US Tax History is More Interesting Than I Thought :)
(The following is my own research about the US tax history. It is not tax advices)
I recently ran into taxfoundation.org and found this data: Historical U.S. Federal Individual Income Tax Rates & Brackets, 1862-2021. I’m fascinated about the insights underlying these numbers. I learned a lot about the US tax of the past 150 years like what happened to taxpayers during the war, why people love (and hate) about the Reagan Administration, and what to plan for the future. Here are some of my findings:
First stagger: Income tax was declared unconstitutional by the Supreme Court in 1895. So, there’s no income tax after 1895 till the 16th Amendment in 1913: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration”. Although shocked, I feel it is expected. People in the United States constantly fight for the balance of civil rights, state rights, and federal rights. The same battle can be found in the history of insurance, too.
In 1913, only the wealthiest 1% (some sources say 3%) paid income tax due to the $3000 exemption ($4000 for married couples). Based on BLS (Bureau of Labor Statistics) CPI Calculator, $3000 in January 1913 is $93,579 in July 2023. Imagine you don’t need to pay tax if you make less than $93,579, and for the income between $93,579 to 623,859, you pay 1% tax! The highest tax bucket is 7%, it means you pay 7% tax on the dollar you make more than $15,596,480. Very jealous, right?
It shows the income tax was for the richest people in the US at the beginning. Gradually, income tax moves from a class tax to now a mass tax, more than 80% of households make more than the standard deduction nowadays (based on the stats of 2021). So, 1913 is definitely a good year of income tax. What is a bad year?
In 1944, the tax exempt was $500 (compare it to $3,000 in 1913 and we haven’t considered the inflation). The lowest tax bracket in 1944 is 23%. It goes all the way to 94% for the highest bracket. Yes, 94 percent, It is not a typo. If you make between $500 to $2,000 ($8,784 to $35,137 in today’s dollars), 23% of it goes to Uncle Sam. If you make more than $14,000 ($246,000 in today’s dollars), 50+% tax; if you make more than $60,000 ($1.05M in today’s dollar), 80+% tax. You can find all 24 tax brackets in the federal tax history link here. Ouch!
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How could people tolerate such heavy taxation? Because in 1944, the country was fighting World War II (1939 to 1945). There is a high correlation between heavy tax and war from the data. For example, the first federal income tax happened in 1862, a year after the Civil War (1861 to 1865). The tax rates went lower after the war was over in 1865 to no income tax from 1873 to 1893. After the income tax was restored in 1913, the tax rates were 1 to 7%. And it was raised to 2 to 67% in 1917, the year in the World War I (1914 to 1918) era. That’s not a coincidence, not only in the United States, and not only in our generation: Citizens pay very high taxes (double to more than 10 times) during war anywhere, anytime, in any format :(
The article is getting long and I haven’t talked about riveting stories of Reagan Tax Cuts (Do you know there were major tax updates in 1981, 1982, 1984, and 1986?) Also, the famous "Read my lips: no new taxes", how ROTH IRA is legislated, and other surprising facts. I think it’s better to put them in the next article. I saw the conceptual change through the past 150 years from these tax histories and it was amazing to me. I hope you like it, too. Please leave a comment or send me a message for your findings or you think there are some misunderstandings in my articles. Hope to learn from you, too.
References:
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1 年Love to hear more about your research about the US tax history. Very fascinating ??