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Under FDR (and he inherited it from Hoover, one of the few good things to come out of Hoover's administration) the top tax rate was 90%. Most people paid a lesser rate but the top Richest 5% paid at a 90% tax rate. Now this sounds drastic, but another aspect of the law permitted the richest NOT to count as income 1/2 of any profits from any investment that they held for Five or more years. In effect the richest 5% of Americans paid an 45% tax rate (90% of 50%) on any investment held Five year on longer (This was called "long term Capital Gain).
Now, this was the Top Rate, something like 95% of Americans NEVER saw the top rates. The vast majority of people who did pay the top rate, received most if not all of their income from investments NOT wages or salary. Thus, with a few exceptions, only investments were affected by the 90% top rate (See below for some comments on such exceptions).
Anyway back to the problem. JFK reduced the 90% tax rate to 70%. "To encourage investments" (passed under Kennedy, but came into effect under LBJ). This was repeated by Reagan who eliminated the whole concept of Long Term Capital Gain when he reduced the top Tax rate to 35% (It is now 42%). One of the side affect of this was that holding an investment for Five years or longer is no longer advantageous. Under the pre-Reagan Tax rate, the Government received almost all of the benefits of any such short term investment, but the investors received most of the profits on any long term investment. Most CEOs received most of their income as some form of long term investment to only have to pay the top rate on 1/2 of the income. Day trading on the Stock Market was was NOT profitable for the people who had the money to do such games. This all changed with Reagan. After Reagan the profits you made today was taxed at the same rate as whatever you held for five years. Thus the profits for Companies for any three month period was as important to investors as the profits over the next 5-10-20 years. In the 1970s (Do to the effect of the above concept) almost all corporations thought in terms of 5-10-20 years, not what was going to be the profit for the next quarter. The reason was investors did NOT care what happened in the next quarter, if they sold the stock as a profit unless the investors held it five years, it was subject to 90% tax rate. On the other hand, what happened over the next 5-10-20 years were important to investors, for if the company had high profits over that time period, when the investors sold the stock after holding it five years, the profits on the sale was only taxed at an effective top rate of 45%.
Thus under Reagan the whole support for thinking in terms of long term was destroyed and we are reaping the cost of that change. Thus Corporations are now more worried about profits the next quarter then the next quarter century and it is all the result of the change of the tax code under Reagan.
Comments on exceptions to the concept most people affected by the 90% top rate were investors:
Now some people, whose income was NOT from investments were subject to the 90% tax rate. One examples were Movie Stars with high income, thus starting in the 1930s many "stars" wanted to get a part of the profits from the film instead of a salary, the salary, if high enough, was subject to the 90% tax rate, but the movie profits, being a long term investment, was taxed at the 45 effective rate (90% of 50%. Another example was people who received a a large payment to write a book. Now such book deals could be viewed as long term or short term even if the payment was made up front. In the Case of Eisenhower, Truman arranged for Eisenhower's post WWII memoirs to be called a long term investment and thus Eisenhower only paid 45% effective tax rate on the advance. When Truman wrote his memoirs in the 1950s he received a $200,000 advance check, but Eisenhower did NOT do anything to get the IRS to call it a long term investment and thus Truman had to pay most of it as
Income taxes (Truman had no other source of income at that time, except some speaking fees and a small National Guard pension, thus some of the $200,000 was taxed at lower rates, but since $200,000 was way above the cutoff for the 90% rate, most of the check went to the Treasury, for it did cost Truman money to write the book, i.e. a secretary, but those expenses for incurred in later tax years, Is suspect Truman did income average and reduced his subsequent years taxes, but not anywhere near the 50% disregard Eisenhower had received for his memoirs in the 1940s).
Please Note the above are exceptions, and given the IRS treatment of Eisenhower's memoirs the above "problems" with the 90% tax rate could be worked around (And Congress had written exceptions for both cases, including the whole concept of Income Averaging, but implementation was up to the IRS and as such the party in power could use those power of exceptions to punish people it did not like. In the case of Truman the abuse was clear, but Congress rather then take away the right of discretion (Which at its heart was always a good part of the law) finally passed a Presidential pension plan. The abuse was so clear that even Hoover, who was still alive and a multi-million heir himself, finally came around to support the concept of a Pension for Former President (Truman needed a source of Income, Hoover never did, but the abuse was that bad).
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