Historical tax rates

[thoughtone]

source: http://www.huppi.com/kangaroo/TaxTimeline.htm


This page contains two timelines. The first is a narrative account to which I will continually add as more information becomes available. The second is a quick-glance chart, courtesy of Citizens for Tax Justice.

Federal taxes (general)
Income and capital gains taxes (top rate)

FEDERAL TAXES (GENERAL, MARGINAL)

1913 - Income Tax instituted. Less than 2 percent of the population had to pay it. Income up to $20,000 was taxable at 1 percent, and above $500,000 at 7 percent. It exempted the first $3,000 earned by a single person and the first $4,000 by married couples. Since the overwhelming majority of Americans supported families on less than $1,000 a year, most were exempted from the tax.

1916 - Income tax, top rate: 15 percent.

1917 - Twenty graduated steps established for the income tax. Top rate on income over $2 million: 67 percent. Under $2,000: 2 percent. Exemptions reduced. Number of returns from 1916 to 1919 will climb from 437,000 to 4.4 million. Even so, 95 percent of all Americans will pay no income tax.

World War I - Income tax, top rate at 73 percent. Capital gains, top rate: 77 percent.

1921 - Capital gains, top rate: 12.5 percent. Income tax, top rate: 56 percent.

1924 - Income tax, top rate: 46 percent.

1926 - Income, top rate: 25 percent. Income tax on first $4,000 lowered from 2.0 to 1.5 percent. Estate tax, top rate, lowered from 40 to 20 percent. Abolished gift taxes.

1930s - Increased capital gains tax rates in the 1930s. For a short period, realized gains were taxed under a complicated schedule that taxed gains from very short-term investments in full, but excluded as much as 70% of gains from sales of assets held for more than 10 years. This system was widely criticized as unwieldy and complex, and in the early 1940s it was scrapped.

1932 - Income, top rate: 63 percent

1936 - Income tax, top rate: 79 percent. Roosevelt also institutes an inheritance tax, estate tax, gift taxes, dividend tax and progressive corporate tax.

Early 40s - capital gains taxed at half the regular rate or 25 percent, whichever is lower.

World War II - the bottom income tax rate climbs from 4 to 19 percent between 1940 and 1943. Top income tax rate climbs to 88 percent by 1943. By 1945 it hits 91 percent, where it remains until 1964.

1964 - Income tax, top rate: 77 percent.

1965 - Income tax, top rate: 70 percent.

1950s - Corporate tax: 52 percent.

Late 60s - cap gains start rising from 25 percent.

Mid 70s - cap gains reaches 39 percent.

1977 - Social Security Act Amendment of 1977 passed. With Social Security in trouble, Congress passed a schedule of Social Security tax increases, ending in the year 2030, that would gradually raise the combined amount paid by employers and employees from 11.7 to 15.3 percent. Also raised the maximum taxable income from $16,500 in 1977 to $42,000 in 1987. This schedule would be accelerated in 1983.

1978 - Revenue Act of 1978 makes unemployment benefits taxable for first time. Capital gains, top rate: 28 percent (enacted November, 1978).

1981 - The Economic Recovery Tax Act of 1981 (ERTA) passes. Otherwise known as Reagan's supply-side tax cuts. They included: An across-the-board reduction in individual income tax rates of approximately 23 percent, phased in over 33 months. A reduction in the maximum top rate from 70 percent to 50 percent, beginning in 1982. (Only unearned income - from interest and dividends - had been taxed at 70 percent. Wage and salary income was already taxed at 50 percent.) Inflation-indexing for the individual income tax brackets, the zero bracket amount and the personal exemption, beginning in 1985. The accelerated cost recovery system (ACRS), which provided depreciation write-off periods ranging from 3 years for equipment to 15 years for structures. Reduction of the maximum tax rate on capital gains to 20 percent.

1982 - Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) passes. Institutes a half-basis adjustment for investment tax credits in calculating depreciation. Repeals the acceleration of depreciation scheduled in 1985 and 1986 by ERTA. Raises the federal unemployment tax (FUTA) wage base from $6,000 to $7,000 and the FUTA tax rate from 0.7 percent to 0.8 percent. Increases airport, airway, cigarette and telephone excise taxes. Reduces tax-free contributions to a defined-contribution pension plan from $45,475 to $30,000 and reduced limits on benefits from a defined-benefit plan from $136,425 to $90,000.

1983 - Social Security Amendment Act of 1983 passes. This drastically accelerates the schedule of tax hikes in Social Security originally passed in 1977. The schedule is to be completed by 1990 instead of the year 2030.

1984 - The Deficit Reduction Act of 1984 (DEFRA) passes. A repeal, beginning in 1985, of the provision that allowed an exclusion from income tax of 15 percent of up to $3,000 in interest income for a single taxpayer ($6,000 for couples). A $2 per gallon increase in the excise tax on alcohol and a one-year extension of the 3 percent telephone excise tax. An increase in the minimum recovery period for real property from 15 to 18 years. A reduction in the holding period for long-term capital gains from one year to six months for assets acquired between June 1984 and January 1988.

