US Historical Income Tax Rates
taxfoundation.orgGraph: Historical Marginal Tax Rate for Highest and Lowest Income Earners
https://commons.wikimedia.org/wiki/File:Historical_Marginal_...
Honestly kinda worthless without knowing the average marginal rate that people in each income brackets payed. People always hype up the 90% tax bracket but tax deductions and credits were so plentiful that the raw rates are very misleading.
Not to mention it was still a society where one could legitimately hide income from the government with ease.
A reminder that comparing old tax rates with modern ones is very hard, since there was a huge amount of deductions available for the high income earners, and hardly anyone actually paid anywhere near the nominal 91%.
It's also arithmetically impossible to pay the highest bracket given that it's a marginal tax rate.
Huh? This makes no sense. If you made over 400k you were in the guest tax bracket Yes, b you wouldn't pay 91% of your income but you would pay 91% of everything over 400k.
And there were fewer taxes and government income streams so single big taxes (like income tax) represented a larger share of an individual's overall tax burden.
I don't understand why we don't just not tax income below say $20k. It can't be a lot of money for the government even in aggregate, and it would make a huge difference in low income people's lives, arguably larger than any of the government programs their taxes are going to fund.
This is already the case and has been for quite some time. The table depicted at the link is shows tax rates before deductions. Think of it as a "top line" or "nominal" tax rate. People making under $20k (and more) have an effective tax rate of $0 in the USA.
As Mitt Romney pointed out in 2012 [1]: "Forty-seven percent of Americans pay no income tax."
[1] https://www.politifact.com/factchecks/2012/sep/18/mitt-romne...
With the earned income tax credit, many people at that income level "pay" negative income tax.
It is often negative.
The rates presented are slightly misleading because it's not including the standard deduction. For a single individual in 2021, income below $12,550 is effectively not taxed (or $25,100 for married couples).
The tax brackets are always based on AGI, millions have an effective negative tax rate due to EITC.
That's what the standard deduction does.
For example, 57% of households did not pay any federal income tax in 2021: https://www.cnbc.com/2022/03/25/57percent-of-us-households-p...
That's not even from COVID, the percentages are fairly similar going back a number of years.
If some politician really wanted to make a difference, then move FICA (employee not employer) to start at something like $30k and continue higher before the cutoff, then add a tax after a million to cover the low income folks' FICA. Then make the individual deduction $30k.
I am really opposed to taxing things that aren't actually realized (stock). The number of horror stories on HN about stock options just leads me to believe we do it wrong. I would rather we do a better job on the transaction to cash out.
The key problem for <$20k earners is the constant 7.65% FICA ("Social Security/Medicare") Tax plus any local taxes, not income tax.
After the standard deduction, the net income tax rate for a single filer making $20k is 3.75%. For a couple filing jointly it's 0 up through $25.5k/yr.
In both cases, the EITC guarantees those with at least one child a (substantially) negative effective tax rate, while single child-free filers are left with about a 2.6% effective rate.
$20k x 2 >> $25.5k. Marriage penalty in action.
The post-deduction income tax rate for a MFJ household making $40k is also 3.75%. There are some examples of a marriage penalty -- and others of a marriage benefit -- but this isn't an example of either one of them.
We do this in Australia (($18,200). It largely works well. The downside is people can use others tax free threshold. E.g. If someone is working and is married to housewife plus has a couple kids at uni, if they have a business or assets in trust they can distribute $20k to each person so now they have $80k effectively tax free.
I'm not sure the scale of this being taken advantage off though but it's well know benifit if you situation allows.
This should not be a problem. Basically you are saying each person gets 20k tax free. If one person is earning and supporting the other then yeah they should get 40k tax free. But if they are both working they will still only get 40k tax free.
I don’t disagree. And I think what with various subsidies and whatnot it may be that the effective tax rate for people making that little is zero.
Two theories: 1) Maybe it’s better for everyone to feel like they are ‘chipping in’ … for pride and unity.
2) Maybe the government is really invested in knowing what everyone makes, regardless of the net on it.
Also avoiding the "they don't even pay taxes" talk about people with low incomes.
If you would consider $12,400 a value of "say $20k" this is already the case... and the tax rate on the remaining $7600 is 10%. Someone earning $20k qualifies for other benefits worth more than $760, so their total effective tax rate is already negative.
I mean we basically don't 12% of $20k (ignore marginal rates just taking the top braket) is $2.4k and the standard deduction is $12,400 for single filers.
> I don't understand why we don't just not tax income below say $20k.
Because you want people to feel like they have skin in the game.
