A History of Progressivity in the US Income Tax

One hundred years ago, in 1912, the presidential contest also had the income tax as a major issue.  However, in that year all three major presidential candidates (Wilson, Taft, and Roosevelt) were in complete agreement:  They all said that we should have one.

The 16th amendment was submitted to the states in 1909, and was being ratified at a rapid pace.  Less than a month after Woodrow Wilson took office, it was added to the constitution and congress rapidly passed the income tax with broad bipartisan margins.

The nation had income taxes before.  To fund the Civil War in 1861 the nation imposed a flat tax of 3% of incomes over $800 per year (about $20 thousand in today’s purchasing power)  which was replaced the following year by the first progressive income tax, reducing the 3 percent rate to start after $600 per year and adding a 5% rate on income over $10 thousand per year.  The 1862 act was written to specifically expire in 1866.

In 1894 Congress reduced import tariffs and made up the revenue by passed the first peacetime income tax of 3 percent on annual incomes over $4000, which meant that only about 10% of families paid any income taxes.  Then the Supreme Court with the Pollock decision effectively made income taxes unconstitutional until the ratification of the 16th Amendment.

In examining federal tax rates from the passage of the 16th Amendment onward, I will be looking at Married Filing Jointly rates and adjusting the brackets to 2011 dollars.  I will also be ignoring state income taxes, which have generally been increasing significantly.  Of course taxes are complicated and the brackets and rates are just the largest element in a picture that also includes deductions, exemptions, credits, etc. that also were changing all the time as well.  Thus this should only be taken as a broad, not specific comparison of the income tax over time.

(All data is from www.taxfoundation.org)

Era 1: 1913 to 1925

The rates Congress set in 1913 seem almost laughably low today, ranging from 1% to 7%.  But they kept the $4000 exemption from the prior law which equals over $90 thousand in today’s value.  The 2% rate began at $453 thousand in today’s dollars and the maximum rate, seven times the lowest rate, started at $11.3 million in today’s dollars. It may have been a very light tax but it was certainly one directed almost exclusively at the wealthy of the day.

With war looming on the horizon, in 1916 the lowest rate was doubled to 2% and the uppermost rate extended to 15%, the latter not kicking in until an astounding $2 million per year in 1916 dollars ($41.1 million today).  But that was not to last.  War funding pressures pushed the rates in 1917 both into the middle class with a rate of two percent on incomes up to $2 thousand ($35 thousand today) all the way up to 67% on incomes over $2 million ($35 million today). 1918 continued the trend with a beginning rate of 6% on the first $59 thousand in today’s dollars up to 77% on income over $14 million in today’s dollars. 1919 saw a small degree of relief with rates ranging from 4% to 73% until 1921.  With war bonds beginning to be paid off the top rate was reduced to 58 percent in 1922 (on incomes over $2.6 million in today’s dollars) and 46% in 1924 (on incomes over $6.5 million in today’s dollars).

With the war debt mostly retired in 1925 a real peace dividend occurred, with rates reducing to 1.5% on income up to $4000 ($51 thousand today) up to 25% on income over $100 thousand ($1.2 million today) and those rates would remain untouched until 1931.

So in these early years, the income tax started off as a tax pretty much on the wealthy only.  The demands of funding World War 1 pushed taxes into the middle class to lower middle class but the demands on them were relatively light compared to the borderline confiscatory levels imposed on  those regarded as the very wealthy.  Even in the between-war years the top tax rate was nearly seventeen times the lowest tax rate and rates climbed through many tax brackets all the way to what we would regard as a million dollar plus income.

Era 2: 1931 to 1946

Tax rates remained at very low levels from 1925 to 1931.  However plummeting revenues from the expanding Great Depression caused Herbert Hoover to enact a huge income tax increase to reduce the deficit.  The lowest rate jumped from 1.5% to 4% on incomes less than $4000 ($65 thousand today) and the top bracket went from 25 percent to 63% on income over a million dollars ($16 million today).  One can argue whether or not Hoover’s actions made the Great Depression better or worse, but it certainly did not win him any friends.

Despite running against Hoover’s tax increase, Roosevelt did not change them until 1936, and then only increased rates on those above $50 thousand ($807 thousand today).  There were also new rates added at the top all the way up to 79 percent on incomes over $5 million a year ($80 million today) in 1941 with war on the horizon the brackets stayed the same but the rates jumped from 4% to 10% at the low end and from 73% to 81% at the top end.  In 1942 both the brackets and rates changed.  The lowest bracket was 19% of income up to $2000 ($27 thousand today) up to 88% on income above $200,000 ($2.7 million today).  1944 brought even higher taxes to fund the war:  23% on incomes up to $2000 ($25 thousand today) all the way to a near-confiscatory 94% on incomes over $200,000  ($2.5 million today).  1946 saw all rates reduce, but by just three percent.  The end of the war would not bring much change.  With the continuing demand of paying down war debt and the demands on the US being the new global superpower the income tax rates would not be reduced further until 1964.

Era 3:  1958-1977

In 1958 tax rates were still mostly unchanged from their rates just after the end of World War 2.  Thanks to growth rather than actual surpluses the nation’s debt-to-GDP ration had improved in the mid-sixties to the extent that tax rates could be reduced.  In two years, the top rate on incomes above $200 thousand ($1.4 million today) was reduced from 91 percent t0 70 percent.  The low end was also reduced from 20% to 14% however the lowest rate only applied to income under $1 thousand ($7 thousand today).  If we regard this as the end of the tax boost from World War 2 then the combination of the Great Depression and the Second World War was to both increase taxes (and government) across the board but also to reduce progressivity in the income tax.  The 1965 rates and brackets had only minor changes until the 1980’s, however inflation was changing the value of the brackets in current dollars.  This ‘bracket creep’ was pushing middle class persons into tax originally presumed to be for persons with upper middle to middle class incomes.  Congress tried some actions to help persons at the low end, such as beginning the Earned Income Tax Credit in 1975 and steadily increasing both it and the standard deduction over time.  But it did little to reduce frustration at bracket creep across the rest of the income spectrum.  That eventually resulted in the mandate to pass Reagan’s 1981 tax reform package, which indexed tax rates in order to eliminate bracket creep, but it also went much farther.

Era 4: 1980-Present

In 1980 rates and brackets had been essentially unchanged for fifteen years.  Then during the Reagan Administration rates were substantially lowered and the number of brackets reduced by eliminating upper brackets.  The 1988 income tax, with just two brackets: 15 percent under 29,750 and 28 percent over that  From 1988 through 1991 the country had essentially a flat income tax over much of the earnings spectrum.

With growing concerns regarding the size of the deficit, additional brackets were added in 1993,  The new uppermost rate of 39.6% was similar to the 38.5 % rate of 1987 except that it occured at incomes above $250 thousand rather than $90 thousand.

The tax curve from 2003 to today closely parallels the one of 1993, the difference being the ‘Bush Tax Cuts’.  But these cuts were not that substantial as rates go, since the big changes had already happened in the 1980’s.

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