When talking about numbers and taxes, it is hard to talk about facts. There are always people who see the glass half empty when I see it half full. Of course, there are those that have a half dozen when I have only six.
My gleanings from reading about 50 different articles, with all sorts of political slants, did boil down to what I think of as facts:
The 1920s
During the administrations of Harding and Coolidge, tax rates were slashed from the confiscatory levels they had reached in WWI. The Acts of 1921, 1924, and 1926 reduced the top rate from 73% to 25%.
- Spurred in part by lower tax rates, the economy expanded dramatically. In real terms, the economy grew 59% between 1921 and 1929, and annual economic growth averaged more than 6%.
- Notwithstanding (or perhaps because of) the dramatic reduction in tax rates, personal income tax revenues increased more than 61% from 1921 to 1928 during a period of no inflation.
- The share of the tax burden borne by the rich rose dramatically. Taxes paid by those making $50,000 and up in those days climbed from 44% of the total tax burden to 78% by 1928.
The 1930s
Herbert Hoover raised tax rates from 25% to a maximum of 63%. Franklin Roosevelt boosted them to 79%.
- The 1930s are not remembered as one of the American economy’s better decades.
The 1960s
President Kennedy proposed a series of tax rate reductions in 1963 that resulted in legislation the following year dropping the top rate from 91% in 1963 to 70% by 1965.
- The Kennedy tax cuts helped trigger the longest economic expansion in America’s history.
- Between 1961 and 1968, the inflation-adjusted economy expanded by more than 42%.
- Tax revenues grew strongly, rising by 62%. Adjusted for inflation they rose by one-third.
- Just as in the 1920s, the share of the income tax burden borne by the rich increased.
The 1970s
Unearned income (interest and dividends) taxed at 70% and earned income (salary and wages) taxed at 50%. There continued to be a high exclusion rate on the percentage of long-term capital gains that were taxed. Through most of the 1970s 50% of gains were excluded from taxation. In 1978 Congress effectively reduced long-term capital gains to a rate of 28%.
The 1980s
1981: Reagan’s tax cuts included an across-the-board reduction in individual income tax rates to a maximum of 50%.
1986: The Tax Reform Act of 1986 reduced the number of tax brackets from fourteen to two – 15% and 28%, and increased the zero bracket amounts. However, the rates were effectively 15%, 28%, 33% as top earners lost the benefit of the 15% bracket. At this point many deductions were also lost, such as consumer loan interest, restriction of IRA deductions, a change in depreciation calculations, the restriction on taking losses from passive activities, etc., (Effectively raising rates.)
The 1990s
In 1993 the top rate was raised to 39.6% In 1997 capital gains taxes were first slashed to a maximum of 28%, with lower rates for certain taxpayers, and for five-year holding periods, ultimately resulting in 20%/10% rates.
The 2000s
2001: EGTRRA more commonly referred to as “The Bush Tax Cuts” phased in lower rates (and more brackets) including 10%, 25%, 28%, 33%, and 35%. This bill also phased in eliminating the marriage penalty, full exemptions for all taxpayers, and phased out the loss of deductions for higher earners.
2013: The American Taxpayer Relief Act of 2012 and the Patient Protection and Affordable Care Act. A new 39.5% rate has been carved out of the 35% rate; Higher income taxpayers must pay an additional 3.8% tax on net investment income; Higher wage earners will pay an additional 0.9% Medicare tax at a certain threshold. The limit on deductions and exemptions was reinstated for higher income earners. The top income tax rate for capital gains increased to 20% (plus the 3.8% on these gains if total income reaches a threshold of $200,000-$250,000.)
Did You Know:
According to data from the IRS, the top 1% of income earners in 2010 paid nearly 38% of the income tax burden, the top 10% paid 70.6%, and the top 25% paid 87.1%. The bottom 50% of income earners paid 2.4% of income taxes collected. The reality is it is impossible to cut taxes without the so-called rich receiving a share of the benefits.
Tax Freedom Day® is the day when the nation as a whole has earned enough money to pay off its total tax bill for the year (federal, payroll, state, local.) In 2012 it arrived on April 17. The year 2000 was the latest ever Tax Freedom Day® on May 1; a century earlier, in 1900, Tax Freedom Day® came on January 22.
Lady Godiva was one of the first tax protesters. She lived in England during the 11th century. According to legend, Lady Godiva’s husband Leofric, Earl of Mercia, promised to reduce the high taxes he levied on the residents of Coventry when she agreed to ride naked through the streets of the town, which she did.
For more information on the history of U.S. taxes or on other tax related topics, contact Henssler Financial at 770-429-9166 or experts@henssler.com.