A 99 YEAR HISTORY OF TAX RATES IN AMERICA

By Brian T. Lynch, MSW

OUR TAX STRUCTURE USE TO BE MUCH MORE PROGRESSIVE THAN IT IS TODAY.

(Note: Since I first published this blogpost in October of 2011 it has been my most viewed article. We are beyond the tax code's 100th anniversary and I have not updated this post until today, May 14, 2020. The reason for updating it now is a remarkable animated graphic on Twitter of the changes every year in the marginal tax rates from 1950 to the present. This prompted me to create a companion graphic showing the political party in power in the Executive branch and in Congress for the same period of time. This were added below with little additional commentary as they speak for the DATA.)

The Progressive Tax Code

Our progressive, or graduated income tax was implemented by Howard Taft in 1913.  The idea was to create a system where those who did well shouldered a greater responsibility for funding the government.  In fact, the original intent was to only tax the wealthiest citizens.  The income tax was never meant to burden the majority of wage earners.  The new law taxed individuals making $3,000 or couples making $4,000 per year. $4,000  at that time would be equivalent to about $100,000 per year in today’s dollars.  What the law did not take into account was inflation.  Much the same as is presently the case with the minimum alternative income tax, the original income tax brackets stayed constant every year while inflation and working-class wages slowly rose.  Eventually, income taxes became a burden to lower-wage earners as well as the rich.    [ http://www.buzzle.com/articles/the-controversial-history-of-the-graduate-income-tax.html ] 

The progressive nature of the income tax is achieved by creating multiple income tax brackets for rising levels of income.  Each tax bracket has a slightly higher tax rate.  Between 1913 and 1918 the number of tax brackets that applied to wealthy incomes rose to 56 brackets.  By 1940 that number of brackets fell to 24 and there it has more or less remained for the next 40 years.  

What did rise over this time period were the marginal tax rates.  By the 1950’s the top marginal tax rate for the wealthiest earners was 90 percent. The top marginal tax rate was gradually lowered over the next 30 years until it was at 70% in 1980.  In 1981 President Ronald Reagan collapsed the top 9 tax brackets to lowered the top marginal tax rate from 70% to 50%.  During his second term, he eliminated 10 more upper tax brackets dropping the top marginal tax rate from 50% to just 28%.  He also raised the tax rates on the lowest income earners, those who were originally not expected to contribute.  At the same time, tax breaks for the wealthiest Americans combined with huge jumps in military spending resulted in huge budget deficits and a large national debt that has been with us since.  

The top marginal tax rate for wage income was eventually raised back to 35% but not before capital gains income was stripped from the progressive tax code and separately taxed at a rate of just 15%.  Capital gains income represents the major source of income for the wealthiest Americans. So the original intent of the progressive tax code, that the tax burden should only fall on the wealthiest American’s, was turned upside down. 

For a glimpse of the problem with our current tax structure, see the US states map at the following URL to see how much more the bottom 20% are paying in taxes, as a percentage of income, over the top 1%.  
http://tiles.mapbox.com/occupy/map/TaxBurden

The graph below shows the 99-year history of tax rates for four income levels in the US. The data is adjusted for inflation and reflect the current value of the dollar.  Tax rates for those making one-million dollars are in blue, those making $100,000 are in pink, those making $50,000 (approx. median household income) is in brown, and those making $25,000 (half of all American making less than $26,364) are in black.  All rates are based on the married, filing jointly category.  The tax information begins in 1913 and continues through 2011.

See data source here: http://taxfoundation.org/article/us-federal-individual-income-tax-rates-history-1913-2011-nominal-and-inflation-adjusted-brackets

What the graphic says to me is that for most of the last 100 years the wealthiest Americans have been paying more taxes than they are today, a lot more.  Also, there was a period from around 1932 to 1988 when tax rates were lower for the working poor than for middle Americans.  I also noticed that beginning in the early 1980s the tax brackets for the wealthy began collapsing until 1987 when a person making a million dollars a year was paying the same tax rate as someone making $117,760 per year.  This had the effect of adding millions of taxpayers into the same federal tax bracket as the ultra-wealth.  From a political perspective, they became a single voting block on the issue of taxation.  Also note that the tax rates for the two lower incomes jumped significantly in 1942-1946 and has been relatively steady since decreasing only slightly during the Reagan administration when taxes on the wealthiest Americans began dropping sharply.  Remember that mantra in the '80s, "It's not what you make, it's what you keep."  This was never truer than for the wealthiest among us.

See Raw Data Here
http://www.taxfoundation.org/files/fed_individual_rate_history_nominal&adjusted-20110909.pdf

The Rise and Fall of the US Progressive Tax Structure

Below is a companion chart to the 99 Year History of Tax Rates in America  (Click Here to see chart).  This graph charts the number of tax brackets into which income was divided over the years.  Looking back, it is apparent that our progressive tax structure had many more tax brackets separating rich and poor for most or hour history.  There was a peek of 56 income tax brackets in 1918.  In 1924 (the Roaring 20's) that number was compressed to just 23 tax brackets.  The number of tax brackets fluctuated over the next 62 years but maintained an average of 25 brackets until the 1980's.

In 1981 the first of Ronald Regan's tax cuts were passed dropping the top tax rate from 70% to 50%.  Five years later his Tax Reform Act of 1986 dropped the top tax rate again to 28% while raising the bottom rate from 11% to 15% where it remains today.  The 1986 law also collapsed the number of tax brackets from 15 in 1984 to 5 in 1985.  While lowering the top tax rate for the rich from 70% to 28% was a huge boost for the wealthiest Americans, compressing the top 10 tax brackets helped assure that the changes would not be undone.  The reduction in tax brackets meant that the number of people in the top earners' bracket went from tens of thousands of the riches voters to many millions of voters including those with much more modest incomes. By lumping together people making over $300,000 with those earning many times that amount the change created a large voting block of voters who would oppose future tax hikes.

During these same years, the Regan administration began deregulating the banking and finance industries leading to more and more wealth-building opportunities for those already blessed with riches.  Ronald Reagan was following the economic path created by the economist, Milton Friedman, who, in turn, was influenced by the Objectivism philosophy of Ayn Rand.  Ayn Rand believed that altruism and self-sacrifice for others are evil.  See more here]

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ADDENDUM 5/14/2020:

The following video shows every change to the US Marginal Tax Brackets from 1950 to 2020. Note how the tax brackets for the wealthy (on the right side) drop over time while the tax brackets for the poor (left side) rise. This shows how the tax burden has been shifting from the wealthy to the poor and middle-class for the past 70 years. 

This next graph shows which political party was in control of the White House, the House of Representatives and the Senate during the same period of time, from 1950 to 2020. Republicans were fully in control of Congress for just four years during this period. The Democrats were fully in control for 20 years during this period and retained control of the House of Representatives for an additional 21 years since 1950.  The point here is that the decline of the progressive tax system and the shifting of the tax burden from the rich to the poor has been a bipartisan outcome. 

 http://www.aseyeseesit.blogspot.com/#!http://aseyeseesit.blogspot.com/2012/10/paul-ryans-hero-ayn-rand-w-mike-wallace.html 

Source Material:  See Raw Data Here, and the Tax Reform Act of 1986