How is it that the tax code of the 1950s has a maximum tax rate of 91%, but it only resulted in an effective tax rate of 42% for the richest taxpayers? In fact, the situation is even stranger. The 42.0% tax rate on the top 1% takes into account all taxes levied by federal, state, and local governments, including: income taxes, wages, corporations, consumption, wealth, and estates. If we look specifically at income tax, the richest 1% of taxpayers paid an average effective tax rate of only 16.9% income tax in the 1950s. [4] Recent history shows that tax rates were extremely high about 50 years ago. How do historians (and educators) take into account the recent past when contextualizing today`s noisy events? A few years ago, a critic of the recent Bush administration claimed, “When Clinton stepped down [January 2001], federal income taxes as a percentage of the income of the typical American family were lower than at any time since 1966.” Maybe so, but the typical overall tax burden, given all household outflows, had increased. Americans` taste and justification for expanding government services had increased, as had their growing resentment of spending. These tensions have given rise to the “noisy events of today,” in which polarized denunciations seem to set aside pragmatic policy-making. Two final remarks: Despite these increases, Americans remain among the lowest-taxed citizens of advanced industrialized countries, with 28% of gross domestic product used for taxes. an average of 36% for the 38 member countries of the Organisation for Economic Co-operation and Development, while since 1942 the United States has spent far more than any other country on military and national security needs. Second, none of the above discussions addressed the issue of corporate tax, which is included in the assessment between the United States and the OECD, but is rarely studied historically, especially given their state and local components. A corporate income tax (IRS) is levied by the federal and state governments on corporate profits.

Many businesses are not subject to the IRS because they are taxed as intermediary businesses, with income reported as personal income tax. Overall, the idea that high-income Americans paid much more of their income in taxes in the 1950s should be abandoned. The richest 1% of Americans today do not face an exceptionally low tax burden by historical standards. The highest income tax rate has been lowered to 37% for tax years beginning in 2018. The additional 3.8% is still applicable, so the maximum federal income tax rate is 40.8%. The fact that the highest tax rates have been so high for so many decades, including such remarkable periods of U.S. growth, obviously does not prove that the tax rate should be 70% again. As Erik Brynjolfsson briefly pointed out, the tax rates themselves omit many details: about the levels of income to which the tax brackets applied, what loopholes and exemptions prevailed in each period, how much tax people actually paid, etc. The Economic Recovery Tax Act of 1981 lowered the highest rate from 70% to 50% and indexed inflation bands.

Data shows that between 1950 and 1959, the richest 1% of taxpayers paid an average of 42.0% of their income in federal, state and local taxes. Since then, the average effective tax rate of the richest 1% has fallen slightly. In 2014, the richest 1% of taxpayers paid an average tax rate of 36.4%. [3] It should be noted that, according to data from Piketty, Saez and Zucman, the tax rates of the richest 0.1 and 0.01% of taxpayers have decreased significantly since the 1950s. The average tax rate for the top 0.1% of Americans was 50.6% in the 1950s, up from 39.8% today. The average tax rate for the richest 0.01% was 55.3% in the 1950s, up from 40.8% today. The “excessively high” part of this question most likely refers to the higher “confiscatory” rates of World War II federal income tax, which the Eisenhower administration left in place until the 1960s. During the war, the highest “marginal rate” was 94%, but 94% of what? Then, as now, income tax rates have risen at significant stops. In this invented example, consider a rate of 15% up to $25,000, 21% from $25,000 to $50,000, and 25% above $50,000. Those earning $50,001 or more do not pay a quarter of their total income, but 15% of the first $25,000, 21% of the next $25,000 and 25% of anything over $50,000.

This is why the system is called progressive – the percentage increases with income, but the higher percentage only applies to new (marginal) incomes above each breaking point. In 1944-45, “the most progressive tax years in U.S. history,” the 94% rate applied to any income over $200,000 ($2.4 million in 2009, taking inflation into account). There`s a common misconception that high-income Americans don`t pay a lot of taxes compared to what they used to do. Proponents of this view often refer to the 1950s, when the highest federal income tax rate for most of the decade was 91%. [1] Despite these high marginal rates, however, the richest 1% of taxpayers in the 1950s paid only about 42% of their income in taxes. As a result, the tax burden on high-income households is only slightly lower today than it was in the 1950s. Through the Tax Policy Center, you can find here the list of the main tax rates from the introduction of income tax in 1913 until a few years ago.

After the war, federal income tax rates absorbed the steam of the roaring 1920s, falling to 25% from 1925 to 1931. Tax Policy Briefing Book: How do U.S. taxes compare internationally? Updated March 18, 2010. The percentage of GDP for taxes is the internationally recognized comparator; it does not mean the same as the percentage of personal income for tax purposes. The federal income tax as we know it was officially adopted in 1913, while the corporate income tax came into effect earlier in 1909. The American Taxpayer Relief Act of 2012 increased the highest income tax rate to 39.6%. The Patient Protection and Affordable Care Act added 3.8%, bringing the maximum federal income tax rate to 43.4%. At the World Economic Forum in Davos this week, Michael Dell, founder of Dell Computers, was asked about the idea of raising the marginal tax rate above 70%. (That`s now 37 percent.) Tax rates tend to change – often for the worse. This is a fact that Americans must always take into account when faced with the threat of a new tax. For example, when the federal income tax was introduced to finance the First World War in 1913, the marginal tax rate was 1% on income from $0 to $20,000, 2% on income from $20,000 to $50,000, 3% on income from $50,000 to $75,000, 4% on income from $75,000 to $100,000, 5% on income from $100,000 to $250,000, 6% on income from $250,000 to $500,000 and 7% on income of $500,000 or more.

In 1913, the top tax bracket was 7% on all income over $500,000 ($11 million in today`s dollars1); and the lowest tax bracket was 1%.2 In the 1990s, the maximum rate jumped to 39.6%. Over the next three decades, the federal government`s highest tax rate remained high and never fell below 70%. Did you know that half of U.S. taxpayers pay 97% of all personal income taxes? This story is important because it shows that tax law is constantly evolving. You need to pay a lot of attention to these changes as they affect your results. For example, a change in the income tax rate affects your investment portfolio and the value of your home. Second, the Tax Reform Act of 1986, which claimed that it was a single, two-tier tax, broadened the tax base and lowered the maximum rate to 28% for taxation years beginning in 1988.4 The hype here was that the broader base included fewer deductions, but brought in the same income. In addition, lawmakers have claimed that they will never have to increase the maximum rate by 28 percent. In case it`s easier to read, here`s a chart from CCH/Wolters Kluwer that shows the same information but only highlights the years when the higher tax rates changed: Very few people experienced this higher rate, however. .