Income Taxes and the Rich: A Brief Historical Perspective

During the early days of our Republic, we imposed various forms of taxes to fund our new government, many of which had an eye to social policy – for example taxes on liquor were popular to depress the amount of drinking.

During the war of 1812, the first direct nationwide tax was imposed on property – including homes and slaves.

The government introduced a tax on income in 1861 to cover the cost of the Civil War. Driving this was the belief that the budget must be in balance. In 1862, with the Union’s debt growing at the rate of $2 million a day, a number of additional items were taxed, and the first “tax reform” bill passed Congress, establishing a two-tier system that would last for many years, with incomes below $10,000 taxed at 3% and higher incomes taxed at 5%. Interestingly, the bill also included some deductions.

With the war paid for, the income tax was abolished in 1872, and revenue was raised with high taxes on liquor and other goods.

In 1894, a flat rate federal income tax was enacted.

In 1895, the Supreme Court ruled the tax unconstitutional because it was a direct tax and not apportioned to the population of each state.

Lacking revenue, bonds were sold to fund the Spainsh-American war and taxes on goods were hiked significantly. To deal with the unconstitutionality issue, a new tax was conceived to tax business income and the 16th Amendment to the Constitution was proposed.

By 1913, 36 States had ratified the Amendment. In October of that year, Congress passed a new income tax law with rates beginning at 1 percent and rising to 7 percent for taxpayers with income in excess of $500,000. Form 1040 was introduced as the standard tax reporting form, which remains in use today.

By 1916, the highest was 15% and applied to those who were making more than $2 million a year

In 1918 the top tax rate was 77%, enacted to help pay for World War I

In 1945, to help pay for World War II, the top tax rate was raised to 94%. It stayed at over 90% until 1964, when it was lowered under President Johnson to 77%

In 1981, Kemp-Roth brought the top tax rate down to 50%

In 1986, the top tax rate was cut to 28. Over the ensuing years, Congress instituted an unprecedented number of tax breaks and loopholes as both parties sought help for “special interests” and wielded the tax code to enforce social policies.

In 1990, facing a shortfall, George Bush backed away from his infamous no new taxes pledge and Congress raised the top rate to 31%

In 1993, the top tax rate raised to 36% but with a surcharge that meant the rate was really 39.6%. Taxes were cut for the middle class and working families.

In 2001, George Bush cut the top tax rate to 33%

According to a Congressional report, in 2007, due to loopholes, the richest 400 Americans paid their taxes at a rate of 16.5%

— Jeff Kimball

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6 responses to “Income Taxes and the Rich: A Brief Historical Perspective

  1. Firstly Jeff – thanks for the time it took to research and put this out there for comment without a particular position attached. This is nice red meat for our readers and listeners to pounce on with opinion and observations.

    I can’t wait – so I’ll start…

    Let me say, the trend is definitely going back in the “correct” direction. The direction that I think the founders envisioned with a more limited central government capable of and required to tax only when absolutely necessary. This is a statement of State’s rights, not a denunciation of any and all taxes. Government and taxation should be closest to the governed.

    I’m currently reading – The New Road to Serfdom, a Letter of Warning to America by British and EU MP Daniel Hannan. I just finished a chapter on taxation last night. I’ve lifted a quote attributed to James Madison from this book, which provides some interesting perspective on what you have documented.

    “The powers delegated by the proposed Constitution to the federal government are few and defined. Those which are to remain in the State governments are numerous and indefinite. The former will be exercised principally on external objects, as war, peace, negotiation, and foreign commerce; with which last the power of taxation will, for the most part, be connected. The powers reserved to the several States will extend to all the objects which, in the ordinary course of affairs, concern the lives, liberties, and properties of the people, and the internal order, improvement, and prosperity of the State”.

    James Madison – Federalist Papers #45

    It would seem that the framers envisioned federal taxation as a way to wage war, secure the homeland, and conduct foreign trade and policy. Limiting this to the things that it made sense for the US to have a unified effort vs. 13 or more states individually.

    As you cite, the primary reasons we’ve raised taxes in the past have been associated with War. Even the Civil War, though driven by the societal evils of slavery, was a war nonetheless. Whether caused by slavery, states rights, or college football, the Civil War would have required taxation funding.

    Think about how this legacy is with us even today in the institutionalized war spending of the Department of Defense and how much of our tax dollars go there. It’s the one place in the budget that is the most Sacred Cow, and it dates back to the founding of the Republic.

    One thing confused me a little about your post. You wrote

    “During the early days of our Republic, we imposed various forms of taxes to fund our new government, most of which had an eye to social policy – for example a tax on liquor” – Can you elaborate on “social policy”?

    Almost every example you used of expansion of taxation was related to War, not to doing social good. This seems to reinforce the notion that expansion of social programs has not generally been a good justification for increased taxation, and in fact taxes ebb and flow more with armed conflict, vs. efforts to expand social programs.

