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What Bernie Sanders misses about Dwight Eisenhower's tax rates

At the Democratic presidential debate in Des Moines Saturday night, Bernie Sanders reiterated his support for raising the top income tax rate far above its 39.6 percent level. He wouldn't give an exact number, but he said it would be below 91 percent, its level for the most of Dwight Eisenhower's presidency (the rate peaked at 94 percent during World War II):

BERNIE SANDERS: We haven't come up with an exact number yet, but it will not be as high as the number under Dwight D. Eisenhower, which was 90 percent. I'm not that much of a socialist compared to Eisenhower.

It was the first laugh of the night. And Bernie's absolutely right. Very, very high tax rates on the very richest Americans are hardly unprecedented. While a quite tiny fraction of Americans paid the 91 percent top rate — the threshold was about $3.5 million in today's dollars, which, given how much poorer and more equal the country was then, many fewer people met — some did, and that likely played a significantly role in deterring extremely high executive salaries and keeping inequality low.

However, an important caveat is in order. Sanders has frequently called for the abolition of the preference of capital gains income, which is currently taxed at a top rate of 23.8 percent, well below the 39.6 percent ordinary top rate. He'd also add a 6.2 percent tax on capital gains above $250,000 to help pay for a Social Security expansion.

But a 91 percent tax rate on capital gains really would be historically unprecedented. From 1954 to 1961, during most of Eisenhower's presidency, the top rate on long-term capital gains was 25 percent. The gap between the ordinary rate and the capital gains rate was 66 points — more than four times larger than the current gap. And while capital gains rates have gone higher than that, they peaked at 39.875 percent, from 1976 to 1978.

Would going higher than historical rates cause unacceptable hits to growth? It's hard to say. Most economic modeling — even by fans of capital taxation like Thomas Piketty and Emmanuel Saez — suggests that some kind of preference should be given. That said, while it's quite hard to study the effects of taxes econometrically, given how many other factors affect economic growth, the empirical evidence for lower capital taxes helping growth is lacking.

But if Sanders wants to propose rates on capital gains in excess of 40 percent, he needs to defend that on its own terms, not through reference to history.

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