A Brief History of Income Tax

by Kelly Todd

November 11, 2014

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In the heated atmosphere of elections, debt, wage gaps, and poverty it is easy to point at taxes as a cause or remedy to the United States’ dynamic state. Although taxes would appear to be a simple discussion of economics and cause and effect, it is one of the most divisive topics in politics. To understand why the discussion of taxes is framed this way, it is important to look at the history of income tax – the largest source of revenue for the United States government.

The income tax was originally instated with the “Revenue Act of 1861” and was extremely controversial. It took two Supreme Court cases and an amendment to the Constitution in order for the tax to work. Congress formally re-instated the income tax in 1913 with a 1% tax on net personal income above $3000 and 6% surtax on income about $500,000. A mere 2 years later the top rate climbed to 77% in order to support the First World War. After the war, the top bracket was reduced gradually to 24%. By 1932 the tax had jumped to 63% once more during the Great Depression. These high taxes were to give more money to the government to stimulate the economy with. In the first 20 years, the income tax endured massive fluctuation and debate, that doesn’t cease as the United States moved into World War II.

Franklin D. Roosevelt attempted to pursue equality in World War II by proposing a 100% tax on incomes over $25,000; however, it didn’t pass through Congress. Despite the fact the 100% tax didn’t pass, between the years 1944 and 1951 the highest marginal tax 92%. These high taxes reflect the same ideology that occurred during World War I, raising taxes to pay for the war. Post War, taxes remained high to prevent a depression.

In 1964, income tax began to fall again, it dropped to 77% and then additional 7% drop in 1965. This rate remained steady until 1981, the first time the income tax remained a steady percent since its establishment. 1978 was another notable year because taxes were adjusted for inflation for the first time. Ten years later, the highest marginal tax had nearly been cut in half to 38.5%, partially in response to the recession in 1982. This is important because it shows a change in ideology from the depression until now. To recover from the depression, Roosevelt raised taxes on the rich to decrease economic inequality and to finance war and recovery. In the 1982 recession, Reagan lowered taxes across the board, especially the rich to relieve the burden of taxes and increase spending. This is also the time when “trickle-down” economics was implemented within the United States, a different way to reduce the gap between the rich and poor.

Since this transition, the gap between the rich and poor has increased and the highest marginal tax rate has remained below 40%. As recessions within the United States have increased and become more dramatic, greater portions of the population on either side of the aisle support taxing the wealthier groups of the population. Despite this, taxes haven’t risen for the rich. Throughout the history of the income tax, the manner in which the government taxes the richest of the country has reflected the socio-economic state of the nation, whether it be economic depression, war or income gaps.

Any opinions expressed in this article are those held by the author, and are not representative of the Policy Review.