Historical U.S. Tax Rates

I heard a lot of news about ‘tea parties’ going on yesterday. If you don’t know, tea parties are supposed to mimic the Boston Tea Party, where New Englanders complained that they were paying tax, but had no say in government, i.e. taxation without representation.

That got me wondering why people would be participating in tea parties today. Nearly everyone in the U.S. has representation, so that can’t be it. From the Financial Times

The protests are focused on Mr Obama’s economic recovery efforts and $3,600bn (£2,400bn, €2,700bn) federal budget, which critics portray as “big government” measures that will pile debt on future generations.

Nothing about taxation directly there, but these tea parties are scheduled for April 15th (the deadline to file your US individual tax return). So does it have something to do with taxes or not? If you want to protest government spending as opposed to taxation, don’t have a tea party and don’t do it on April 15th. If you want to protest taxation, well, that got me curious.

I assumed that the US has the lowest taxes in its modern history. I knew that the first tax rates in our history would be really small, so my definition of modern history is, say, after the depression. The Tax Foundation has the historical numbers and even an Excel download. Unfortunately the data isn’t normalized, so I had to do some manipulating.

historical us tax rates

The moral is, don’t protest taxes when taxes are low (unless you think they should be higher).

I really have to thank Jon Peltier for his timely post about Callout Label Error Bars. I changed all of the years (four digit integers) into dates using

<span class="text">=DATE(YEAR(A2),1,1)</span>

. I wanted the x-axis to be a date, so I made every year January 1st. Next, I found the maximum marginal tax rate for that year for the married-filing-jointly filing status. I guessed that MFJ is the most typical filing status. Then I created an X-Y scatter chart with a big purple line.

For the error bar callouts, I used this range.

I started with .2 error bars for everything, then manually adjusted them to make them look nice. The formula in F2 is

<span class="text">=VLOOKUP(E2,$A$2:$B$98,2)-G2</span>

. It finds the rate for the date in question and subtracts the error bar value. I had to round all the historical dates to the nearest January 1st so that the error bars weren’t out in space.

The workbook isn’t pretty, but you’re welcome to download taxgraph.xls.zip.

18 Comments

  1. I like the look of the chart apart from (quibble quibble) two things.

    First I could use some gridlines: I can’t say for sure where the current rate is by eyeballing it and I got funny looks from colleagues when I held a ruler up to my screen (at least we have flat screens nowadays). They could be fashionably pale…

    Second, I think the diagonal sections between different values are a bit misleading: a pedant (quilty) might argue that they’re saying that tax rates changed incrementally throughout the year. I wish Excel had a chart type for this kind of step-line thing (I’m sure Peltier has an easy answer) because they’re tedious to assemble.

  2. Kevin says:

    I think the chart needs to show the bottom tax rate as well for perspecitive. The chart has no relevance to zero. It really should be a spread chart showing the high and low at the same time for real perspective. I find it amusing that it shows the top rate and one of the pointers is Reagan takes office (like that is on par with WWII).

    Additionally the scale of 0 to 100% is flawed. What was the income level, government costs in 1913 (year 1) compared to 2009. Come on.

  3. Kevin says:

    Upon further reflection, you can make a chart say whatever you(or your political idealogy) want.

    How many states were in the union in 1913 compared to 1960? Fewer states means lower tax rates….

    Why not show when Clinton took office. The rate was significantly lower than Reagan because more people were paying…

  4. Sean says:

    Interesting logic. Let me repeat to see if I understand your reasoning:

    - I heard there are these things called Tea Parties

    - I heard they’re modeled after the Boston Tea party which was about Taxation without Representation.

    - These can’t be about representation so they must at least be about taxes.

    - Hand waving number details about plotting in Excel

    - A plot showing that rich have paid anywhere from 8% to 95% and currently pay 40%

    - Therefore, these people are all full of crap.

    That about sum it up?

  5. Jon Peltier says:

    Nice chart, Dick. I like the dots connected to the callout lines; I wasn’t quite happy with the lines just ending and not really pointing to the labels, but your dots make an effective anchor.

    Mike: You mean a step chart, which I’ve covered in Line Chart vs. Step Chart.

  6. Michael Pierce says:

    The chart itself is nice and free of junk and I like the look of the callouts. That said, I’m not sure what it really tells me since the relative dollar amount to hit the maximum tax rate varies over time as well as the value of that dollar. It might be more insightful to see what percentage some arbitrary dollar amounts hit, with values adjusted for inflation, etc.

  7. Jim says:

    Dick, keep in mind that this is just the Federal Government. Yes tax rates are historically low but we have other taxes to pay for as well which may or may not have been around back in the day.

    I don’t know about everyone else but I live in good old “tax”-achusetts so I get my paycheck every week and pay the Federal and State Government before I see a dime. Then on my disposable income I pay my property tax, sales tax, gasoline tax, sin tax on tobacco and alcohol, and if that isn’t enough we have this road called the Mass Turnpike which is basically in place to extort money out of people who live in the western part of the state.

