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A Look at Historical Federal Tax Brackets
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Can you imagine that in 1913, the highest tax bracket in the United States was 7% and it applied to those folks who earned more than $500,000 a year? By 1916, the highest was 15% and applied to those who were banking more than $2 million a year and in 1917, that rate spiked to a whopping 67%! Now, getting a read on the max rate and income levels is a little misleading because you’re only looking at the tops of trees and not the forest itself… so I’m going to try to paint that forest for you and put some of those crazy numbers into context. (historical tax rates)
In reality, I’m only going to take a look at the highest tax bracket, which itself won’t give a complete picture of the income tax situation at that time but will enlighten us at least a little bit about the history of income taxation.
One big miss in that historical listing was the introduction of a tax on income in 1862 to help pay for the Civil War. As will become apparent in a few more paragraphs, instead of running a deficit and having a national debt, the government did the fiscally prudent thing of raising taxes. But, just like how the American public has racked up credit card and other debt, the government has led the way by borrowing instead of increasing collections (increased collections usually means those in power are no longer in power come the next election cycle). Anyway, back in 1913 there were only three brackets:
- Income under $300 paid no tax,
- Income between $300 and $10,000 was taxed at 3%,
- Income over $10,000 was taxed at 5%.
That income tax was repealed in 1872 and after some Supreme Court cases and an amendment to the Constitution (16th), income taxes reappeared in 1913, which corresponds with the start of the historical tax rate chart above.
1918: The top rate was in fact 77%, as the chart said, because tax rates were raised in order to help pay for World War I. Tax rates started to fall in the years afterwards.
1932: Rates had been falling the past few years until 1932 when the top rate was 63% (if you think this is bad, wait until the US was deep into World War II). This rate increased in the years leading up to and including World War II.
1945: 94% tax on income over $200,000 – absolutely astounding. It stayed over 90% until 1964 when it was lowered to 77% and had been consistently falling until …
1988: “Read my lips: no new taxes” said George H.W. Bush in 1988 – three years later the top rate was increased from 28% (in part due to a recession and legislative deadlock), where it had bottomed out, to 31%. As you may remember, President Bush Sr. wasn’t asked to return for a second term.
Implications: When a lot of people analyze their personal finance decisions, such as whether to contribute to a Roth or Traditional IRA, they claim that their taxes are likely to be less in the future because they’ll earn less – so they opt to take the tax deduction now. While there has been greater stability in the tax code in recent memory, I firmly believe that our taxes will go up in the near future simply because the government won’t have a choice (debt, social security, universal health care, etc.). If you look historically at the maximum tax rate, we’re only 60 years removed from a time when it was 94%. For every extra dollar you earned (over $200,000), you kept six cents (one thing to consider though is that $200,000 in 1944 is the equivalent of $2,290,909.09 in 2006 according to the Department of Labor’s Bureau of Labor Statistics inflation calculator).
Take a look at the charts, do a little deeper research than I have done on income taxes (especially all the exceptions and breaks), and come up with your own conclusions (and please share your opinion!).
The historical information was compiled from a bunch of random websites and trusty Wikipedia.
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“That income tax was repealed in 1972″… I’m assuming this should be 1872?
Hahah, yeah it should be 1872… Thanks!
Interesting research and historical summary!
I agree with your conclusion that the federal government is likely to have to raise taxes during our lifetime to fund the many liabilities that are building up. It certainly doesn’t seem wise to assume that the tax code will remain static over the next 20-50 years. But I think it’s possible some of that new revenue will be in the form of a national sales tax, a VAT, or some other mechanism other than income taxes.
As I understand it, the Roth shelters the investment return from future income taxation, but if the tax structure changes, we may be taxed on that return in other ways. I’m not at all against the Roth – my wife and I certainly contribute to ours and I wish my employer offered a Roth 401(k) option; but it seems it may be wise to hedge one’s tax strategy by contributing to both Roth and standard accounts (401(k), 403(b), ‘Normal’ IRA).
