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

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        1The Real Lesson of 70 Percent Tax

                            Rates on Entrepreneurial Income

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.
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