April 2009 - Spring Issue
	Home		Archives		Subscribe		Contact Us		EBR Home

Marginal Federal Income Tax Rates: A History

Alberta H. Charney, Ph.D.

Introduction

In the recent presidential election, there was a great deal of discussion about whether or not to raise the highest marginal tax rate for family incomes (married couples, filing jointly) that are over $250,000/year from 35%, the 2008 rate, to 39.6%, the highest marginal income tax rate during the 1990s.  This article provides an overview of federal income tax rates throughout much of the 20th century so that this proposed tax increase can be put into perspective.

Table of Contents

Definitions and the 2008 Tax Structure
Assumptions and Procedures for Comparision
The Recent Period: 1987 - 2008
The Early 20th Century Period
The 1920-1935 Period
Pre-WWII - 1960 Period
The 1968 - 80 Period
Conclusion

Definitions and the 2008 Tax Structure

First, some definitions are required.  Income tax brackets are the various taxable income levels where tax rates change.  Marginal income tax rates are rates that apply to taxable income received above each consecutive tax bracket.  Table 1 presents the tax structure for married couples filing jointly in 2008. 

Table 1 indicates that for the first $16,050 of taxable income, a married couple filing jointly would pay at a 10% rate.  For taxable income over $16,050, but less than $65,100, couples would pay 15%, and so forth.  The tax rates in the left-hand column of Table 1 are called marginal tax rates because they only apply to income over each consecutive bracket.  Married couples would pay the 35% rate on all income over $357,700.  This type of “block” tax structure has existed throughout the 20th century, although the marginal tax rates and the income brackets have changed dramatically over time.

Table 1: Tax Structure, 2008

Taxable income is income after a variety of subtractions are made, that is,

taxable income = money income – subtractions.
 
In the modern era, subtractions include personal exemptions and standard or itemized deductions.  After taxable income is determined, then the set of rates in Table 1 are applied to consecutive levels of taxable income.  This type of income tax structure is said to be progressive because the marginal tax rates increase as incomes rise. 

Assumptions and Procedures for Comparison

A 1913 through 2008 history of the federal individual income tax rates was obtained from the Tax Foundation website (www.taxfoundation.org).  Each year’s tax brackets were converted to 2008 dollars by inflating all pre-2008 tax brackets using the Consumer Price Index (CPI) for All Urban Consumers.

All of the tax structures compared in this article are for married couples filing jointly.  For comparison purposes and facilitation of graphing, tax structures are rounded as follows:  brackets under $100,000 are rounded to the nearest $5000, brackets over $100,000 and under $1 million are rounded to the nearest $10,000, brackets over $1 million but less than $5 million to the nearest $50,000, and brackets over $5 million to the nearest $100,000. 

The graphs of tax structures in this article are intended to compare tax rates for medium and higher incomes.  It is hard to use the data in these graphs to compare tax structures for lower income individuals because none of the tax structures in this article have been adjusted for exemptions, deductions, other subtractions or credits.  Subtractions from income occur before any tax is paid, so they affect the tax paid by the lowest income couples proportionally more than they affect taxes paid by middle and higher income couples.

The Recent Period: 1987 – 2008

Figure 1 graphically presents the marginal tax rates and brackets ($2008) for taxable years 1987, 1992, 1999 and 2008.  These tax structures extend back through the four most recent presidents’ terms.  Although there are some differences among them, there are far more similarities.  After all subtractions to income are made, the resulting taxable income had a starting tax rate of 10 or 15 percent.  By the time taxable income reaches $55,000-$65,000 (in $2008), the marginal tax rate increases to between 25% and 28%.  From there, the 1987 tax structure increases the fastest, reaching 35% by the time taxable income reaches $90,000 and increases to 38.5% at $170,000.  The 38.5% marginal rate is the highest among the tax structures, except for the 1999 tax structure, which taxes income over $370,000 at 39.6%.  The lowest tax bracket for higher income couples occurred in 1992, when the highest marginal rate of 31% was reached at approximately $135,000.

The income tax plan which President Obama proposed during his campaign increases the 2008 structure to 39.6% for taxable incomes over $250,000 (not presented on the graph).  In addition, his proposal would cut taxes for at least some families below this income by $1,000, but this tax reduction would be accomplished through a tax credit, rather than through changes in marginal tax rates and/or brackets.

Figure 1: Marginal Tax Rates – 1987, 1992, 1999, 2008

The Early 20th Century Period

Tax structures in the early 20th century looked very different than in the recent era.  In addition, huge changes occurred in the tax structure between 1913 and 1918, probably because of WWI-associated spending.  The marginal tax rates in 1913 started at 1% and increased by 1% increments to a maximum marginal rate of 7%, reached at approximately $10 million in annual income.  Those rates were doubled across all income categories by 1916, from 2% to 14%, with an added 15% tax rate for incomes over $40 million (See Figure 2). 

The number of brackets increased from 7 in 1916 to 50 in 1918.  The marginal rates in 1918 increased in an almost linear fashion until taxable income reached $1 million, after which the rates increased dramatically from 45% to 64% within a $500,000 increase in income, then rates gradually increased again until they reached a maximum marginal rate of 77%. 