That certainly won’t minimize the eventual tax bite – one strategy or the other will turn out to be best, but I’m not sure those of us in our early saving years can accurately predict which will turn out to be optimal. At any rate, it’s probably not a great idea to depend too heavily on a Roth when estimating the tax bite in retirement.
Just my thoughts for the day. Comments or discussion welcome.
Hi Aaron,
It is my understanding that the difference between a Roth IRA and a standard IRA is that the former uses after-tax dollars as contributions and the latter uses pre-tax dollars as contributions. Since Roth contributions have been taxed once they are exempt from taxation when withdrawn. This includes any gains. Qualified withdrawals from a Roth are exempt from any personal tax, period (as the law stands now.)
That said, in my opinion it is always better to maximize your 401(k) before investing in any other IRA type product. This statement assumes your employer offers matching funds to you 401(k) contribution. Matching funds provide instant return on your money. Over the years this free money (matching contributions) could compound into quite a sum!! But, funds withdrawn from a 401(k) account are taxed at your current rate when withdrawn, the principle as well as any gains.The favorable tax treatment of 401(k) contributions is why they are restricted in amount.
These are my opinions based upon the way I understand the system currently. All of this could change with the stroke of a Presidential pen! Under the current legal environment regarding IRA and personal retirement accounts, it is always better to defer any tax payment to when you are of the age and income that dictates your lowest tax exposure.
The tax rates between 1945 and the 1960s were insanely high. However, I remember hearing that many more tax deductions were allowed back then than are currently allowed. So the actual tax rates that very wealthy people paid must have been substantially lower than the rates listed (although even accounting for deductions, it had to be higher than it is today).
I can’t imagine the tax rates actually being 94% (but then again, how many folks are earning the equivalent of $2.9M?) without some sort of magic going on underneath.
I did some analysis of whether a 401K is really a good deal using future tax rates a reason why it could backfire. The way I see it, I’m basically opting out of paying today’s tax for tomorrow’s tax. I think I get a little extra compounding with that deferred tax.
On the other side of the coin, if I saved that money after tax, I could put it in some dividend earning investments and pay dividend and long capital gains taxes which seem to be less than my current income tax level.
Just a thought, I need to talk to my tax specialist about this. Before I do, I need to find a tax specialist
.
This is pretty interesting. I’m in the “gray” area (28% bracket) where I hear — from some — that its better for me to invest in a Roth, and — from others — that I should stick with a traditional account. Seems like this historical data gives credence to going with a Roth.
Weekly Roundup – 01/19/07
Here’s a quick look at some of the personal finance articles that caught my eye over the past week:
Flexo is thinking about dumping NetFlix. My wife and I actually go ’round and ’round about this same thing. I don’t think we&#…
Trouble is, it’s all idle speculation anyway. How well can you predict the actions of a gang of thieves so intrinsically dishonorable that they’ll bill you for the gun they used to rob you with? That’s how well you can predict future tax rates.
I wouldn’t depend on currently-promised tax exemption on gains in a Roth account being honored in the future. Nor would I depend on any other current promise. Which is why I’m glad I have the option of keeping almost all my liquid capital outside the United States and not subject to US taxes until I repatriate it as income. It’s a real shame that the method by which I accomplish this legally is unavailable to most people.
Sure, I have a 401k at work and an IRA outside it…no sense wasting an opportunity for matching funds. But I make no assumptions about what the tax situation is going to be 11 years from now when the Social Security fraud is exposed so flagrantly that even the Democrats won’t be able to pretend the Trust Fund is real anymore.
Great article, Jim! For the record, when I start making over 2.3 mil per year, remind me not to complain about my tax rate..
Also interesting comments, especially from those suspicious of the value of the 401(k). I had not previously thought about the effect of increased tax rates.
Jim, why has the date magically changed on this post?
When I upgraded to WordPress 2.1, I saw that my carriage returns (br’s) were being lost somehow. So, I put them back into this post and updated the date – well I found out the reason they were being lost was because of some hiccups with the Markdown plugin and so I disabled the plugin.
I always find it interesting to note that some of the times when the top tax rate was the highest were also times of great economic prosperity. I’m not trying to say that high taxes on the wealthiest people leads to prosperity as a direct cause and effect– but they are not as incompatible with prosperity as some people would have you believe.