I wonder if they'd feel better about that if they could instead earn enough where they actually had to pay income tax. It's not much consolation that you have skin in the game if you can only get 15 bucks an hour.
With the deductions it cost nothing, but it gets then the same feeling, and a visibility of how it works should they start making more money.
This is easy. Because we have a well-established institutional hate for poor people. There is a subconscious belief that poor people are poor solely because of poor decisions. So, it's not our job to improve their lives. It would be 'unfair' for the rest of society to keep these 'freeloaders' afloat. /s
There's gonna be a lot of comments in here saying ^^ but unironically. It's just ingrained in the fabric of our society.
I'd love to see these state-wise as well. Looking at the highest ever federal rate and adding my current california rate would put the total marginal rate at 103%.
It's actually kind of amusing to think about what a marginal rate over 100% would lead to. If the top bracket is $1M+ and you earn $100M, and that last $99M is taxed at 102%, then you owe roughly $101M of your $100M earned, leaving you negative for the year. Better not go above the max! Quick! Donate that $99M in order to maximize your earnings!
Then in future years, make sure to avoid the problem by furloughing all your workers as soon as you hit $1M. Sure, that means both you and your workers only work 1/100 of the year, but what's the point in working longer than that if it earns you nothing?
Yeah, you could also pay your workers a lot more and take less yourself. But in that case you'd spend the whole year working to make what you could make in 1/100 of the year. So again, what's the point?
So I suspect a >100% (or even >90%) marginal tax rate would have a lot of very negative side effects. (Keep in mind that back when the top rate was officially >90%, there were so many loopholes that nobody actually paid that. Closing the loopholes and drastically lowering the top rate was actually revenue-neutral.)
> furloughing all your workers as soon as you hit $1M
You'd likely have a hard time getting them to come back the next year. Who is going to take a job that pays a normal daily wage but only employs you for three days? And can you really ramp the org back up up in three days? Maybe you'd be better off working for a few days then handing the job off to someone else for the rest of the year. Even then, good luck convincing the board that you're doing anything worthwhile coming in 3 days per year.
I think the equilibrium for this would be fascinating.
Interesting. I think it would be more impactful/meaningful if it also had columns for inflation adjustment, income distribution, and average effective tax rate.
It seems like when it first started, it only taxed the rich and at a very low rate. Then it expanded from there, to the point where 20% was the min and 91% was the max. Then lower to what we have now.
Looking at 1961, where we have 20% and 91% marginal tax rates, this comes out to be ~19k and 1.9mil, adjusted for inflation (2k and 200k nominally).
Compare these days, where we have 12% min and 37% max for 10k and 500k respectively.
If we were to tax at 37% using 1961 threshholds, you'd have to be making 95k inflation adjusted (that's the 38% threshhold), or 10k nominally.
Something else I found fascinating was that we had over 25 brackets back in the day. I can only imagine the headache that would be without an Excel spreadsheet.
People (myself included) might complain about taxes now, I can only imagine in the 60s.
Thanks for the insights, OP.
It might not be that bad, depending on the simplicity of deductions and other structures.
For example, 401k, IRA, 529, 403b, etc didn't exist. A lot of states and localities didn't have income taxes at that time either. If the deductions and overall tax code was simpler, then calculating the brackets would be easy - you're basically taking the percent times each bracket max until you get to your top bracket, then the amount in that bracket times that percent.
My understanding is that most people could do their taxes just based on the instructions on the back of the form just because there weren't so many deductions, credits, and complicated securities/instruments.
I couldn't find info on the deductions, but this was interesting.
> Something else I found fascinating was that we had over 25 brackets back in the day. I can only imagine the headache that would be without an Excel spreadsheet.
I have to imagine that the IRS tax tables aren't a recent creation, so the math should have been similarly easy.
Nowadays you get taxed because your mate lent you 1200 dollars through Venmo because you couldn't make the security deposit for the new overpriced apartment. (Of course your mate will be taxed as well when you repay him.) But Jeff Bezos can borrow against stock that he owns. Income tax is completely meaningless when the 1%-ers have tax evasion strategies that Joe Citizen couldn't possible take advantage of.
This is false in the US. Neither loans nor gifts of $1200 are taxed.
Also, loans don't evade the capital gains tax, they merely delay it. Stepped-up basis is what evades the capital gains tax.
Yes, when your friend says it's a loan and you treat it appropiately on your tax return it's not taxed. Else it will be. And if you can delay capital gains tax, great for you! How do I delay income tax?
Wrong. If it's not a loan then it's a gift and that's not taxed either for $1,200 as I mentioned. No need to even report it if it's under $16,000 per year.
