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Explore Freedom » Income
Taxation

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Income
Taxation
by Gerald F.
Scully August
1, 1995

In
1913, the minimum marginal tax rate was 1 percent on income of $300,000 or more
(measured in 1993 dollars). The top marginal tax rate was 7 percent on income
above $7.5 million. Very few people had incomes that met the filing requirement.
As a fraction of the labor force, far less than one-tenth of 1 percent had to
file. Is it any wonder that political opposition to the federal income tax was
not widespread? The tax was imposed only on the very rich, and the rate they
paid was modest.

Provoked by World War I,
within four years marginal tax rates were increased, income subject to taxation
was lowered and the tax base was expanded. In 1917, a tax of 2 percent was
imposed on incomes above $23,000 and 67 percent on incomes above $23 million.
About 8.5 percent of the labor force filed a tax return that year.

Prior to World War II, a
tax of 10 percent was imposed on incomes above $20,000 and a rate of 81 percent
on incomes above $50 million in 1993 dollars. With the advent of war, the
minimum marginal tax rate nearly doubled and the maximum marginal tax grew to 88
percent on incomes above $1.8 million. Presumably, patriotism overcame tax
resistance. For the first time, employers were required to withhold income tax
from wages. This increased compliance and 60.4 percent of the labor force filed
returns. At this point, the majority of Americans were paying income taxes,
leaving only the bottom third or so of the labor force free of taxation.

After the war, marginal tax
rates fell, but so did the level of income subject to tax. By 1970, the minimum
marginal tax rate was 14 percent on incomes above $1,900 and the maximum rate
was 72 percent on incomes above $380,000; and 86.5 percent of the labor force
filed returns. Since 1970, a creeping incrementalism has widened the tax base
somewhat. During the Reagan administration, the top marginal rate was reduced to
28 percent. As a result, people were encouraged to realize more taxable income,
and the share of total income taxes paid by the wealthiest 1 percent of
taxpayers rose from 18 percent to 27 percent. . . .

Some of the gains achieved
during the Reagan years have been reversed by the Bush and Clinton
administrations. Today, the top income tax rate is 39.6 percent and, when the
phase-out of the standard deduction and the personal exemption are figured in,
the marginal tax rate on income reaches 43 percent for some taxpayers.

This is an excerpt from
NCPA Policy Report No. 188, entitled “What Is the Optimal Size of Government in
the United States?,” published by NCPA.

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This post was written by:
Gerald F.
Scully

Dr. Scully is senior fellow of the National Center for Policy Analysis in
Dallas, Texas, and a professor of economics in the school of management at the
University of Texas at Dallas.

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