1986 - The Tax Reform Act of 1986 passes. A reduction in the number of individual income tax brackets to two - 15 percent and 28 percent. Increases in the zero bracket amount and personal exemptions. Repeal of the two-earner deduction, income averaging, and the state and local sales tax deduction. Repeal of the 60 percent capital gains exclusion for individuals. Reduction in the maximum corporate income tax rate from 46 percent to 34 percent. Broadening of the corporate tax base through repeal of the investment tax credit, limiting depreciation deductions, restricting the use of net operating losses, etc. Capital gains, top rate: 28 percent. Corporate tax: from 46 to 34 percent.

1990 - Omnibus Budget Reconciliation Act of 1990 passes. Income tax, top rate: 31 percent.

1993 - Omnibus Budget Reconciliation Act of 1993 passes. Income tax, top rate: 39.6 percent. Corporate tax: 35 percent.

1997 - Taxpayer Relief Act of 1997 passes. Capital gains taxes are slashed in a complicated schedule. After July 29, 1997, assets that have been held for a year are taxed at 28 percent. For assets held over a year and a half, the rate is 20 percent (10 percent for individuals that were earlier taxed at the 15 percent rate). After the year 2000, assets that have been held for 5 years will be taxed at 18 percent (or 8 percent). The Alternative Minimum Tax is removed for C Corporations that earn less than $7.5 million in receipts after 1997. Also included: a $500 per child tax credit, tax breaks for college expenses and tuition, a higher exemption for estate taxes and expanded Individual Retirement Accounts.

 

[SPECTRE1]

Top income tax rate was 77 percent...

Democrats only want to raise it four percent to 39 and claim that is a huge difference between them and Republicans.

Do nothing about outsourcing and unionization...

If they raised it higher, they would lose campaign cash....

 

[Lamarr]

The Power To Tax Is The Power To Destroy

Where the state is, there is the power to tax; for rulers cannot rule without taxation. As Ludwig von Mises wrote: "The funds that a government spends for whatever purposes are levied by taxation." Or as Murray Rothbard put it: "...all state actions rest on the fundamental binary intervention of taxes..."

Where the state is, there also is the growth of the state. Why does a state's scope enlarge? One theory is that interest groups seek to use the state's taxing power for their own benefit. As Richard Ebeling writes: "As long as many people want government to use its power to tax and regulate to benefit them at the expense of others, it will retain its power and continue to grow."

This article suggests a complementary theory. When the power to tax is conferred upon rulers, many harmful incentives necessarily are conveyed with it. These encourage the rulers to expand their destructive acts.

Incentives

Purposeful action involves choice among alternatives. Choices embed incentives (rewards) and disincentives (costs), both of which can be monetary or nonmonetary. Consider, for example, the Crown's provision of justice in medieval England. Convicted felons were typically hanged and their goods forfeited to the Crown, although the King might pardon a felon who agreed to serve in the Royal army. This incentive structure motivated the Crown to convict felons, because for each conviction the payment was either the felon's property or use of the felon as a soldier (the incentives). The Crown faced disincentives too, not only out-of-pocket costs but also disloyalty, disaffection, loss of reputation and resentment, if it wrongly convicted innocent people of felonies.

Under this incentive structure, the Crown likely displays a marked enthusiasm for arresting and convicting felons (and perhaps non-felons). The incentive structure also induces the Crown to change the laws so as to define more crimes as felonies. If this dynamic sounds similar to the case of police and municipalities in the United States benefiting from the seizure and forfeiture of goods and the resulting expansion of crimes subject to seizure and forfeiture, that is because it is.

Harmful Incentives Of The Power To Tax

Rulers, being human, have wants that they wish to fulfill, items like doing good (as they see it), power, glory, money, ego-satisfaction, pride, respect, adulation, security of office, aiding the poor or the rich, ending capitalism, spreading democracy, etc. However, what rulers want is not what subjects want. Individuals have widely varying ideas about what is desirable, as evidenced by the many ways they live. Obviously, rulers are unable to choose actions that satisfy every subject's individual preferences, even if they know them; but also no ruler knows what the subjects want now or ten minutes from now. Since rulers absorb taxpayer resources and spend them on projects that cannot satisfy their subjects' preferences, it follows that rulers destroy the happiness of those they tax.

When constrained to employ their personal resources, rulers have a disincentive to spend. The power to tax removes that disincentive, that is, provides them an incentive to fulfill their aims. Consequently, they are encouraged to such things as wars to end all wars, wars to further democracy, great leaps forward, wars on poverty and drugs and terror, genocides, disruptive programs, territorial expansions, subsidies and guarantees, lavish parties, entertainments, airplanes and limousines, volumes of regulations that kill off markets, etc.

