An Explanation of Historical Tax Rates vs. Current Tax Rates

September 19, 2011 at 7:00 am | Posted in Uncategorized | Leave a comment

I read this article from teachinghistory.org. I thought it gave a very good explanation about the history of tax rates and now have a better understanding of how they work. It’s a little lengthy; I tried to shorten it to hit the important concepts and I left some of the numbers and percentages in to give some perspective. 

During the World War II, the top “marginal rate” was 94%, but 94% of what? Then as now, income tax rates moved up at distinct break points. In this made-up example, consider a 15% rate up to $25,000, 21% from $25,000 to $50,000, and 25% over $50,000. Those making $50,001 or more won’t pay a quarter of their total income, but rather 15% of the first $25,000, 21% of the next $25,000, and 25% of everything above $50K. That’s why the system is called progressive – the percentage rate progresses upward with income, but the higher percentage applies only to new (marginal) income above each break point. In 1944-45, “the most progressive tax years in U.S. history,” the 94% rate applied to any income above $200,000 ($2.4 million in 2009 dollars, given inflation).

Very few individuals encountered this top rate, however. Tax rates have fallen since then: the current top level is 35% of income above $357,000. Brackets also have simplified (24 in the 1950s, just six today), yet the federal government takes in far more revenue than 60 years ago and citizens complain hugely about being over-taxed. What has happened?

Three things, basically.

  1. First in World War II, tax law revisions increased the numbers of “those paying some income taxes” from 7% of the U.S. population (1940) to 64% by 1944, vastly broadening the tax base and increasing the total intake.
  2. Second, other federal taxes increased substantially. The share of earned income taxed increased fourfold or more since the early 1950s. As well, Medicare and Medicaid taxes appeared in the late 1960s and rose from half a percent then to nearly 1.5% now. Thus many Americans currently pay more for these retirement and medical coverages than they do in regular income taxes.
  3. But the biggest blow may have been the evidently sharp increase in state and local taxes since the 1970s. Rising from a national average of $800 per capita (multiply by the number of your family members) in 1977, these taxes neared $4,300 per person by 2008, rising 44% faster than inflation. The principal mechanisms employed by non-federal governments were wage and income taxes, property taxes, and a vast range of fees, all of which went to support public safety (police, fire), health, basic and higher education, roads and other infrastructures, courts, prisons, and the regulation of everyday life (deeds, inspections, voter registrations, licensing, et al.)

Two final notes: despite these surges, Americans remain among the least-taxed citizens of advanced industrial nations, with 28% of gross domestic product taken for taxes, vs. an average of 36% for the 38 member countries of the Organization for Economic Cooperation and Development, while, since 1942, the U.S. has spent far more than any other nation on military and national security needs. Second, none of the above discussion has touched the issue of business taxes, which are included in the U.S. vs. OECD assessment, but rarely examined historically, especially with attention to their state and local components.

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