The 2008 tax structure is presented on all the historical graphs as a reference because the shapes of the tax structures change substantially, depending on the income bracket associated with the highest marginal tax rate.  In addition, it allows a comparison between the more recent tax structures and past structures.  The 1918 tax structure had significantly lower income tax rates than the 2008 tax structure for incomes below $700,000 and much higher income tax rates for incomes above $700,000. 

Figure 2:  Marginal Tax Rates – 1913, 1916, 1918 and 2008

The 1920-1935 Period

The 1918 tax structure continued, with some modifications, into the early 1920s (Figure 3, for 1922).  The period 1922-23 had maximum marginal rates of 50% to 58%, with the highest rate applied to incomes over $2.5 million.

However, starting in 1925, marginal income tax rates were substantially reduced across all income levels.  The highest marginal rate from 1925 to 1931 was 25% and applied to incomes as low as $1.2 million (1930 in Figure 3). 

Then, beginning in 1932, tax rates and the tax structure were returned to their pre-1925 levels and couples with income in the highest bracket were taxed at 63% (see 1930 in Figure 3).  As shown, the tax structures of 1922 and 1935 are very similar, but the tax structure of many of the years in between were very different (1930). 

Figure 3:  Marginal Tax Rates – 1922, 1930, 1935 and 2008

Pre-WWII – 1960 Period

The highest marginal tax rates continued to rise after 1935 until they reached 79% during the pre-WWII (1936-38) period.  The 79% rate applied to taxable income levels over approximately $75 million.  The pre- and late-war tax structures differed substantially (Figure 4).

The tax structure for 1960 is grouped with the pre- and late-WWII structures because there was very little change in the tax structure between 1944 and 1966.  For the lowest taxable income categories, tax rates started at 23% in 1944 and 20% in 1960.  After that, they made similar increases in marginal tax rates across all income levels, increasing until the maximum rates were reached near $3 million in income.  The maximum marginal rate for 1944 (and 1945) was 94%.  After 1945, the highest marginal tax rate was lowered to 91% and it stayed at either 91% or 92% through 1960 (as shown) until 1964 when it was decreased to 77% and 1965 when it was again decreased to 70%.

The late-WWII tax structures through the early 1960s are substantially higher than either the pre-war period or the recent 2008 structure for most taxable income levels.

Figure 4:  Marginal Tax Rates, 1938, 1944, 1960 and 2008

The 1968 –80 Period

Figure 5 presents tax structures for 1968, 1974, and 1980.  Four major differences are obvious between the tax structures of 1968-80 and 2008.  First, the marginal tax rates for mid-upper income couples during this period were much higher (reaching 70%), than the highest marginal bracket of 39.6% in more recent years.  Second, there were many more brackets during the 1968-80 timeframe than during the recent period.  In recent years, there were only 3-6 income tax brackets; during 1968-80, there were as many as 25 income tax brackets.  Third, the highest marginal tax rates were reached at higher income levels than during the more recent period.  Marginal income tax rates reached 70% (the highest rate) at incomes between $566,000 (1980) and $1.25 million (1968) during the 1968-80; during the recent period, maximum income tax rates were reached at $370,000.  Finally, tax rates were substantially higher in 1974, and 1980 than 2008 for all but the lowest income couples.  Tax rates were also higher in 1968 than 2008 for most couples, except for those with taxable incomes $60,000- $70,000.  

Figure 5:  Marginal Tax Rates - 1968, 1974, 1980, and 2008

Conclusion

Couples with incomes between $30,000 to $600,000 are taxed at higher rates in the recent period than they were in the pre-WWII era.  Beginning in 1944 and continuing into 1980s, couples in this income range paid higher rates than currently (1988-2008).  In the 1980s, tax rates were cut for most income groups. 

The most striking aspect of these graphs is how very high income couples have been taxed over the years.  Ignoring the very low rates of 1913 through 1916, maximum marginal tax rates varied from 25% during several years during the 1920s to 94% during 1944 and 1945. 

The highest income bracket, to which the highest marginal tax rate applies, occurred in the mid- to late 1930s, when it was over $77 million.  In the recent period, 1987 through 2008, the highest marginal income tax rates apply to relatively low incomes ($150,000-$400,000) when compared to earlier periods.  Couples in these income groups who earn an additional $1 pay the same marginal tax rate as very wealthy individuals who earn millions of dollars per year.

As was shown in the above graphs, the federal income tax structure has changed dramatically over the years.  Both the overall level of taxation and the progressivity of the tax structure (how rates change as incomes increase) changed over time.  The structure of taxation in any given era is politically determined and can depend on many factors.  First, society’s view of what is “fair” changes over time.  Society and the political climate determine how two couples, with very different incomes, should be taxed, relative to each other.  Second, tax structures have to provide sufficient revenues to pay for public services.  The demands that society put on governments, in terms of the amount and nature of public goods desired, affect the level of taxation.  In addition, government’s requirements for tax revenue, such as during time of war, strongly influences tax rates and tax structures. 

There have also been economic concerns that affected tax structures over the years.  Those concerns involved whether very high marginal tax rates will a) dampen work or entrepreneurial effort, or b) cause taxpayers to engage in tax avoidance behavior by legally or illegally sheltering money from taxes or, in the extreme, changing residences or citizenship.