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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That income tax was repealed in 1872 and after some Supreme Court cases and an amendment to the Constitution (16th), income taxes reappeared in 1913, which corresponds with the start of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.

{ 52 comments, please add your thoughts now! }

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52 Responses to “A Look at Historical Federal Tax Brackets”

  1. Bob says:

    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.

  2. Anonymous says:

    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.

  3. Anonymous says:

    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.

  4. Hu says:

    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.

  5. K_Teeters says:

    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

  6. Downix says:

    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?

    • Anonymous says:

      does this mean that loweriong tax rates on top incomes create jobs?

      • Yglorba says:

        Just the opposite; RAISING the tax rates on top incomes creates jobs, because it encourages people to invest their money in things that produce long-term income (like businesses) rather than going for as much cash as possible and then retiring.

      • PhucPhyshyng says:

        That messaging ploy by conservatives has been so thoroughly and completely disproven that I am shocked that anyone still wonders if it was valid! That was a rhetorical, no?

  7. Anonymous says:

    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.

  8. CapitalistMom says:

    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!

  9. L. Sanders says:

    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!

  10. David says:

    The solution to this problem is simple: we need a wealth tax.

  11. Patriot says:

    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

    • tom says:

      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.

    • dj says:

      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.

  12. NoelV. says:

    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!

  13. fred eades says:

    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.

  14. Bob Carroll says:

    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.

  15. Zeph says:

    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.

  16. Haresh Patel says:

    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.


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