While some "subjects" gain from these depredations and lobby for them, thereby becoming rulers, most do not. They can only vote, gripe or write letters, highly imperfect means of affecting ruling actions. Votes are on representatives, not projects; and they occur only at infrequent intervals during which the rulers create numerous faits accomplis. No voter can unilaterally withdraw support from the war on drugs or the war on terror or the social security program or any other state program.

Getting their way is but the first of the bad incentives that accompany the rulers' power to tax. The second is to increase the taxes levied, which is undesirable because it supports more misguided actions by the rulers. Tax increases are predictable because the rulers gain from them as long as the cost in lost votes is not excessive. The incentive structure inherent in the power to tax is incredibly malign because the rulers control the amount of the incentive! They can raise taxes at will, subject only to the loss of some votes, which they have many stratagems to forestall.

Third, taxation provides a powerful incentive to raise funds by borrowing. Without taxes to pay interest and principal, a state cannot issue large amounts of debt. With that power, the state can borrow and expand, thereby mortgaging future taxpayers. Future generations must pay the debt out of their savings, which harms them. Furthermore, having issued debt, the state has an incentive to pay it off with cheaper dollars. The power to tax leads the state to replace private money by the state's currency and thence to the many ills attendant upon the inflation of that currency.

Fourth, the power to tax provides the rulers with an incentive to institute programs that distribute wealth and create dependency. Distributionist schemes grew enormously in the U.S. only after the state gained the power to tax incomes. These harmful programs benefit rulers. They create state support among dependents who fear losing their handouts from the state, and that support greatly complicates any effort to reduce the state's power.

Fifth, the power to tax is the power to to sell or exchange tax relief for favors or donations, as well as the power to extort money so as to prevent taxes from being imposed. Corruption of political officials is encouraged. Additionally, these activities create differential taxation and costly economic inefficiencies.

Sixth, rulers have an incentive to camouflage their levies so that the subjects do not even know how much tax they are paying. They diffuse the tax pain widely so that it is more bearable. This is why rulers institute withholding taxes, social security taxes, gasoline taxes, payroll taxes, sales taxes, value added taxes, etc. Additionally, they make the tax code so impossibly complex that even tax collectors do not understand it.

After a while, public attention settles on the complexity of the tax code rather than the taxes. Those who debate tax code simplification often assert that their proposals will lower taxes. They may, and pigs may some day colonize Mars; for the rulers have no incentive to adopt tax simplification unless they expect a gain – in revenue, in power or some other benefit.

Seventh, in order to persuade taxpayers that they spend taxes carefully on good causes, rulers have an incentive to lie about the benefits and costs of their projects and to report them in distorted and confusing ways. If a war occurs, no one will be able to ascertain its cost without doing a master's thesis on the subject. NASA will assert that the benefits of the space shuttle program "can be found just about everywhere!" or that "... it continues to give the American people tremendous value for their tax dollar" while avoiding any mention of the program's estimated $173 billion cost.[9] Truth is a casualty of the power to tax.

Eighth, the power to tax encourages rulers to adopt measures that work badly. Put another way, they have a diminished incentive to do well with tax monies raised because they do not personally bear the full cost of error. They can always raise more money by taxes. Hence, all programs funded by taxes will be less efficiently run than comparable private sector provision of the same services.

Finally, the rulers have a ninth incentive, to maintain indefinitely the power to tax. At least three destructive activities result. One is continually to manufacture propaganda to justify taxes. Rulers are forever raising a hue and cry about imminent dangers and problems. They publicize desperate "needs" that are essential to survival: poverty programs to forestall disunity, riot or crime, drug prohibition to prevent threats to the nation's health, subsidies to prevent failure of the food supply or loss of the family farmers who are the nation's backbone, and central banking to prevent catastrophic banking failures. Basically, rulers appeal to their subjects' fears, insecurities and deep nationalistic, patriotic, religious and other desires in order to justify their actions.

Second, rulers recruit a corps of propagandists, in government and out, who tout the party line, and in return receive money, favors, access, or other emoluments that they value, including power and feelings of importance. The perverse consequence is a corruption of society's information processes.

A third means of keeping the power to tax is to diminish effective criticism of the rulers. Were rebellious anti-tax voices to gain influence, the rulers would be worse off. Hence, they try to halt and suppress such criticism. Sadly, free speech and the power to tax are incompatible, and the rulers will curtail free speech wherever possible and under whatever clever guises they can manufacture.

Summary and Conclusion

Purposeful choice in the realm of voluntary behavior among ordinary people tends to improve life. Purposeful choice among rulers tends to destroy life, because rulers act on their wants, not those of taxpayers.

 

[thoughtone]

Pop quiz Lamarr. What happened during this time?

1926 - Income, top rate: 25 percent. Income tax on first $4,000 lowered from 2.0 to 1.5 percent. Estate tax, top rate, lowered from 40 to 20 percent. Abolished gift taxes.