Due to popular demand, I have updated my 2010 graph on top marginal tax rates. In addition, during this year’s tax season, I will be selling copies of my Top Marginal Tax Rates graph as a tabloid size 11″x17″ poster.
FYI, your marginal tax rate is the rate you pay on the “last dollar” you earn; but when you view the taxes you paid as a percentage of your income, your effective tax rate is less than your marginal rate, especially after you take into account the deductions and exemptions, i.e. income that is not subject to any tax.
Green line is the top marginal rate for married couples filing jointly (most years dividends were tax like ordinary income until 2003), orange is the top rate for income from capital gains. The top corporate tax rate is included for comparison. Your marginal tax rate is the rate you pay on the “last dollar” you earn; but when you view the taxes you paid as a percentage of your income, your effective tax rate is less than your marginal rate, especially after you take into account the deductions and exemptions, i.e. income that is not subject to any tax.
Over the years, changing the amount of taxes people pay was accomplished not just by changing rates but by changing the income limits of the tax brackets. Just looking at the top rates does not give the whole picture about who is paying taxes. Before the 1986 tax reform, the income tax had 15 brackets. In the 1930s, there were more than 50. The Wealth Tax Act of 1935, applied the top rate to income over $5 million and had only a single taxpayer: John D. Rockefeller, Jr. As the number of tax brackets decrease, the the top rate was applied to more people over the decades. Since 1987 the income tax brackets were combined so now more than a million people “qualify” for the top marginal rate. If you are interested here is the first 1040 form for 1913.
A federal income tax was imposed on several occasions in the 1800s. However, in response to a court case which determined that income from property was required to be imposed in proportion to states’ population, Congress proposed the Sixteenth Amendment. Thus in 1913, the modern income tax system was born.
In 1913, 358,000 returns were filed which was 2% of all households. While the top tax rate was 7% on incomes above $500,000 ($10.9 million in 2010 dollars), the first $3,000 ($65,331 in 2010 dollars) was exempt from the the income tax for single persons.
In 1918, 4,425,000 returns were filed which was 20% of households. Now the exemption was $1,000 ($14,352 in 2010 dollars) while the top rate of 77% was now applied on income over $1,000,000 to pay for World War I ($14.3 million in 2010 dollars). There was high inflation during and right after the war so by the peak in 1923 almost 40% of households were being taxed due to bracket creep. This was fixed in 1925.
In 1942, 36,619,000 returns were filed and the exemption had been dropped to $500 for single persons ($6,613 in 2010 dollars). For the first time the number of income tax returns filed exceeded the number of households.
I wanted to try out the new Tableau Public so I took the Average Tax Rates I calculated for my Comparing Rates by Income series and created this little graph. A couple disclaimers: I am assuming standard deduction and exemptions for the children and/or spouse in each example. Also I am combining all the taxes applied to your salary including: Income, Social Security, Medicare, and Payroll (paid by your employer).
Since this is a live, interactive chart you can hide/show each line using the check boxes at the bottom of the graph.
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