    So now my 2 cents. Taxes are going back the right way, lower. Spending needs to lead that trend. Including spending on War and Defense. I can hear it now, “the rich should feel lucky they are not taxed at 90% anymore” – Just like the French should feel lucky they do not have to eat bratwurst.

    If you look at the tax reform proposed by the debt commission, they make the tax code fair and simple, remove loopholes, and will actually make the rich pay more, though that rate will be lower. I know it’s hard to grasp, but a simpler tax code with lower rates leaves less room to avoid taxes.

    All right, jump on in you bleeding hearts and pile on the uncaring conservative for believing that states and individuals are better at providing for their own communities, not Washington through taxation and expanding social programs.

    • “During the early days of our Republic, we imposed various forms of taxes to fund our new government, most of which had an eye to social policy – for example a tax on liquor” – Can you elaborate on “social policy”?

      Sure. While we have seen an unprecedented level of using the tax code to push social policy over the last 20 years, it was interesting to note that in the early days of our republic we created taxes on liquor, I think, to reinforce our puritan values. If only they had started taxing prostitution back then, we would probably be running a huge surplus today, but they just focused the taxes on “evils” like liquor back then. These taxes not only raised money, but pushed a social agenda as well (trying to limit drinking).

      Jeff K

    • “During the early days of our Republic, we imposed various forms of taxes to fund our new government, most of which had an eye to social policy – for example a tax on liquor” – Can you elaborate on “social policy”?

      Sure. While we have seen an unprecedented level of using the tax code to push social policy over the last 20 years, it was interesting to note that in the early days of our republic we created taxes on liquor, I think, to reinforce our puritan values. If only they had started taxing prostitution back then, we would probably be running a huge surplus today, but they just focused the taxes on “evils” like liquor back then. These taxes not only raised money, but pushed a social agenda as well (trying to limit drinking).

  2. Seems like several types of taxes were overlooked, namely tariffs and payroll taxes.

    Tariffs were some of the highest in the industralizing world I believe from the 1860s, when the south was no longer around to object to about 1913 (when Wilson snuck into the Presidency), maybe between 35% to 45%, when places like Japan, China, etc. were kept at a 5% ceiling. I would be interested to see if tariffs delivered a substantial proportion of revenues during ths period while fulfilling the socio-economic policy advocated by Alexander Hamilton in encouraging American industrialization.

    Payroll taxes were increased in the 1980s if I recall correctly. Seems like everyone that works for a paycheck pays them until that cap is hit (~$100,000?). I would not be surprised if they go up a bit again in the future, although a expanding workforce should ease the pain (which I assume will continue since we will supposedly become a 400 to 500 million person country over the next 50 years).

    As for taxes on drink, the folks in W. Pennsylvannia were not happy, and hence the subsequent rebellion where Washington asserted Federal powers.

    Taxes probably should go up for the rich to pay for the two wars. It is the only practical way for quickly securing funds, and righting finances quickly, and could set a useful precedent that would focus the minds of societies leading citizens about wars – like being more serious about winning them. Maybe 50% for the short term, a la the average, historical take of a landlord on a peasant’s crop in many preindustrial societies.

    After that I generally favor a downward direction. However, I would prer lowering corporate taxes over lowering top personal income tax rates, and I would like to remove most loopholes/credits/deductions.

    In an ideal world, I would keep the research credit for businesses. For the middle class: more circumscribed interest deductions for one house (say up to a million since 80 plus percent of people live in cities), an annual contribution to a health account that could roll over , an annual contribution to an education fund that accumulates savings for college for named dependents over the course of a generation (in case some go do grad school, or even beauty school following college).

    Otherwise, I would be up for national sin taxes. Where are people going to go? Mexico? Not with bodies swinging from the telephone poles of nice places like Cuernava (kind of Greenwich of Mexico City). And to paraphrase and distort what Earl Long may have said: Don’t tax you, don’t tax me, tax that drunk behind a tree….

    • Mike,

      I should have been more specific. I didn’t include payroll taxes and a more detailed look at excise taxes — I really just focused on income taxes. I included the parenthetical note up front about the liquor tax to make two points — that before the income tax the government was doing something to raise money, and while the social engineering via taxes is at unprecedented levels now, our puritan values drove the taxes on liquor in the early days of the Republic, which I thought was interesting. I’m going to try to update this with Medicare, social security, etc. soon. Thanks for all the illuminating comments. — Jeff K

  3. Here is an introductory sentence from wikipedia that lacks citation – Tariffs were the largest source of federal revenue from the 1790s to the eve of World War I, until it was surpassed by income taxes.
    – I usually take Wikipied with a grain of salt, but in this case I think they may be correct. Heck, the Underwood Tariff cut under the Democrats came into being right with that new income tax that followed the constitutional amendment.

    Even if the statement is half true, I suspect tariffs probably deserve serious as part of any history of tax policy and efforts to promote certain socio-economic agendas (slavers for free trade; certain nationalists along with the commercial class and new urban workers for Republicans and protection).

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