Tax rates were higher in the past…

More laughter.

His dad laughed so hard that he went into a coughing fit. After hacking and spitting, he finally calmed down telling Joe “you have no idea what you are talking about.”


His brow furrowed in confusion, Joe’s mood changed from anger to curiosity. “What do you mean?” he asked.

“Son, the income tax you are paying now is much lower than what we paid when I was in my prime,” he replied. “Back in my day, over 50% of my income was taxed. 50%! And I didn’t have it as bad as those who earned more – some of them were taxed at over 80%,” he calmly informed Joe.

“Eighty percent? You’re kidding!”

“Not at all. The taxes from World War II were sky high. And the government didn’t drop those rates until nearly twenty years later,” he recalled.

Joe put his finger to his chin in thought. Maybe I don’t have it so bad. Standing up, he said “Dad, let’s go watch the game – my treat.”


The above short story only illustrates a lower-middle income tax family. If you were really wealthy back in the 40s and 50s, a great deal of your income was taken by the government. Even if you were quite poor, your tax rates were still above today’s rates, so it affected everyone to varying degrees.

The above graph is called a ‘box and whisker’ chart. The lower line represents the bottom 25%, the lower half of the red bar the next 25% up, the top half of the red bar the next 25% and the top line is the top 25% of all the marginal tax rate brackets. Although the prior statement seems like a mouthful, you can generally see how the tax rate has fluctuated wildly over time.

The single person tax tables were used to generate the above chart. When plotting other charts such as married (filing separately or jointly), they all looked nearly identical to the one above.

For the political inclined, the graph is also colored to show the party of the president in power at the time. Read into that what you will!


The author is not a tax lawyer nor an accountant. Therefore, what is presented here is just one part of the taxation story. A few items, however, are undeniable:

1. Before 1913, there was no permanent income tax. There were, however, previous income taxes that expired – mostly to pay for the civil war, which brings up point #2:
2. Wars are hideously expensive, not to mention horrifying (see last week’s graph “U.S. Soldiers Died from What?“). In the above graph, tax rates skyrocketed during both world wars, gradually coming down later (much later in the case of WWII).
3. The poorest 25% in this country have had their tax rates vary by about 20%.
4. The wealthiest 25% have had their tax rates vary by nearly 90% which has sparked considerable debate.
5. Today’s tax rates are relatively low.

It’s easy to feel like a victim when it comes to taxation, especially since it comes in so many forms. However, residents are enjoying very low personal income tax rates when compared to historical numbers. Whether or not income should be taxed at all is another issue which will not be discussed here. As we dig deeper into this sensitive issue, there will be future charts on taxes featured here on ‘Graph of the Week’, so stay tuned. Until then, enjoy taking home more of your pay than your parents did.

---

Questions:
1) What are the other sources of governmental revenue?
2) Will tax rates ever stabilize for more than a few years?
3) Tax rates shot up after the Great Depression – will they go up in response to our recession?

Data:
Code:
These graphs were generated using the ‘ggplot2‘ package within the R programming language:

1st graph:

ggplot() +
  geom_boxplot(data=tax.rates.frame, aes(x=Year, y=Single_Tax_Rate, group=Year),fill="red") +
  geom_rect(data=presidents.frame, aes(NULL, NULL, xmin=start_year, xmax=end_year,
      fill=party), ymin=0, ymax=1) +
  scale_fill_manual(values=alpha(c("blue","red"),0.1)) +
  
  ylab("Range of Tax Rates (Marginal)") +
  xlab("Year") +
  
  opts(title="United States Personal Income Tax Rates (Marginal)",
    legend.title = theme_blank(),
    panel.background = theme_blank())