Today is Tax Day (unless you are in Massachusetts or Maine where Patriots’ Day gives you an extra day to file), and although no one likes paying taxes, a look back on tax rates may provide some solace.
When examining past federal income tax rates, one conclusion immediately sticks out—tax rates are always changing. Though the last several years have been seen relatively stable rates, this is not the historical norm, especially for the highest earners. The figure below shows the evolution of marginal tax rates for the lowest and highest earners (in 2015 dollars).
Another clear takeaway is that while taxes can be complex, the income tax brackets themselves have been greatly simplified in recent years. For 2015, there were seven total income brackets, and the range between the lowest tax rate (10%) and highest (39.6%) was 29.6%, pretty tame by historical standards.
The award for the simplest tax bracket in history goes to the late 1980s, when there were two tax rates: 15% for those making less than $35,000 in today’s dollars, and 28% for those making more. On the other side of the coin, in 1918 (shortly after the U.S. entered into World War I), there were a total of 56 income brackets, with a range of 70% between the lowest rate, at 6%, and the highest marginal rate, at 76%. World War II saw one of the largest tax hikes in history, with the lowest tax rate moving from 4% in 1940 to 23% in 1945. In addition, 1944 and 1945 had the highest marginal rate in history, at 94% for the highest earners; the lowest rate in history was a 0% tax bracket for the lowest earners from 1977–86.
Presidential candidates have put forward a range of proposals from a flat tax, to a 0% tax rate for the lowest earners, and a 52% tax rate for the highest. At this point, the proposals are more talk than substance, and a divided Congress means that agreement on potential tax reform could remain a long-term objective. If nothing else, we hope that data outlining the past complexity and very high marginal rates will make your own tax bill easier to digest this year.
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The economic forecasts set forth in the presentation may not develop as predicted.
This research material has been prepared by LPL Financial LLC.
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