T3 High and Low range for Top Bracket

The top tax bracket affects how the top tax rate and capital gains tax rate correlate with growth. As the top bracket moves higher the growth maximizing marginal tax rate also moves higher.

The top tax rate appears to have a growth maximizing rate of 54% when the top bracket is below 80 times per-capita GDP and a maximizing rate of 66% when the top bracket is above 80. The scatter plots showing these correlations are in Figure G12. Eighty times 2010 per-capita GDP was about $3.8 million.

The capital gains tax rate appears to have a growth maximizing rate of 28.7% when the top bracket is below 900 times per-capita GDP and a growth maximizing rate of 91% when it is above 900. The scatter plots showing these correlations are in Figure G13. Nine hundred times 2010 per-capita GDP is about $42.6 million.

T2 Top Tax Bracket 1913-2010

The top tax bracket is the income level above which the top marginal tax rate applies. In 2010 the top bracket for married filing jointly couples was $373,650. The portion of ordinary family income above this level was taxed at the top rate of 35%. The first $373,650 of family income was taxed at the lower marginal rates.

The top bracket has ranged from $29,000 to $5 million or from 1.4 times per-capita GDP to 7648 times. Currently the bracket is about 7.9 times per-capita GDP. The top bracket as a multiple of per-capita GDP has a stronger correlation with growth and job creation than as a dollar amount or an inflation adjusted dollar amount.

The top bracket to some degree represents the scope and progressivity of the tax system. When it was at $5 million it directly affected very few people, but represented a system with over 30 tax brackets.

The top bracket has its strongest positive correlation to GDP growth leading 3 years. So a higher bracket this year would be a positive influence on GDP growth 3 years from now. The correlation is shown in Figures G9 and G10.

T1 Tax Rates 1913-2010

The top tax rate has ranged from 7% to 94%. Only 15 of the 98 years since 1913 have had a top rate lower than the current 35%.  The capital gains rate has ranged from 7% to 73%. Only 13 years have been lower than the current 15%. The current average of the top rate and capital gains rate at 25% is the lowest since the Great Depression.