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1 Scott A. Hodge, The Real Lesson of 70 Percent Tax Rates on Entrepreneurial Income 1 (2019)

handle is hein.taxfoundation/rletx0001 and id is 1 raw text is: 1The Real Lesson of 70 Percent Tax Rates on Entrepreneurial Income FISCAL FACT Scott A. Hodge No. 632 President Feb. 2019 Key Findings Recent debates over income inequality have focused on the role of higher income tax rates during the 1930s through the 1980s. Some assert these higher rates reduced income inequality, relative to today, when income tax rates are significantly lower. These arguments fail to consider that the high individual tax rates from 1950 through 1980 largely drove entrepreneurial business income out of the individual income tax system and into the corporate income tax system. This phenomenon reversed itself during the 1980s when the top individual income tax rate fell below the corporate rate and restrictions on the structure and participation in partnerships and S corporations eased. These trends suggest that the high personal income rates from 1950 through 1980 simply encouraged the rich to modify the composition of their income. Their wealth was still there during this period, just not accounted for on individual tax returns. The shifting composition of income claimed by the rich due to changes in tax laws explains this illusion. Focusing solely on the individual income tax data leads to a misjudgment on the historic level of inequality. The Tax Foundation is the nation's leading independent tax policy research organization. Since 1937, our research, analysis, and experts have informed smarter tax policy at the federal, state, and local levels. We are a 501(c)(3) nonprofit organization. ©2019 Tax Foundation Distributed under Creative Commons CC BY NC 4.0 Editor, Rachel Shuster Designer, Dan Carvajal Tax Foundation 1325 G Street, NW, Suite 950 Washington, DC 20005 202.464.6200 taxfoundation.org

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