You may have heard this before. History has a tendency to repeat itself.
Before digging into this article, make two guesses:
What was the highest tax rate at the time lawmakers enacted the income tax in 1913?
What was the highest rate of tax at any time from 1913 through 2011?
Tax on Day One
In 1913, the States ratified the 16th Amendment, instituting the federal income tax. The 1913 tax looks nothing like it looks today. For example, where the actual form and directions fit on a mere four pages in 1913, they total an intimidating 181 pages today.
Click here to see the 1913 IRS Form 1040.
Click here to see the 2010 IRS Form 1040.
The tax law, like almost all laws, grows as lawmakers use it for pork, try to make it fairer, use it to stimulate a sector of the economy, or just want to raise revenue.
As Will Rogers said: “The difference between death and taxes is death doesn't get worse every time Congress meets.”
In 1913, the top tax bracket was 7 percent on all income over $500,000 ($11 million in today’s dollars); and the lowest tax bracket was 1 percent.
World War I
In order to finance U.S. participation in World War One, Congress passed the 1916 Revenue Act, and then the War Revenue Act of 1917. The highest income tax rate jumped from 15 percent in 1916 to 67 percent in 1917 to 77 percent in 1918. War is expensive.
After the war, federal income tax rates took on the steam of the roaring 1920s, dropping to 25 percent from 1925 through 1931.
Congress raised taxes again in 1932 during the Great Depression from 25 percent to 63 percent on the top earners.
World War II
As we mentioned earlier, war is expensive.
In 1944, the top rate peaked at 94 percent on taxable income over $200,000 ($2.5 million in today’s dollars). That’s a high tax rate.
The 1950s, 1960s, and 1970s
Over the next three decades, the top federal income tax rate remained high, never dipping below 70 percent.
The Economic Recovery Tax Act of 1981 slashed the highest rate from 70 to 50 percent, and indexed the brackets for inflation.
Then, the Tax Reform Act of 1986, claiming that it was a two-tiered flat tax, expanded the tax base and dropped the top rate to 28 percent for tax years beginning in 1988. The hype here was that the broader base contained fewer deductions, but brought in the same revenue. Further, lawmakers claimed that they would never have to raise the 28 percent top rate.
The 28 percent top rate promise lasted three years before it was broken.
During the 1990s, the top rate jumped to 39.6 percent.
However, the Economic Growth and Tax Relief and Reconciliation Act of 2001 dropped the highest income tax rate to 35 percent from 2003 to 2010. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 maintains the 35 percent tax rate through 2012.
What this Means for You
This history is important because it shows that the tax law is always changing. You must pay close attention to these changes because they affect your bottom line.
For example, a change in the income tax rate influences your investment portfolio and the value of your home.
To stay on top of tax law changes, we suggest that you read the monthly articles published online at the Bradford Tax Institute. We provide cutting-edge tax information for the self-employed, the one owner business, and the husband and wife owned business.
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History of Tax Rates: 1913 – 2012