There is a lot of discussion of tax rates in the United States, especially every four years as an election approaches.  I remember when I was taking an accounting ethics course at Austin Community College, one student said that our tax structure is not as progressive as it used to be and the teacher quickly agreed with him.  He was implying that the rich were not paying their fair share.  On the other hand, others talk about the high tax rates on the rich stifling business and growth.   I did not intend to argue one way or the other, but just give a summary of the federal income tax in the United States and let readers draw their own conclusions.  However, after going through the facts myself, I felt compelled to offer up some observations at the end.

The first tax in the United States was enacted during the civil war (to help with war efforts in the North), but it was repealed after the war was over.  If you are reading this and one of your ancestors forgot to file their return, you can assess the 1864 federal income tax return here.   It was only only for people with annual incomes above $600, which was a lot back in 1864.

Later on income taxes were ruled as unconstitutional in Pollock v. Farmers’ Loan & Trust Co.   Thus, an amendment became necessary in order to enable Congress to levy taxes.   The 16th Amendment to the Constitution was passed in 1913.  In 1913, taxes for individuals ranged from 1% to 7%.  However, most individuals did not pay taxes, since most individuals did not make $3000, the amount of the personal exemption.  The seven percent bracket was only for those who made over half a million dollars a year, which was a lot of money in 1913.

In 1916 the maximum tax rate went up to 15%, but that was people making over $2 million a year (again a huge of money in 1916).

However, in 1917 with WWI the maximum tax rate escalated to 67% for those making over $2 million a year.  It was 65% for incomes over $1 million a year and 50% for those making over $300,000 per year.  As you can see rates went up dramatically and affected more people.  However, most families still did not make $5000, the amount of personal exemption for that year.  So for all practical purposes the income tax was a tax on the rich.

The maximum tax rate went up to 77% in 1918, and then dropped down to 73% the next year.  It dropped down to 58% in 1922.  It dropped down to 46% in 1924, but the top rate only applied to anyone making over $500,000.   Again, not many people made a half a million dollars in 2024.  The next year it dropped down to 25%, but this time it applied to anyone making over $100,000.  Granted that was still a whole lot of money in the 1920’s.  Families making less than $5000 were not required to file, and that applied to a whole lot of people in 1925.   The lowest tax bracket was only 1.5%.

Tax brackets remained pretty much the same from 1925 through 1931.

To Continue: See Great Depression through WWII

Then, in 1932 during the great depression the highest rate shot up to 63%, which was for people making over a million dollars.  Obviously, there were not a lot of people making over a million dollars a year during the great depression.  Still, it was 50% for those making over $88,000.  And the lowest tax bracket went up to 4%.  Of course, those who had lost their jobs were not paying anything.

Again tax brackets remained the same until 1936 when the highest rate went up again to 79% for people making over $5,000,000.    Still, it was 70% for people making over $300,000 and 59% for those making over $90,000.  The lowest bracket remained at 4%.

In 1940 tax rates remained the same, but the thresholds were lowered for those having to file returns.   Those who were single had to file if their income was over $800.  Those who were married had to file if their income was over $2000.

Once again, tax brackets remained the same until 1941 when the top bracket went up to 81% (for those making over $5 million) and the bottom bracket went up significantly to 10%.   Furthermore, any couple making over $1,500 had to file a return.

Then in 1942 the top bracket went up to 88%, which applied to anyone making over $300,000.  The lowest tax bracket was raised to 19%.  Obviously, this is during the time of WW2 when the United States needed a lot of money to support the war effort.   A couple of things to note about this.  One is that the highest tax bracket started a lot lower.  Granted, few households were making over $300,000 in 1942.   Second, the lowest tax bracket was a lot higher at close to 20%.  Thus, there was more of a shared responsibility during war time by all of those making over the exemption amount which was again reduced $1,200 for married couples.

The top tax rate jumped again in 1944, this time to 94% and applied to anyone making over $200,000.  The lowest rate also went up to 23%.

To continue: See Baby Boom years through Ronald Reagan

Back to George Bush’s famous read my lips statement.   In 1991 and 1992 Congress added one additional bracket of 31% for married couples making over $82,000 per year.  It was only 2.5% additional tax on higher end taxpayers, and yet it hammered him politically.  I guess you do not make promises you cannot keep.  In 1993 to 2000 under President Clinton, we went to five tax brackets ranging from 15% to 39.6%.   Under George W. Bush, we went to 6 tax brackets ranging from 10% to 35%.  Under Obama, we have six tax brackets that range from 10% to 39.6%.

In summary, the first four years after the 16^th Amendment was passed, tax rates were very low by today’s standards.  But after the United States entered WWI, tax rates went up significantly.  The highest rate in our history was in 1944 (towards the end of WWII), 94% for those making over $200,000.  The lowest the top bracket dropped to after WWI was 28.5% under Reagan, but it was for everyone with taxable income over about $30,000.   Again, this is the closest we came to a flat tax in the last 100 years. Between 1946 and 1964, the period of the baby boom, tax rates remained at 91% for the highest bracket and 20% for the lowest bracket.  From 1965 to the early 1980’s the top tax bracket was 70% and the lowest tax bracket was 14%.  Thus, during some of our most prosperous years as a nation, tax brackets were much higher than they are today.

Of course, there were a lot of other factors leading to the prosperity of those years.  We were basically the only industrialized nation not torn apart by WWII.  Much of Europe was ravaged by the war.  Thus, we had a huge trade surplus:  we were a huge manufacturer and exporter of goods.  Needless to say, we live in a much more competitive environment today.

In all, our tax rates today are higher than they were in the late 1980’s and early 1990’s, at least for higher income taxpayers.  But our rates are lower today than much of our history (i.e., since the 16^th Amendment was passed).  However, we existed for roughly the first 140 years without an income tax at all.