Interesting thing about contributing to regular IRAs, 401Ks and 403Cs in the belief that your taxes will go down after you retire because your earnings will be less: They may NOT be less. If you’ve squirreled away enough in savings, taxes on the proceeds might even be more. For sure, I can’t afford to live on less than the State of Arizona is paying me now; to retire, I’ll need enough in savings to generate about what I earn now, less the $800 a month projected from Social Security. So my taxes would be the same.
But…when I die, whatever is left in those tax-deferred savings instruments will be hugely taxable for my estate. My son will inherit a small fraction of a lifetime’s worth of scrimping and scrounging. The only way we baby-boomers can help our kids stay in the middle class will be to pass assets to them. So if you’re an old bat like me and you’d like to pass financial security along to your hypereducated kids who are watching living-wage jobs disappear and expecting to spend their lives in low-paid dead-end jobs while taxes rise to orbital levels, you’re better off with Roth IRAs or even ordinary boring non-tax-deferred mutual funds, so that your estate will pass to the kids with the lowest possible tax gouge.
I wish that link were updated with the 2001-2006 information. Heck, there’s a 10% bracket, and a 33% bracket now!
Glad to see I’m not the only one perplexed by taxes, IRA’s, conversions, etc. I’m torn between converting my traditional IRA funds to Roth. At 55 does it make sense for me to convert now? I can pay the taxes with outside funds. Then there’s the question of the 0% tax on long term capital gains starting in 2008 for people in the 10 and 15% tax bracket. I was forced to retire early, I have enough savings to last till I’m 59 1/2 and start drawing from a large annuity but my cash savings does generate taxes. How much long term capital gains can I redeem tax free per year? The information online is so vague I don’t have a clue. All I’m certain of is one way or another I’ll end up paying more than my fair share.
Thanks for the history on tax rates and brackets. Comparing this to economic growth proves interesting. From 1981 when Reagan cut taxes through 2007 GDP annualized growing 3.05% a year. The top marginal rate averaged 39.7% for this period. From 1947 to 1981 growth annualized 3.63% while the top tax rate averaged 80%.
An important difference between the high top tax rate, high growth period and the low top rate below average growth period is the tax bracket the top rate applied to. In the faster growth period the top bracket averaged 97 times per-capita GDP. In the recent slow growth period the top bracket has only averaged 7.2 times per-capita GDP. Today 97 times per-capita GDP would be, $4,446,700 vs. our top bracket of $357,701. IF you measure by economic vitality, the Reagan revolution looks like a dud to me. We probably would be better off with a higher top tax rate and a dramatically higher bracket.
If the tax on income over $200,000 was 94% what was the tax on the first $199,000?
@mikef: There were a lot of tax brackets in 1954. The lowest rate was 23% if you earned $0 to $2000. You can see a full list in this spreadsheet by the Brookings Institution, navigate through the tabs at the bottom.
Thanks Jim,
What I’m confused about is if a guy made $250,000 In 1945 the $50,000 over $200,000 was taxed at 94%, what rate was the first $200,000 taxed at?
There are some historical details missing. When the tax rate (across the board) is lowered, people of all income brackets become less concerned about tax relief and tax shelters. If you look at the periods where taxes were dramatically reduced, especially for the rich, the amount thay paid in taxes increased, even though their tax rate was decreased.
Historically, there has been more money in the economy when the tax rates are lower. The economy is like a large company or corporation. If you take money out of the company (increase taxes), how do you expect the company to grow?
When the rich get richer, the poor do better, because the rich are more frivolous with their money. When you start taking money away from the rich, through taxes, they become, relatively, frugal.
Dale, your argument flies in the face of current evidence. We are really interested in what you are basing your argument on. Even David Stockman has pronounced the curent tax scheme as disastrous for America. CEO pay is now well over 400 times the pay of their workers. And, this seems alright to you as middle class income has flatlined over the last ten years?
