US Federal Income Tax History from 1913

The Yield of Federal Income Tax

Over half a century, since World War II, the federal income tax has collected about eight percent of GDP.

Chart 1: Income Tax as % GDP 1910-2010
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Chart 2: Income Tax Top Marginal Rate 1913-2010
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The progressive income tax has been boosted as the great leveller. It is said to ensure that the rich “pay their fair share.” Indeed, marginal tax rates were raised to 92 percent in World War II, as shown in Chart 2, and remained at 90 percent for many years after. The amount actually collected, since the tax was modified in World War II to collect revenue from average salaried employees, has pretty consistently ranged between seven and eight percent of GDP, with a notable excursion to 10 percent of GDP in the boom years of the 1990s.

In fact, the federal income is the great cockpit of the special interests. Every provision is an invitation to lobbyists to importune for an exemption, and Congress is not slow to reward its friends and punish its enemies.

Highs and Lows of Progressivity

The Federal Income Tax began in 1913, just in time to help finance World War I.

Chart 3: Federal Income Tax Rates 1913-2010
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The federal income tax has always been a progressive income tax. Chart 3 shows the range in tax rates between the lowest rate band and the top rate on personal income. Although the income tax started by taxing incomes at a maximum of seven percent over $4,000 for married couples, the rates soared in World War I, rising to 6 percent for the lowest tax rate and 77 percent on the highest tax rate.

In the 1920s Treasury Secretary Andrew Mellon reduced tax rates, reaching down to 25 percent for the top rate and 0.38 for the lowest rate. But Congress raised tax rates at the bottom of the Great Depression in 1932, and President Roosevelt raised rates consistently throughout his administration, with the lowest rate peaking at 23 percent in 1944 and the highest rate peaking at 94 percent in 1944.

After World War II income tax rates were reduced, but raised again in the Korean War. Rates were reduced by President Kennedy starting in 1964, raised by President Johnson during the Vietnam War, and then reduced in two stages by President Reagan in the 1980s so that the top rate was 28 percent and the bottom rate was 15 percent by 1988.

In 1991 President Bush raised the top tax rate to 31 percent and in 1993 President Clinton and Congress raised the top rate to 39.4 percent. In the recession of 2000-2001 President Bush lowered the top tax rate to 35 percent and the bottom tax rate to 10 percent.

The Income Tax and the Average Person

When it started, the federal income tax only affected the rich. But in World War II it descended upon the average wage-earner.

Chart 4: Income Tax and Per-capita GDP
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When the federal income tax began in 1913 nobody earning less than $4,000 per year was taxed. If you were earning $4,000 you were earning real money, 10 times the per-capita GDP of $406. For nearly 30 years, the income tax remained a tax on the rich. But then, as Chart 4 shows, came World War II, and Congress began lowering the income threshold at which income tax commenced. In 1942, incomes above $1,200 for married couples were taxed. In that year the per-capita GDP was $1,192. Once the average person had been enrolled into the income tax system, the federal government never relaxed its hold. The income threshold for income tax never again rose above the per-capita GDP.

The Rich Pay More

Chart 5: Federal Income Tax by Filer’s Income

The Internal Revenue Service has prepared a spreadsheet on the share of income tax as paid by different segments of the tax filers, arranged by income. Chart 5 shows the data from the IRS on the share of federal income tax paid by three different sets of taxpayers since 1986. The green band shows the share paid by the top one percent of federal income tax filers. The blue band shows the share paid by the bottom 50 percent of filers. The red band shows the share paid by tax filers between the top one percent and the bottom 50 percent. In 2008, the latest year for which data is available, the richest 1 percent of taxpayers paid 38.0 percent of all federal income taxes; the bottom 50 percent paid 2.7 percent of federal income taxes, and the those in between paid 59.3 percent. Of course, many taxpayers in the bottom 50 percent are eligible for the Earned Income Tax Credit, and receive a rebate on their income tax which may exceed their tax liability. Data from Internal Revenue Service SOI Tax Stats - Individual Income Tax Rates and Tax Shares here.

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