Income Tax Rates from 1913 to 2006

By Woolsey, W. William; Foster, Sheila D. | Journal of Private Enterprise, Fall 2009 | Go to article overview

Income Tax Rates from 1913 to 2006


Woolsey, W. William, Foster, Sheila D., Journal of Private Enterprise


Abstract

Since being enacted in 1913, the tax code constantly has been changing with rates on personal income ranging from less than 5 percent to more than 90 percent over the years. This paper highlights these changes by examining periods of historic high and low rates for taxpayers with varying levels of income. This paper looks at the marginal and average income tax rates that would have been faced by typical households of today using tax rates from 1913 to 2006. Representative levels of gross income are adjusted for average levels of deductions and exemptions to obtain typical levels of taxable income for 2006. After adjusting for inflation using the CPI, the tax tables for married couples filing joindy are applied for each year from 1913 to 2006. The results are presented in graphs for representative levels of gross income - today's median income, the 95th percentile, minimum wage, and $2,600,000.

JEL Code: H24

Keywords: Income taxation; Historic tax rates; Progressive income tax

'In this world nothing can be said to be certain, except death and taxes. " - Benjamin Franklin (1789)

Although almost everyone believes taxes are inevitable, many people miss the fact that the amount of taxes paid and collected has varied widely over time. Within the past 100 years, taxes have ranged from less than 5 percent to more than 90 percent of income. The purpose of this article is to put changes in the income tax rates over the past century into perspective and to highlight the fact that, even if one accepts that taxes may be inevitable, high tax rates are not. Comparison of effective tax rates over time enables taxpayers to better evaluate current rates compared to earlier ones and to understand the effects of a tax code that is constantly in flux.

The combination of the top marginal income tax rate and the income to which it applies is one of the components of the Economic Freedom of the World index (Gwartney and Lawton, 2008, p. 4). Textbook public finance analysis shows that, like other taxes, it creates a wedge between the prices buyers pay and sellers receive, distorting incentives and creating a deadweight loss as well as transferring income from the taxpayers to the government. Given the broad nature of an income tax, the shift away from labor toward leisure and from future consumption to present consumption has macroeconomic consequences - decreased aggregate supply and potential income.

The adverse impact of the income tax is exacerbated because of its progressive structure, with marginal tax rates being greater than average tax rates. The marginal tax rates determine the wedge on the margin and, thus, the distortion created by the tax. The average tax rate determines the amount of funds transferred from taxpayers to the government. This, at least, suggests that a progressive income tax should be found wanting on the ground of efficiency because it will create a large distortion relative to the amount of tax collected.

However, the progressive structure allows lower income households to pay at a lower average tax rate than higher income households, thereby shifting the financial burden of government to higher income households. The more traditional "ability to pay" defense involves fairly dividing the cost of a given burden of government. However, a more granthose vision of the progressive income tax that promotes social justice by leaving a more equal distribution of after-tax income appears to motivate some defenders. In textbook terminology, these involve questions of equity.

The 25 percent reduction in income tax rates during the Reagan administration of the early eighties was at least partly defended on grounds of efficiency, though the rhetoric emphasized increased production rather than reducing the welfare loss from distortion. These supply-side arguments continue to be marshaled in support of income tax rate cuts and in opposition to rate increases. …

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