Tax rates have been lower for the past ten years than th-ey have been since 1932 (with the exception of the recesson-inducing G. H. W. Bush Economy, 88-92), and the rich are richer than they have ever been, however, they are, definitively, NOT creating jobs. There is ZERO dispute on that fact. The lie that the poor do better when the rich keep their money is a large part of the perversity that has poisoned this nation’s future.
Please post the research you have done to arrive at your conclusion.
What is it to you what a company pays to its highest leader (CEO)? Start your own company and pay the person you put in charge $1,000 a year! See where that gets you.
So he should pay a billion dollars and he will get there much faster like Lehman brothers? To pay that kind of money he has to be con artist forming a public corporation using public money and bribe the politicians to bail him out after he ransacks the business and the economy.
Anyone know the other tax brackets for 1944-1945?
Nevermind, I found them.
What effect does not “continuing” the Bush tax cuts have? I was that these cuts expired but I do not see much difference in the tax tables between 2009 and the estimated for 2010.
The income tax rates will be the same but others will change. For example, capital gains will be taxed differently than they are now.
will ever tax rates decrease? by the way it is going now, that looks highly unlikely.
Tax rates won’t go down. They most certainly go up since the official US debt is over $12 trillion. The unfunded liability (debt) of Social inSecurity, Medicare, Medicaid and the government pensions is between $50 and 100 trillion depending on who is doing the calculations. Our politicians in both parties have no desire to get spending under control. They want to buy votes. Therefore tax rates must go up.
To combat this, we need to convert our retirement income to a tax free basis in order to survive. Roth IRA’s and Roth 401K’s are good starts. Even better is an index universal life policy (IUL). You get tax free build up and withdrawals and the cash value grows with the stock market (usually 2-13%) and you will have no losing years. You can also become your own banker and pay interest to your IUL and not the bank for a car loan.
These tax tables really need to adjusted for inflation in order to do a meaningfull analysis. I’m guessing a 16k 1951 salary is equal to 100k today. If that is the case then the tax rate is the roughly the same (30%) for someone making 100k today.
The dramatically decreasing tax rates from the 1970s has fueled unprecendented financial gain to the top 1% wealth group in the US and that is one major reason why the middle class is shrinking.
Note: countries with a small middle class usually have serious social strife and danger.
Notice how much the marginal rates for the top brackets were cut. For typical working persons’ brackets the cuts usually were much less, but, especially during the Reagan era of tax cuts, many deductions were eliminated, essentially making working class tax cuts zero.
I used to be able to find
IRS Income /year ..since when-ever
and S.Security Income vs Pay-Out
Now these PUBLIC numbers seem well Hidden
Do you have any URL’s ?
Debt-to-the-Penny (Debt-History)
shows the LAST Debt reduction (yr-to-yr)
was Pres. Gen Dwight Eisenhower 1957..
NOT what the media may have last presented
You have to understand, the top tax rate is not there for people to actually pay, it is to get people to invest in business and to dissuade super-huge salaries.
In short, if you made enough to get hit at the 94%, you’d want to do everything you can to drop your income, right? So you’d found a company, or take your salary in stock which means you’d be paid dividends, which is taxed at the lower capital gains. You’d be invested in your work, no point in jumping ship with a golden parachute if you then get taxed so heavily that you only get a fraction of it, yes?
does this mean that loweriong tax rates on top incomes create jobs?
Higher tax rates encourage investing in your own company.(i.e. hiring new employees, so you can deduct the cost of the wages off your taxable income)
Lower tax rates encourage a business owner to take their profits and hoard them since they don’t have to pay as much in taxes.
That’s why business have so much capitol, and aren’t hiring anybody. The Bush tax cuts have encouraged this practice.
No wonder you want to remain anonymous, with an illogical conclusion such as the one you’ve drawn there.
First, cash held by a corporation is capital not capitol. The capitol is that big fancy building with the columns on it where your state legislature does their business.
Next, higher tax rates discourage me from hiring employees. In fact, the new health care bill inflicts my business with new taxes and fewer business opportunities. For example, my all commission sales business is down by about 70% since August of 2008. My husband lost his job in April of 2009, and in his field of residential design, there is almost 90% unemployment. Amidst this economic adversity, I have done everything in my power to retain my assistant. But the increases in health care costs that are coming, coupled with the new taxes that are built in to much of the new legislation, buried deep within, are very likely to result in me having to lay off my assistant. THere simply isn’t enough revenue to pay all these fun new fees and to keep her! So- boom- another middle class job bites the dust, courtesy of President Obama and his fiendish friends Nancy Pelousi and Harry Reid.