Venmo will happily send you a 1099 form if it's above the 600 dollar threshold. We have Joe Biden to thank for that. It used to be higher.
A form doesn’t mean a tax is due
It means a transaction was reported and that you better have a good story about why the tax isn’t due and why you didn’t report it on your own forms
The people that are worried about the venmo 1099 are the people that have not been doing a lot more under the table
(Not to invalidate the rest of the population that is just irrationally afraid of tax collectors)
I'm not sure that's true. They are only supposed to report on a 1099 if they know it's earned income, not just a transfer. If they're reporting mere transfers to the IRS, then that's a problem.
That said, based on personal experience, I don't think Venmo is sending 1099s to everyone above that cumulative amount. I do believe they categorize transfers based on personal or commercial use. I expect a 1099 to be issued only for the commercial transfers.
Transaction is the word I use, not transfer, just in case you mentioned transfer for some other reason. My reason is deliberate. Some kinds of transactions are tax events, others aren’t. Venmo has no way of knowing. Anybody doing automated 1099s has no way of knowing.
1099s just tell the IRS to look for a tax filing from the same tax ID that matches.
That's sort of my point. If they don't know, they don't have to file one. You only need to file one if it's taxable. And I think this is all moot since I believe they differentiate between business and personal transactions, right?
The 1099 is for sales of goods and services. Your friend loaning you $1200 is not a sale of a good or service.
The 1% aren't borrowing against stock - or if they are - it's minimal and not worth discussion.
99% of the borrowing is coming from people worth close to a billion or more (0.001%).
I have no idea if this is how they do it, but I imagine they somehow "mortgage" their shares, then use the money as their own. Any interest you pay on investments is tax deductible, so that would reduce their tax burden. Not to mention, most of it isn't taxed since they aren't realizing those gains.
Again, just me brainstorming loopholes.
The interest is only tax deductible if you reinvest the money, which essentially means you can't use it. If you use it for living expenses, to buy a lambo, etc, then no deduction for you. Also, the loan must eventually be repaid, which means selling the assets and paying the taxes. Only if you carry the loan and pay the non-tax-deductible interest all the way until you die, then the capital gains taxes get erased by stepped-up basis and your heirs pay off the loans without paying capital gains tax. So stepped-up basis is the loophole, not the fact that you can take loans.
Also, carrying ever-increasing loans (including loans to pay the interest on the previous loans) until you die means you pay a lot of interest! The "buy, borrow, die" strategy only works if you withdraw about 1% per year or less, otherwise the loan interest will catch up to you, and eventually you'll be at risk of losing everything to margin calls. Meanwhile if you withdraw normally without loans, then you can withdraw more like 4% per year indefinitely and have way more money to spend per year even after paying tax. So "buy, borrow, die" only works for huge fortunes where you didn't plan to withdraw more than 1% per year anyway. It's not something that most rich people are going to do. It severely limits your cash flow during your lifetime simply for the sake of saving taxes for your heirs.
The people complaining about these loans have no idea how it actually works.
"The people complaining about these loans have no idea how it actually works."
Not that I'm one complaining about the loans, but so you have a link to how it works?
I didn't mean they directly use it like that, which is why I mortgage in quotes. I thought there's a specific type of small corp the wealthy use to avoid/reduce taxes by going through a sort of conversion.
I explained how it works. Which part is unclear? How you get the loans? At the asset levels where you might consider the "buy, borrow, die" strategy, like $100m+, you can simply ask your banker or more likely your family office will do it for you.
Lol OK. How about a link then?
A link to what?
A link to how the ultra wealthy access their money/stocks and reduce taxes.
There are plenty of articles you can find by googling buy borrow die, such as this one https://www.wsj.com/articles/buy-borrow-die-how-rich-america...
You talk to an investment bank and ask
You can borrow against anything, if someone is willing to lend
Collateralized lending is the least constructive of all
Make it worth their while
I'd encourage you to actually research how any of this works, because you are extremely misinformed and parroting the same lines that I see repeated verbatim around the internet by other misinformed people(ie "Bezos can just borrow against stock he owns and never pay any taxes!").
Do you have a link or can give a brief explanation? How the loans work that you say we don't understand?
Not really, because I have no idea the extent of ignorance I'm dealing with.
A simple question would be - how does the loan ever get paid off?
A simple point would be that not paying taxes on loans is not some crazy loophole that only the rich have access to. Literally anyone who has ever taken out a mortgage for a house or a loan for a car has taken advantage of this - I'd guess at least 80% of adults in America have a car or home loan.
