Then and Now: How Tax Brackets Have Changed Over the Past 100 Years
Tax season is here, and recent talk of massive tax reform has Americans even more focused on taxes. Yet even as tens of millions of taxpayers look to prepare their returns, tax reformers seek to put today's tax rates into a longer-term context that looks back at the history of the American income tax system.
When you go back 100 years and look at the way Americans paid income taxes in 1917, you can see how the tax brackets a century ago in some ways stand in stark contrast to what we see today -- yet they also have some interesting similarities.
Image source: Wikimedia Commons.
Tax brackets: 1917 vs. 2017
The tax brackets that Americans currently expect to pay for 2017 depend on filing status. You can get the whole set of 2017 tax brackets here, but below, you'll find the brackets for joint filers:
2017 tax brackets
|
Bracket |
Tax is this amount plus this percentage |
Of the amount over |
|---|---|---|
|
$0 to $18,650 |
$0 plus 10% |
$0 |
|
$18,650 to $75,900 |
$1,865 plus 15% |
$18,650 |
|
$75,900 to $153,100 |
$10,452.50 plus 25% |
$75,900 |
|
$153,100 to $233,350 |
$29,752.50 plus 28% |
$153,100 |
|
$233,350 to $416,700 |
$52,222.50 plus 33% |
$233,350 |
|
$416,700 to $470,700 |
$112,728 plus 35% |
$416,700 |
|
above $470,700 |
$131,628 plus 39.6% |
$470,700 |
Data source: IRS.
Given the way that many people reminisce about the good old days, you might expect that the income tax brackets from 1917 -- which was just four years after the 16th Amendment to the U.S. Constitution authorized a broad-based federal income tax -- would be simpler. Yet as you can see below, the bracket structure was actually more complicated:
1917 tax brackets
|
Bracket |
Tax is this amount plus this percentage |
Of the amount over |
|---|---|---|
|
$0 to $2,000 |
$0 plus 2% |
$0 |
|
$2,000 to $5,000 |
$40 plus 4% |
$2,000 |
|
$5,000 to $7,500 |
$160 plus 5% |
$5,000 |
|
$7,500 to $10,000 |
$285 plus 6% |
$7,500 |
|
$10,000 to $12,500 |
$435 plus 7% |
$10,000 |
|
$12,500 to $15,000 |
$610 plus 8% |
$12,500 |
|
$15,000 to $20,000 |
$810 plus 9% |
$15,000 |
|
$20,000 to $40,000 |
$1,260 plus 12% |
$20,000 |
|
$40,000 to $60,000 |
$3,660 plus 16% |
$40,000 |
|
$60,000 to $80,000 |
$6,860 plus 21% |
$60,000 |
|
$80,000 to $100,000 |
$11,060 plus 26% |
$80,000 |
|
$100,000 to $150,000 |
$16,260 plus 31% |
$100,000 |
|
$150,000 to $200,000 |
$31,760 plus 35% |
$150,000 |
|
$200,000 to $250,000 |
$49,260 plus 41% |
$200,000 |
|
$250,000 to $300,000 |
$69,760 plus 46% |
$250,000 |
|
$300,000 to $500,000 |
$92,760 plus 50% |
$300,000 |
|
$500,000 to $750,000 |
$192,760 plus 54% |
$500,000 |
|
$750,000 to $1 million |
$327,760 plus 59% |
$750,000 |
|
$1 million to $1.5 million |
$475,260 plus 65% |
$1 million |
|
$1.5 million to $2 million |
$800,260 plus 66% |
$1.5 million |
|
$2 million and up |
$1,130,260 plus 67% |
$2 million |
Data source: Tax Foundation.
Those brackets look particularly intimidating by today's standards. A top marginal rate of 67% meant that for every $3 top earners had in income, $2 went to the tax man.
However, there are a couple of things to keep in mind. First, this complicated structure of taxes came as a direct result of World War I. The previous year, the top bracket had been 15%, and the year before that had featured a 7% maximum tax rate. However, the War Revenue Act of 1917 sought to boost federal revenue in order to pay for war efforts. In addition to the changes to income taxes, the Act also created an excess profits tax, expanding corporate taxation as well as affecting individuals.
The other thing is that inflation has made these nominal income brackets a lot different. According to the Tax Foundation, price changes have made the $2,000 in income that defined the top of the lowest 2% bracket worth about $35,000 in today's dollars. Put another way, in order to get to a tax rate that's above the current low bracket of 10%, one would have had to make the equivalent of $350,000 in income, and the top bracket in 1917 applied only to those earnings the modern equivalent of more than $35 million.
What to expect for the next 100 years
The first 100 years or so of the U.S. income tax system provides some insight into what the future will bring. Taxes have generally followed cycles, starting simple and then gradually becoming more complicated over time. Then, reforms start the cycle anew, creating new, simpler structures as a new benchmark from which future additions again begin to complicate matters. Just as 1917's complex structure eventually gave way to simpler structures in the late 1920s, tax reforms in the mid-1980s dramatically simplified taxes by creating just two brackets that were later expanded to the current seven.
It's possible that taxes will once again get simplified in the near future. The Trump administration and Republican lawmakers in Congress have both proposed tax plans that would feature fewer income tax brackets. There's an outside chance that a simpler structure will apply by the time Americans have to file their 2017 taxes, although most political commentators believe that a 2018 tax law change is more likely.
Taxes have been a constant in the U.S. for more than a century, and they'll remain so in the coming century as well. By staying up to date with tax changes and keeping a longer-term perspective, you can prepare yourself and take maximum advantage of any tax breaks that you're entitled to use.
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