Tax Rates Yesterday, Today and Tomorrow

(based on an article by Bob Veres; used with permission)

We're not seeing a lot of patriotic arguments about paying taxes these days. So I present to you a cartoon  from World War II that put taxes into perspective. It features Donald Duck.

Times and thoughts were simpler back then: Buying stuff you don't need is akin to aiding the enemy. Paying taxes meant building guns, ships, and planes to win the war. Now, it is harder for most to equate taxes to liberty.

Today the argument about taxes isn't as clear cut. Do we raise or lower them, make them fairer or simpler, or do away with them altogether?  It's a familiar discussion.  The Tariff Act of October 3, 1913, implemented the 16th Amendment to the Constitution, which made a tax on income for U.S. citizens Constitutional. Since then, Congress has reconstructed our income tax rates an astonishing 40 different times! 

What's interesting about all this is how tax rates compare today to what they have been in the past.  The chart below shows the marginal federal income tax rate, year-by-year, for persons earning $10,000 a year, $20,000, $60,000, $100,000 and $250,000. 

You can see that the government was a bit timid as it reached into the pockets of its citizens in the early years; a person earning $10,000 paid just 1% of income through the 1915 tax year. But by 1918, the top marginal rate had rocketed up to 72% before dropping back to 68% through the 1921 tax year.  From 1944 through 1955, top bracket taxpayers were paying over 90% of their adjusted gross income to Uncle Sam, and the rate stayed at 70% or above through 1981.  Meanwhile, persons of more modest means, earning $10,000 or $20,000, settled into a 10% to 15% bracket, which is where they are today.

As you can see from the chart, higher-income Americans have experienced a long, slow decline in their tax rates since 1981.  You would have to go all the way back to 1931 to find rates lower than the 33% we've enjoyed for the past eight years on income over $250,000, or the 28% rate on income over $100,000.  Even the $60,000 taxpayer is paying at a lower marginal rate than any taxpayer who lived between 1932 through 2002. 

Here's where that silly cartoon comes into the discussion. The highest rates coincided with years in which the U.S. was fighting wars abroad: World Wars I and II, the war in Vietnam-and, of course, the Cold War.  This time around, the U.S. has been fighting expensive wars in Afghanistan and Iraq without raising the levies on its citizens.

What will happen going forward?  If the recent past is any indication, Congress will pass new tax legislation and label it "reform." With today's highest tax bracket looking low by historical standards, it might be safer to plan for the possibility that Uncle Sam will get a little bolder about reaching into our pockets; even Rep. Paul Ryan's plan would collect more total dollars than we are paying today. 

Hopefully we won't have to fund many more wars, but rumor has it that our Uncle Sam owes a lot of money to China. It might need to be paid back eventually.