot of government basically for nothing," he said.

For Peter Schiff, the answer to the debt problem is not to raise 2013 tax rates on the wealthy, but to either spread the pain through more income groups or cut government spending.

"I think that maybe if the middle class was asked to pay for it, instead of thinking they were going to get something for nothing, they wouldn't want all this government in the first place," Schiff said.

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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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