March 27, 2009

History of Income Tax on High Incomes

Recently our congress has talked about a 90% "punitive" tax rate on the bonuses received by some AIG employees. 90% tax rate seems absurd. But did you know that as recent as 50 years ago we had a 91% tax bracket for high income levels? Our current maximum tax rates of 35% seems high now but imagine paying 91% marginal taxes. Before you blow a gasket over the thought of paying 91% of your income to the IRS, realize that that bracket only applied to the top amount of income. And at the time the bracket started at $200,000 when typical median income was less than $5000. But its still a very high tax rate even if it just applies to the very rich. So very few people actually paid such high tax rates.

The Tax Foundation has a document with a history of all the income tax rates from 1913 to 2009.

I pulled out just the maximum tax bracket for joint / married filers. Here is how it looks for the period 1942 to 2009:

As you can see, the maximum tax rate has been decreasing in steps over the decades.

Now keep in mind that these maximum tax brackets were only paid on the highest margin of taxes. This would generally only include the top 1-2% of tax filers. But while the max rate changed over years the income thresholds also changed. We can also look at the maximum tax rate versus the income level that it applies to.

For this kind of information to make more sense we'd have to adjust the income levels to current values.

If we look at the income figures adjusted with CPI data then it looks more like this:

Looking at the previous table you can see that in 1957 the highest tax bracket was 91% on people making over $400,000. But that $400,000 in 1957 dollars equates to about $3 million in 2008 dollars.

In the past 20 years the maximum rates have and the income levels they apply to have been relatively flat. The maximum rates have been in the 30-40% range and applied to income levels equivalent to over $300,000 levels.

4 comments:

  1. Looking back over tax levels. It's my impression that poverty levels have increased inversely porportional to tax levels. Or maybe the gap between the rich and the poor. The theory being that as tax level have come down, the rich got richer and the poor got poorer.

    What about it? Can you show some stats?

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  2. Randy,

    The census has data on the poverty rate for families going from 1959 to 2007 here:
    http://www.census.gov/hhes/www/poverty/histpov/famindex.html

    The poverty rate was in the high teens in the late 50's to early 60's but then dropped down to 10% or less by the late 60's. After that it fluctuated between 9-12% range.

    I don't see any correlation between the tax rates and the poverty level.

    The gap between the rich and the poor is another matter.

    http://www.cbsnews.com/stories/2004/08/13/national/main635936.shtml
    http://www.cbsnews.com/stories/2008/10/21/business/main4535488.shtml?source=related_story

    The rich are getting richer. But I don't think we can necessarily assume thats due to tax levels.

    Jim

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  3. So, the tax levels on the rich have decreased. One of the articles you referenced said that the tax burden on the middle class had declined (although trusting CBS news to say something honest about Bush may be questionable - but I digress).

    During the election, I heard that the upper class actually had a higher percentage of the tax burden. Seems to conflict with the story.

    Have you any stats on the middle class tax burden?

    ByTheWay, if you tire of these stats, I understand, but I really appreciate your analysis.

    ReplyDelete
  4. Randy,

    They did lower taxes for high income and middle income. But the high income group still pays a higher % of the whole.

    The term "tax burden" could mean a couple things. It could mean the % of taxes or the actual amount paid. i.e. it could mean your a tax rate is 2% more or it could mean you pay $2000 more.

    Higher income people have a higher tax bill. They make more so they pay more in taxes. Plus income taxes are progressive so the % rate goes up with your income. Because of this the higher income people will generally pay a higher % of the income taxes compared to lower income people. The top 5% of income earners pay around 40% of the taxes.

    But it really all just boils down to the higher your income, the more taxes you pay.

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