The 16th Amendment in 1913 established the federal income tax. The U.S. income tax code has always had seven tax brackets based on income level, but the rates have fluxuated based on economic policies, political agendas, and societal needs.
Today I'm going to talk a little bit about the history of the tax code in the United States.
Most people don't realize that before 1913, we didn't even have an income tax in this country. We actually had to pass an amendment for the country to be able to charge an income tax.
When they first implemented it, just like today, there were seven brackets, but the seven brackets were a lot different.
In 1913, the tax brackets were 1, 2, 3, 4, 5, 6, and 7 percent. Today, the tax brackets are 10, 12, 22, 24, 32, 35, and 37 percent, so a lot different. Also back in 1913, you would have had to make the equivalent of $11 million to be in that top tax bracket of 7%. So pretty big.
Of course, when they implemented this was right when we were coming into the Gilded Age, which is when basically the top one percent owned everything. You had the tycoons, and you had the Rockefellers and the Carnegies, and they owned everything.
So the government said, look, these guys have too much, they control too much, so we need to tax them.
The top tax rate went from 7% to just under 80% in the 1920s. Then, of course, we had the Great Depression, so the top tax rate came back down.
Then we had World War II, and we had to pay for WWII. Because for every dollar that we were bringing in, we were spending $1.08.
They decided we needed to get more revenue coming in, so eventually they raised the top tax rate up to a little over 90%, and it stayed that way for a while, and it came back down to about 70% for a couple of decades, and then it came back down in the 1980s to about 40%.
That's basically where it's been for the last few decades since the 1980s. Except today, after the COVID outbreak and the shutdowns and everything and then pumping money into the system, for every dollar that we're bringing in, we're spending about $1.25-$1.30 and our tax rates are as low as they've been in 100 years.
So what do you think is going to happen in the future with your tax rates?
They're going higher, right? Even if we do nothing right now, the Tax Cuts and Jobs Act (TCJA) that was enacted in 2018 is going to expire at the end of 2025. So at the beginning of 2026, if Congress doesn't do anything, tax rates are going higher automatically because the TCJA sunsets.
Other videos in this series:
- The Problem: Many Americans Are Sitting on a Retirement Tax Bomb
- The History of the Tax Code in The United States (This video)
- Taxes in Retirement 101 - How Taxes Relate to You in Retirement
- Taxes in Retirement 201 (Part 1) - RMDs & Capital Gains
- Taxes in Retirement 201 (Part 2) -Social Security & Medicare
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