As the actor and comedian Will Rogers once said, “The difference between death and taxes is death doesn’t get worse every time Congress meets.”
If you’ve ever been curious about how much money you’re paying in taxes relative to what other past generations were charged, then you might be surprised to learn just how much they’ve fluctuated over the past century. Here’s a brief overview of the history of taxation in the U.S. and why the rates have changed over the decades.
The early 1900s
The federal income tax system as we know it today began with the Revenue Act of 1913 during the Wilson presidency. This was a 1 percent tax on income above $3,000 with a top marginal bracket of 7 percent for high-income earners. Less than 3 percent of the population was required to pay this new income tax.
Also around this time, many states started passing inheritance taxes which would require beneficiaries to be taxed upon the receipt of their inheritance. This is what became known later as estate taxes.
World War I
When World War I began (1914), Congress passed the 1916 Revenue Act followed by the War Revenue Act of 1917. The income tax rate soared as high as 77 percent by 1918 in order to provide the immediate funding that was needed to support the war.
Also as part of the Revenue Act of 1916, the estate tax became official. This was 10 percent for estates over $50,000.
The Roaring 20s
Following the end of the war (1918), the federal income tax rate cooled off to 25 percent up through 1931. This was thanks in part to the optimism and booming economy that was taking place in the decade after the war that became known as the Roaring 20s.
As the stock market was rapidly expanding, congress passed the Revenue Act of 1921. Up until this point, capital gains were more or less treated just like ordinary income with the highest tax rate at 7 percent. With the new increase of income taxes to 25 percent, the Revenue Act of 1921 provided some relief by making a distinction between capital gains and ordinary income. This reduced the taxes on gains to just half of the ordinary income rate at 12.5 percent.
The Great Depression
World War 2
During the war, taxpayers would also be allowed to exclude 50 percent of capital gains from income on assets held for at least six months or elect a 25 percent alternative tax rate if their ordinary tax rate exceeded 50 percent.
Estate taxes were also increased to 77 percent for estates over $60,000 (starting in 1942).
The 1950s – 1970s
In the decades that followed World War 2, the top federal income tax rate remained relatively high. It was reduced briefly to 82.13 percent but then increased to 91% until 1963. By the end of the 70s, the tax rate had made its way back down to 70 percent.
The capital gains tax rates were also significantly increased due to the 1969 and 1976 Tax Reform Acts. Throughout most of the 1970s, they peaked at 35 percent.
Estate taxes remained at 77 percent for estates over $60,000 all way until 1976. Beginning in 1977, the exclusion amount began to rise with each passing year.
The 1980s Boom
The 1980s started with a slash of income tax rates from 70 to 50 percent thanks to the Regan-era Economic Recovery Tax Act of 1981. This rate was then slashed again with the Tax Reform Act of 1986 dropping the top tax rate down to just 28 percent.
Also around this time, the capital gains tax was greatly reduced. In 1978, the rate was cut down to 28 percent. By 1981, it was lowered to just 20 percent.
The 1990s and ForwardAt the start of the 1990s under President George H. Bush, the top tax rates began to increase again to as high as 39.6 percent. This tax rate remained in effect until they got some slight relief at 35 percent from president George W. Bush in 2003.
Let a Professional Help You Lower Your Taxes
Tax laws can be complicated. There are many different ways to structure your investments so that you’ll owe as little to the IRS as possible. If you’d like to learn more about how your specific tax situation can be optimized, then please feel free to connect with us by sending an email or filling out our contact form.