If You Think Taxes Are Too High, You Need to Read This

By Matthew Frankel Markets Fool.com

A cornerstone of President Donald Trump's campaign was tax reform. You can read the full details of Trump's tax plan here, but the general idea is that Trump pledged to consolidate the number of tax brackets from seven to three, lower the tax rates for most Americans, eliminate the marriage penalty, and generally simplify our tax code.

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While taxes for many Americans are indeed higher now than they were under, say, President George W. Bush's tax cuts, from a historical standpoint, federal income taxes really aren't that high, nor is there a high number of tax brackets. Here's a quick history lesson to put things into perspective -- after all, it wasn't that long ago that high earners paid federal income tax rates of 70%, 90%, or even more.

Image source: Getty Images.

The last 65 years of federal income taxes

To put things in perspective, take a look at the top federal income tax rates since 1952, as well as the income threshold above which they were applied. For simplicity, I've only included the income thresholds for married couples filing joint tax returns, but the same top tax rates apply to all filing statuses.

Year(s)

Highest Federal Income Tax Rate

Income Threshold (Married Filing Jointly)

Inflation-Adjusted Income Threshold

2003-2012

35%

$450,000 (2012)

$477,457

2002

38.6%

$307,050

$415,777

2001

39.1%

$297,350

$409,008

1993-2000

39.6%

$288,350 (2000)

$407,915

1991-1992

31%

$86,500 (1992)

$150,190

1988-1990

28%

$32,450 (1990)

$60,481

1987

38.5%

$90,000

$192,995

1982-1986

50%

$175,250 (1986)

$389,520

1965-1981

70%

$215,400 (1981)

$577,251

1964

77%

$400,000

$3,143,265

1954-1963

91%

$400,000 (1963)

$3,184,353

1952-1953

92%

$400,000 (1953)

$3,649,483

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Data source: Tax Foundation. Inflation calculator from U.S. Bureau of Labor Statistics.

As you can see, the current top tax rate of 39.6% is on the high end of recent history. In fact, it's tied for the highest tax bracket of the past 30 years. However, before 1987, the top income tax rates in the U.S. were significantly higher. The top federal tax rate was 70% as recently as 1981, and it was above 90% before 1963, all the way back to 1944.

It's worth pointing out that in those days, the top income tax rate was only applied to the richest Americans. In fact, the 91% tax rate in 1963 was applied to taxable incomes of more than $3.18 million, in today's dollars, so it's fair to assume that a very low percentage of Americans actually paid such a high rate. And this is a marginal tax rate, meaning that it only was applied to taxable income above this amount. Even so, the rest of the tax spectrum was still rather high compared to today -- for example, a married couple earning an inflation-adjusted $255,000 in 1963 was in the 50% tax bracket.

If you think the current tax brackets are too complex

Aside from the assertion that tax rates are too high, the other aspect of Trump's plan involves condensing the current seven tax brackets into just three, and taking other steps to simplify our tax code.

To be fair, many people on both sides of the political spectrum agree that our tax code has become a bit too complicated. And there have been times when the marginal tax rates were much simpler. In 1989, for instance, there were just two tax brackets -- 15% and 28%.

On the other hand, during some of the periods in the chart where the top rate sounds much higher, the tax brackets themselves were much more complex. For example, in 1955 there were 24 different tax brackets (26 for people filing as head of household) with rates ranging from 20% to 91%. If you think calculating taxes now is a complicated process, just try to determine the federal income tax of a single person with $95,000 in income in 1955 -- it's a 20-step process.

Now, the tax brackets themselves aren't the only thing that makes our tax system complicated. Many deductions, credits, and other tax items are far more complex than they have been historically. The point, however, is that seven tax brackets really isn't too excessive in a historic context.

What will President Trump and the Republican leaders in Congress do about taxes?

Only time will tell what the actual tax reform package will look like, but the President and congressional leaders agree on many of the main points (such as three tax brackets and the marginal tax rates), so there's a good chance we'll see something happen. In the meantime, keep the current tax structure in perspective -- after all, you don't have 92% tax rates and 24 different brackets to worry about.

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