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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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  1. H. Craig Bradley | December 13, 2012

    USER PAYS ( For "Free Lunches")

    The occasional hiker or backpacker back in 1973 used to pay nothing to use the backcountry (Wilderness Areas) of any Western Nat'l Forest and camp out. Today its altogether different. Every hiker or backpacker and visitor must first buy an annual Recreational Pass for $35 (or weekly pass) and affix the decal in their car window, or be cited and pay a fine to the Federal District Court
    (Central Violations Bureau). The National Park Service has long charged all visitors to every National Park and Monument a weekly or seasonal entry fee (during regular business hours).

    Its high time that users of the interstate highway system or other infrastructure paid for by government funds a user fee to cover maintenance expenses in addition to current fees and/or taxes. In addition, its time to reconsider the merits of a national sales tax or VAT (Value Added Tax) to cover all the extra Federal government spending. In fact, its way past due that all citizens are made to realize in reality, there is no free lunch.

    • Joe Peeler | December 13, 2012

      "High time we have user fees of interstates and consider VAT?" We already have user fees for roads. Those who drive the most pay the most gasoline taxes.

      As far as a VAT or national sales tax, the govt. doesn't have a revenue problem (it actually gets too much), it has a spending problem.

      It's high time we start means testing for S.S. and Medicare.

      It's high time the govt. stop propping up tyrants overseas; nation-building; maintaining over 900 bases over the planet; and ending foreign-aid.

      It's high time we get rid of numerous govt. departments and agencies. I suggest Dept. of Interior, Dept. of Energy, Dept. of Commerce, Dept. of Education, and HUD just for starters. On day two we can end the Federal Reserve system.

      A VAT tax is a horrible idea. Europe has that and look at the mess they have with budget deficits. It just gives the politicians more rope to hang us with.

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