How about a link then? It seems like you're trolling or otherwise violating the spirit of HN. I mean calling us all ignorant and uninformed, telling us that we're all wrong, then not explaining how we're wrong. In fact, your second comment conflicts with your prior one (claiming that Bezos can't borrow against stock to avoid taxes, then claiming that's exactly what people do).
Here you go, enjoy: https://www.irs.gov/privacy-disclosure/tax-code-regulations-...
Who is "us all" I'm calling wrong? Are you part of a group of tax ignorant fellows with HarryHirsch? Is it a group of people who get their understanding of tax code from r/antiwork?
Delaying taxes is not the same as avoiding or evading them.
Ok, now do the effective rates paid.
Better yet, do overall tax burden rather than just income tax.
Everyone loves to get a good ideological circle jerk going over the nominal 1950s rates but the actual tax burden at (various different points on the income spectrum) paints a very, very, different picture.
> the actual tax burden at (various different points on the income spectrum) paints a very, very, different picture.
Do you have this data? I'd be very interested in this picture.
1950 Tax Rate - 91.0% > $400,000
The economy overall grew by 37% during the 1950s. At the end of the decade, the median American family had 30% more purchasing power than at the beginning. Inflation was minimal, in part because of Eisenhower's efforts to balance the federal budget.
Unemployment remained low, about 4.5%.
The United States held the majority of the worlds factories and almost all of the ones that weren’t in a decimated war torn country.
It took nearly 20 years to rebuild Europe to the point that it could compete, and USSR was largely cut off from global supply in western worlds.
It’s not the same today and one cannot possibly assert with a straight face that we would enjoy a decade of 37% growth with those rates.
No one paid that tax rate.
https://taxfoundation.org/taxes-on-the-rich-1950s-not-high/
Average rate paid by the 1% back then was around 41%
Apples, meet oranges.
"The data comes from a recent paper by Thomas Piketty, Emmanuel Saez, and Gabriel Zucman that attempts to account for all federal, state, and local taxes paid by different groups of Americans over the last 100 years"
But regardless, it was higher in 1950, almost 6 points higher.
And look at al the caveats...
1] Some of the distributional assumptions in the Piketty, Saez, and Zucman paper are questionable. In particular, the authors assume that the full burden of the corporate income tax falls on owners of capital, which may not be correct. However, the authors note that they “have tested a number of alternative tax incidence assumptions, and found only second-order effects.”
[3] It is worth noting that, per the Piketty, Saez, and Zucman data, the tax rates of the top 0.1 and 0.01 percent of taxpayers have dropped substantially since the 1950s. The average tax rate on the 0.1 percent highest-income Americans was 50.6 percent in the 1950s, compared to 39.8 percent today. The average tax rate on the top 0.01 percent was 55.3 percent in the 1950s, compared to 40.8 percent today.
[4] The data from Piketty, Saez, and Zucman is not divided among federal, state, and local taxes, so it is difficult to tell exactly how much the rich were paying in federal income taxes specifically during this period.
>But regardless, it was higher in 1950, almost 6 points higher.
Sure, but you're being quite disingenuous with your post by suggesting that tax rates were any different back then compared to now.
They were different. 6% different. That is a big raise for any income.
The raw rate tells you something but not everything. What are the available deductions? What counts as income?
Now adjust those 1990 numbers for inflation
In 1944 the Federal income tax rate was as high as 94% for those making more than $200,000.
Posters will now stumble over each other to assure you that tax evasion was so widespread that actually the effective tax rate was lower than Reagan's wildest dreams.
All right, then I'll ask the other question. What do you consider "fair"? You don't say it, and the GP doesn't, but the implicit assertion is that the rich don't pay their "fair share", presumably because in some mythological past they used to pay 94%.
What is then "fair"? 94% ? Do you have a formula? At least a principle. If I make $100 MM (I don't), should I pay 50%, 60%, 70%? I mean, even if I pay 99%, I still retain more than 99% of the Americans, right?
I urge you to look into Zakat to find that formula. It works and is actually fair.
> Do you have a formula. At least a principle.
I have a formula and a principle. Anyone earning $100 MM or above should pay the same effective percentage as the median taxpayer... relative to their wealth.
The median US household has a net worth of $120k and pays about $10k in taxes each year. That equates to an 8% wealth tax.
If a billionaire has $1 MM in income one year, they could pay $2 MM in tax and not even notice, despite that being a 200% effective income tax rate. What matters, in terms of "fairness", is what that burden feels like, which is losing 0.2% of their wealth (assuming wealth of exactly $1000 MM). For the median household that would be like paying $240 in taxes.
Note that this doesn't even take into account the law of diminishing marginal returns, which states that the millionth dollar matters less to someone than their first dollar, so the millionth dollar should be taxed at a higher rate for the same hedonic burden.