I am a small business person with a corporation. My corporation provides 2 jobs, and the “change” the president has begun to straddle me with is putting one employee out in the cold. If my tax burden/rate were reduced, I would be able to offer her more hours, more time on the job. But higher taxes to my corporation mean less money for me to spend on my advertising and supply vendors, and less money to spend on my employees wages, and therefore, less money out in circulation for all of my vendors and my employee. This is the part of the equation that those currently in power are not grasping. This is why Obama’s economic advisors are advising that he renew the Bush Tax Cuts and dropping like flies from their administration posts. Oy!
CapitalistMom, I sympathize with your family’s financial circumstances. However, I wonder if your and your husband’s economic woes are aren’t more a reflection of the overall economy that this administration inherited than imagined or potential future tax impact? I wonder if you blame your husband’s unemployment on Obama, only in office 1-2 months when he lost his job? I wonder if your company is paying your staff’s health care insurance? If so, you should have been up on a soapbox advocating for health care reform to help reduce your liability and that of other small businesses like yours. If you weren’t advocating reform, you are part of the problem. If you don’t pay for your staff’s health care, with the rapidly escalating costs how is your staff going to pay for their health care without substantial salary appreciation, probably larger than the taxes that you anticipate coming? As far as Obama’s staff jumping ship, you must have forgotten the exodus of staff that left Bush’s administration. Oy!
The solution to this problem is simple: we need a wealth tax.
I make about $5 million per year and dont mind paying a higher percent of tax than people that make less. (I am paying the top rate of 35% federal and another 9.6% for California state). That is about half of my income going to taxes. Obama needs to be extremely careful….there is a straw that breaks the camels back.
I can tell you with certainty that myself and other high earners are not stupid and most have worked very hard to get to this level of success. If that tax rate goes up substantially, I would immediately shut down one of my businesses if not both. It would not be worth it to me to work so hard, incur so much liability, and have to manage over 200 employees to retain 25 cents for every dollar I make. I would buy a house in Hawaii, shut down my two businesses so the Government would now be getting ZERO tax from me, and leave over 200 more people unemployed in our great country. “REWARDING SUCCESS BREADS SUCCESS, PUNISHING SUCCESS BREADS DISASTER”. Be very careful Mr. Barrack Hussein Obama…you are playing with fire. You will certainly not redistribute my wealth
I think you will remember before 1980 the tax code had several exemptions and credits for business expenses which allowed the corporations to become very strong finacially.
while managments personal income was low because of the high marginal rate. After the tax cuts the asset rich companys were liquidated by the corporate raiders and other companys assets were raided by the managment taking big saleries and bonuses. Which is one of the reasons the middle class is suffering.
Patriot, is $5 Million your adjusted gross? Also, how much of that counts as capital gains and not wage income? As I understand it, someone making about $5 Million annually makes very little of that in w-2 taxable wages.
So as an example, if I may, let’s say you really bring in $6 Million, but after deductions etc you now make $5 Million AGI. Let’s say 40% of that is capital gains and 60% is wage income. That means $2 million is taxed at the 15% rate, and $3 million is taxed at the 35% rate. (and actually, the top rate is for every dollar over $379,000, and the lower amounts are lower rates. The average from dollar $0 to dollar $378,999 is about 9%).
So the first $379,000 = about $32,000
from $379,000 to $3 million = about $910,000
$2 million capital gains = $300,000
$1,242,000 total federal tax, which is just 25% of the $5 million, but remember gross income is $6 million so the actual federal tax amounts to just over 20%, not 35%.
California tax works much the same way. The average tax on income under $1million is about 5%, and dollars over $1million are at the full 9% (10% I thought). So you effective rate on the whole is about 8%. Total between federal and state is 28%, not “almost half” your income.
