It’s almost hard to imagine, but back in the year 1913 the highest tax bracket in the United States was a mere 7%, and it only applied to people making $500,000 a year, which would be about $26,000,000 in today’s dollars! By 1917, the top tax rate had jumped up to 15% for those who make at least $2,000,000 a year. When 1917 came around, the top rate jumped to a shocking 67% rate! This of course only applied to the wealthiest of people, but it’s an interesting historical perspective.
During the civil war, there was a shortage of revenue and it was very difficult to pay for the war effort. In order to raise more income, the Federal Government instituted an income tax in order to pay for the civil war. This enabled the federal government to remain fiscally solvent and not keep the piles of debt that it has today. The government soon lost its focus, and its appetite for taxing and spending has grown exponentially since then. Let’s look at how we got from there to here.
Before beginning, let it be clear that US government has long since taxed pretty hard on the citizens, even during the days of great depression when the world economy was in shambles as theirs’ is a classic case of obsessed wealth management where apart from high rates, they also come out pretty hard on tax defaulters.
All the way back in 1913, there were only three tax brackets. People who made less than $300 paid nothing in tax. People who earned between $300 and $10,000 were taxed at 3%, and those who earned more than $10,000 were taxed at 5%. These reasonable tax rates jumped out the window when World War 1 happened. By 1918, the top tax rate had jumped all the way up to 77%! Fortunately the tax rate fell soon after the war.
After World War 1, tax rates had begun falling, but when the Great Depression came about, money was needed. The top tax rate then jumped all the way up to 63%. This might sound shocking, but when World War II started, the tax rate skyrocketed. In 1945, there was a tax-rate of 94% on all income over $200,000. It stayed over 90% until 1964 when it was lowered to 77%. Since then the tax rate has fallen steadily over time.
The top tier of the income tax bottomed out at 28% in 1988 because of a recession and decreasing taxable income. More money was needed to run the government, so George H. W. Bush did the only thing that made sense at the time, and raised taxes despite campaign promises not to do so. The tax rate was raised to 31% soon after that.
There are some implications in your financial life when it comes to historical tax rates. Know that they are very volatile and can change overtime. It may be very beneficial to use retirement accounts in which you pay the taxes now, such as a Roth IRA, as opposed to one where you will have to pay taxes on in the future. We know that the tax rates are fairly reasonable right now, but in the future, who knows what the rates will be?