I'm not sure why my comment is so objectionable, when all I did was offer a formula and principle as per the parent comment's request. I suspect that people with more than $100 MM in wealth have better things to do with their time than downvote suggestions on HN that they should pay more tax, so, in the absence of any more substantive criticism, I'll assume the objectors were people who consider themselves temporarily embarrassed millionaires.
I did not downvote you (on HN you can't downvote someone who answers your comment).
I think you proposed a reasonable option, but a bit imprecise. It's not clear if you advocate for a wealth-based tax, or some type of crossover tax, like a max between an income-based tax and a wealth-based tax. In any case, a lot of people (and especially a lot of startup oriented people, like readers of the HN forum) are against taxes on unrealized gains, which is what your proposal would end up to be.
As for the temporarily embarassed millionaire. I have a different reason to oppose taxing the wealthy. In my native country there's a saying that roughly translates "it's easy to prescribe 10 whiplashes to someone else's buttocks".
I personally find profoundly immoral to wish a category of people to suffer, when you know that you are not in that category. Now, you may say that the rich people don't "suffer" when they pay more taxes, but I don't know that. I believe in the benefit of doubt. As far as I'm concerned, if someone is rich, they deserve to enjoy the fruits of their labor, not to a lesser extent than me. I personally know lots, really lots of people who work much harder than me, and make more money than me. They have chosen to forgo or postpone gratification in life, and I chose not to. I can clamor for them to now forgo their reward, but I simply find that immoral.
You make some excellent points, thank you.
> like a max between an income-based tax and a wealth-based tax.
I'm not sure if you mean "mix" or "max" but I think my answer might be yes to both. :) What I'm proposing is that the rich continue to pay an income tax like everyone else, but above a certain wealth threshold they need to be assessed for paying a wealth tax. Any amount they pay in income tax can be counted towards their wealth tax, so they don't get double-taxed and don't have to worry about paying more than the median citizen (proportionally).
> I believe in the benefit of doubt.
The best philosophical approach to this that I've found is Rawls's "veil of ignorance"[0] thought experiment. While it is difficult to completely rule out the possibility of bias when asking someone to come up with a policy that has harsher effects on people who aren't like them, I feel confident that I would be willing to trade my current place for the place of a billionaire living in the sort of society I'm proposing.
> As far as I'm concerned, if someone is rich, they deserve to enjoy the fruits of their labor, not to a lesser extent than me.
What if the rich person became rich by inheriting money, or winning the lottery, or being lucky in some other way (e.g. finding oil on their property, or being born with the looks of a supermodel, or being the first to patent an obvious idea)? Societies do try to address these issues with different policy measures, but all I am asking is that the rich "suffer" the same amount as everyone else (i.e. as the median person in their society).
Paying a given dollar amount in tax obviously feels much hard if you have close to that amount in assets, compared to if you have so much money that it's literally uncountable and you wouldn't notice if that given amount were taken from you. So I think it is the poor that we should be giving the benefit of the doubt to when they say that the current system is unfair to them.
> I personally know lots, really lots of people who work much harder than me, and make more money than me.
And I know people who work much harder than me, and make less money than me, because the market doesn't value their work in the same way as it values mine. Sadly I see more people trying to protect the status quo for idle billionaires than trying to change the system so that the hard-working poor are rewarded according to their intrinsic worth as human beings, rather than how little the rich can get away with paying them for the value extracted from them.
What's fair is a constant rate across everyone regardless of income level (once a minimum threshold is reached) as Islam does in Zakat. Without getting into too many details, it requires 2.5% of the amount of money sitting in the bank (or equivalent) for a year to be donated to certain classes of charity. It works so well that it has been reported that there were no poor people left to accept Zakat in Iraq during the Ummayad period.
This.
Brains here clearly in overdrive trying to elicit all the vaguely possible excuses and attenuations, everything but confronting the hard fact staring them in the face on a G-damn spreadsheet.
Folks, it doesn't get more straightforward than a spreadsheet. Income tax in the US was higher in the mid-1900s than it is today in Europe.
>Posters will now stumble over each other to assure you that tax evasion was so widespread
Arranging your income to reduce the tax paid in accordance with the law isn't tax evasion.
I’m pretty sure the rationale given by current politicians for at-present proposals is that they are arranging their income to avoid taxes, and therefore they aren’t paying their “fair” share.
It’s nauseating but evasion (a legal term) and avoidance are taken as the same morally compromised position now.
Tax evasion is illegal and can get you thrown in jail. Tax avoidance is legal. And much everyone tries to avoid as much taxes as possible.