Everyone wants to point fingers and blame someone else. I was in the mortgage field for 5 yeas as a succesful Account Exec. and in heavy building materials industry for 2yrs. I lost both of those jobs and now work in auto ins field making half of what I use to make. Somehow I don’t blame the gov. or executives for wanting to be succesful. The greed was by the consumer that wanted something for nothing and living beyong their means. If anything maybe the gov. should invest more in education. This after all is the land of oppourtunity, right? But appearently if your to oppourtunistic the gov. frowns on this, I’m baffled? Don’t work and get paid? Work hard and get taxed? For those on the receiving end of small businesses, don’t bite the hand that feeds you!
If the bush tax cuts work then why are we in such bad shape economicly.
The us tax rate is at historic lows, is it solving our debt problem? NO
After WW1 we raise taxes to pay for the war, same was true after WW2.
Today we want to rage war, not pay for it, keep taxes low for the rich.
Then tell everyone we are broke. When will america wake up and quite giving the corperation welfare on the backs of the poor. I see alot of whining by the rich that call themselves patriots, but what I see is alot of traitors crooks and theives doing there best to destroy amarica.
When in crisis, as we are how with the debt,
who paid the bills? It was the rich. So what is
the rich? I am retired and once thought I was
middle class. I think anyone with and annual
income of more than a half million dollars is
rich!
At present a income of more than $150,000
is required to make ends meet and send three
kids to a decent collage. Take a look at history.
Who paid the cost for the World Wars? -the
interstate system? The poor and the middle class can not do it. The Republicans must get
their s–t together and accept a tax increase
to get us out of this mess. -as was most certainly done in our history.
Interesting stuff. Strangely, if you compare top marginal tax rate with economic growth in the last few generations, there is a fairly pronounced overall positive correlation (ie: more growth with higher rates), which is exactly opposite of what many of us would expect. I don’t blame folks for guessing that lower taxes = more growth, it’s a reasonable hypothesis that certainly “makes sense” to me – but it should still be a testable hypotheses. And it appears to fail the real world tests.
It appears however that some economic models are more faith based than evidence based. The less evidence some people have for the economic stimulus of lower top tax brackets, the more indignant and hostile advocates become to any objective analysis.
I don’t know if anonymous was correct about higher top taxes encouraging investment while lower ones encourage cash-out, but that hypothesis does appear to be more consistent with the data and deserves consideration.
A capitalist incentive of earning more if you work harder and smarter seems to pay off for a society; but it’s far from clear that therefore the larger the differential between the rich and the poor the better it works. The executives of the 1950′s were just as smart, just as hard working and incentivised, and far more successful than today’s, while earning only dozens as much as their workers rather than hundreds to thousands as much.
As the middle class gets squeezed out, between the “live from paycheck to paycheck with barely any accumulated net worth” niche at the bottom, and the top which concentrates ever higher portions of total income and total wealth into smaller percentages of the economic elite – the system is likely to become more unstable. Our only hope is a rational and objective view of the big picture, without ideological blinders of left or right.
Yeah, right.
The solution to our current problems is the top tax rate like 94% of the year 1945 and for CEO’s of public high tech companies it should be extended to 99% because they are giving away America’s technology to foreign nations to make a quick multimillion or multibillion dollar at the expense of killing their own company and other American companies. For example if GE gives away jet engine technology to China for short term gain USA will lose the Aerospace business in the near future killing both GE’s jet engine business and Boeing and likely the European companies. This is how we have lost all technology developed by America. The CEO’s do not need a job after that one year bonus. It may seem unfair to some people like patriot who made 5 million dollars by hard work. Well, he need not work so hard. He should enjoy life in Hawaii and give other people chance to make some money instead of grabbing all for himself. He does not realize, he is exploiting 200 of his employees to make money and 5 million dollars is more than fair compensation for an individuals own compensation. How about somebody making 10 billion dollars? Is he working 100000 times harder than an average American? Remember that a CEO of a public company gambles with public funds and not liable for a penny of loss. In fact he has obscene golden parachute and then just walks over to another public company to spin the wheel again. He is not the guy who sweats out the details of the business.