Eisenhower-era tax-avoidance strategies from… Eisenhower

I’ve been listening to Eisenhower in War and Peace. Supporters of Bernie Sanders and Hillary Clinton sometimes reference Eisenhower-era top marginal tax rates as evidence that the U.S. economy can thrive under a similar system. Eisenhower, himself, though, managed to avoid these rates. He was paid roughly $6 million in today’s dollars for writing Crusade in Europe (one thing that Eisenhower did not foresee was the rise of Islam as a military force!). Instead of the deal with the publisher being structured as advance-plus-royalties it was a lump sum for turning over the completed manuscript. Thus it qualified for a roughly 25 percent capital gains tax rate rather than a marginal ordinary income tax rate of 82 percent.

[Note that Eisenhower was generally in favor of trimming government spending, especially military spending (the biggest budget item of the time), so as not to “rob citizens of the fruits of their labors.” But he abhorred deficit spending/government borrowing, the U.S. was heavily indebted following World War II (though not as indebted in the 1950s as now), and therefore did not help Congress deliver on Republican campaign promises to cut tax rates.]

Another tax comparison from the book: A Federal gasoline tax of 4 cents/gallon was imposed in the mid-1950s to pay for building the Interstate Highway System. That works out to 36 cents/gallon in today’s mini-dollars. Current Federal gas tax is 18 cents/gallon, which turns out not to be enough to maintain the system (Heritage). (See “Cost to renovate Longfellow Bridge compared to its construction cost”)

4 Comments

  1. Al Lehotsky

    May 6, 2016 @ 1:58 pm

    1

    that $0.04/gal built the highways over a 40yr period. Now we have to maintain that system every year and we’ve underfunded maintenance, so a large number of bridges need replacement – so why are you surprised that $0.18/gal isn’t sufficient?

  2. philg

    May 6, 2016 @ 8:04 pm

    2

    Al: I would love to have you as a customer for the Greenspun Home Maintenance company. Every few years you can pay me the complete cost for building a new house from scratch, including acquiring the land, bringing in gravel for drainage, etc. In exchange I will keep the surface of your house freshly painted and reshingle the roof periodically. Sounds like we will both be delighted with the arrangement!

  3. Will Chang

    May 8, 2016 @ 5:15 pm

    3

    It has always seemed to me a gross injustice that capital gains is taxed at a lower rate than regular income, and no one in my limited circle of acquaintances can say anything to give me perspective on this. Why is it that capital gains, which is basically some rich guy making more money while sitting on his ass or doing laps in his pool, be taxed less than regular income, which is me and other working stiffs sweating our butts off to actually make things? Why do we want to incentivize moving money around (of dubious value to society at current levels, as repeated financial meltdowns demonstrate) over actually making something from nothing? And how is this situation even politically tenable, given that most Americans don’t have all that much in the way of savings? Why is it never discussed by either Republicans or Democrats?

  4. philg

    May 8, 2016 @ 8:22 pm

    4

    Will: Unlike in some other countries, capital gains are not adjusted for inflation. Thus there is no way to know what the rate is. On an asset purchased 50 years ago for $1000, for example, capital gains tax could be owed if the asset were sold today for $2000. The asset’s value had gone done, in real terms, but a substantial amount of tax was yet owed. The same amount of tax would be owed on an asset sold for $2000 today and purchased a year ago for $1000 (i.e., one that had actually gone up in real dollars).

    Do keep in mind that if you raise the capital gains tax rate you’ll shift money from investments with forced exits, such as venture capital, into investments that can be held indefinitely, e.g., Berkshire Hathaway (Warren Buffett hasn’t paid any tax for about 50 years; see http://www.barrons.com/articles/warren-buffetts-nifty-tax-loophole-1428726092 ) or simply an S&P 500 index fund. You’ll also see more of your fellow citizens going into business handling 1031 exchanges (see https://en.wikipedia.org/wiki/Internal_Revenue_Code_section_1031)

    If you’re tired of Silicon Valley culture, crank up the capital gains tax rate to 95 percent and it will go away! No more Ellen Paos!

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