A half-century ago, a top automobile executive named George Romney — yes, Mitt’s father — turned down several big annual bonuses. He did so, he told his company’s board, because he believed that no executive should make more than $225,000 a year (which translates into almost $2 million today).
He worried that “the temptations of success” could distract people from more important matters, as he said to a biographer, T. George Harris. This belief seems to have stemmed from both Romney’s Mormon faith and a culture of financial restraint that was once commonplace in this country.
Romney didn’t try to make every dollar he could, or anywhere close to it. The same was true among many of his corporate peers. In the early 1960s, the typical chief executive at a large American company made only 20 times as much as the average worker, rather than the current 271-1 ratio. Today, some CEOs make $2 million in a single month.
The old culture of restraint had multiple causes, but one of them was the tax code. When Romney was saying no to bonuses, the top marginal tax rate was 91 percent. Even if he had accepted the bonuses, he would have kept only a sliver of them.
The high tax rates, in other words, didn’t affect only the post-tax incomes of the wealthy. The tax code also affected pretax incomes. As the economist Gabriel Zucman says, “It’s not worth it to try to earn $50 million in income when 90 cents out of an extra dollar goes to the IRS.”
The tax rates helped create a culture in which Americans found gargantuan incomes to be bizarre.
A few years after Romney turned down his bonuses from the American Motors Corp., Lyndon B. Johnson signed legislation that lowered the top marginal tax rate to 70 percent. Under Ronald Reagan, it dropped to 50 percent and kept falling. Since 1987, the top rate has hovered between 30 percent and 40 percent.
For more than 30 years now, the United States has lived with a top tax rate less than half as high as in George Romney’s day. And during those same three-plus decades, the pay of affluent Americans has soared. That’s not a coincidence. Corporate executives and others now have much more reason to fight for every last dollar.
The theory behind all those high-end tax cuts — a theory that I once found persuasive, I admit — was that it would unleash entrepreneurial energy: The lure of great wealth would inspire business leaders to work harder and smarter, and the economy would flourish.
The first half of that theory may well have come true. Many of the world’s most successful companies are American — not only Amazon, Apple, Facebook and Google, but also Exxon Mobil, Walmart, Johnson & Johnson and JPMorgan Chase. The second half of the theory, however, has been a bust. Most Americans have not flourished in the era of a reduced top-end tax rate.
Incomes for the middle class and poor have grown sluggishly since 1980, while the upper middle class has done modestly better. Only the wealthy have enjoyed the sort of healthy pay increases that had been the norm in the 1950s and ‘60s.
The decline in high-end tax rates has helped change the culture of money. George Romney, a highly successful and personally decent man who thought that making even a couple million dollars a year was unseemly, beget Mitt Romney, a highly successful and personally decent man who has made a couple hundred million dollars.
Across society, the most powerful members of organizations have fought to keep more money for themselves. They have usually won that fight, which has left less money for everyone else.
What would be the right top tax rate today? I don’t know the precise answer. A top rate of 90 percent clearly has the potential to drive away entrepreneurs. But I am convinced that the current top tax rate, 39.6 percent, is too low.
It has contributed to soaring inequality, with the affluent having received both the biggest pretax raises and the biggest tax cuts. Plus, there is no evidence that a modestly higher rate would hurt the economy. The recent president with the strongest economic record, Bill Clinton, increased the rate, while the one with the weakest economic record, George W. Bush, cut it.
This week, President Donald Trump and Congress will turn their attention to tax policy. After the failure of their health care bill, they are desperate for a legislative win and hope to pass a bill by year’s end. Of course, they are not considering a higher top tax rate.
The question is whether their plan will further cut taxes on the wealthy. The early evidence is that it will — enormously — while Trump pretends otherwise. If so, the tax bill will deserve the same fate as the health care plan: energetic and organized opposition, followed by defeat.
David Leonhardt is a columnist for The New York Times.