    So yeah, I’m pretty much taxed out and in the end what are we really getting back from the Government for services and infrastructure?

  8. us historical rates with gridlines

    I left the gridlines off because I don’t care what the real rate is, just the relative rate, trend, etc. But this doesn’t look bad, so I should have just included them.

  9. Michael says:

    Kevin -

    States in the Union, 1913: 48
    States in the Union. 1960: 50


    48ArizonaFeb. 14, 1912
    49AlaskaJan. 3, 1959
    50HawaiiAug. 21, 1959

    How does this mean lower tax rates?

    …mrt

  10. I’m making the assumption that the highest marginal tax rate is indicative of taxes overall and in general. I know it’s not a perfect correlation, but I think it’s good enough. Also, I’m a registered Republican – in case you want to read bias, I want to make sure you’re applying the correct bias.

    Kevin: 48 states as of 1912. I tried to show call outs that had an impact on the direction of the graph. Wars and depressions generally mean increasing taxes; prosperity usually means the opposite. Reagan was a ‘small government’ guy and his agenda was to reduce taxes and reduce spending. That was significant to the highest marginal rate, so it was notable IMO. Clinton had very little impact on the tax rate as is clear from the graph.

    The lowest marginal rate is always zero, by the way. I know that’s not what you meant, but as arbitrary as the highest marginal rate may be, I think a spread would be more so. It might be interesting, though.

    Funny, though that the Korean and Vietnam wars didn’t have the same effect. Tax rates were already pretty high during the Korean war, so there wasn’t a lot of room to move up. Vietnam actually saw a tax decrease. I would have liked to have a callout there around 1965, but I couldn’t determine a historical event that would have caused it – in fact it seems it should have been the opposite if Vietnam was costing us a lot of money. Perhaps it was just the policy of the current administration, or perhaps taxes were just too high regardless of the circumstances and needed to be reduced.

    Sean: You don’t like my logic? Taxes (by one measure) are as low as they’ve been since 1929. Don’t protest high taxes when we don’t have high taxes – that’s all I’m saying.

    Micheal: I thought about (and even started) doing a chart that shows what a family making $100,000 per year would pay in taxes over time. A family making that much in 1913 is probably a little different than today, so should I adjust the dollars for inflation? I think a good graph would be effective tax rate at an adjusted gross income number. So take $100,000, adjust to 1913 dollars, figure the tax, divide the tax into the adjusted dollars, get the effective rate. It sounded like a lot of work, so I went with highest marginal rate.

  11. fzz says:

    This is a US-centric topic, so I’ll assume US tax terminology.

    Maximum marginal rates are relatively useless. What really matters are AVERAGE tax rates, and then average tax rates separately by income decile and by wealth decile. And that leads to arguments about what the taxable income basis should be: adjusted gross income (AGI), gross income (i.e., including interest from tax-exempt state and local government bonds, excluding Schedule D and E losses) less full capital and business (active only or active and passive? i.e., without or with tax shelters?) losses rather than the capped losses that go into AGI, AGI after subtracting itemized deductions (aka taxable income), or Alternative Minimum Tax income.

    The graph of marginal rates also ignores how capital gains have been taxed over the years and the fact that the top wealth decile derives at least as much of its income from capital gains as from ordinary income.

    The current US tax code is very complex, but it’s much, much less complex than it was in 1980, just before Ronald Reagan became president. The inflation-ridden 1970s were the golden era of tax shelters, and while the top marginal tax rate applied, only 60% of capital gains were subject to tax, which means an effective top marginal rate on capital gains of 42%. And capital losses were included in full back then, so paper losses could completely offset ordinary income. I did mention that that was the golden era of tax shelters.

    A fine example of nonacademic discussion of US income tax policy: concentration on marginal rates because it’s all that 99.99% of the population can understand. Graphs too to make it pretty pictures!

  12. Sean says:

    Any chance these people are protesting the anticipated rise in taxes given the predicted federal deficit?

    http://blog.heritage.org/wp-content/uploads/2009/03/wapoobamabudget1.jpg

    Nahh

  13. Dan Maxey says:

    I thought the spirit of the protests were really about SPENDING. Governments can spend money they (a) acquire from taxes, (b) borrow through bonds, and (c) “create” by printing. Taxing is painful in the short term, but that’s just it…. it’s short term. Borrowing is a burden on the future (and if carried to extreme can bankrupt you). Printing devalues everything everyone has (and if carried to extreme can cause rampant inflation). You are correct that the protests are not about taxation. In essence they are about borrowing and printing. Now if you want to (because I surely don’t want to!), go figure out a chart to show over time how much money the US government has borrowed and/or printed (perhaps as a percentage of GNP) that might show a different story!

  14. Kevin says:

    Dick,

    Not to quibble too much but “The lowest marginal rate is always zero”. The chart needs to show the bottom rate not zero.

    The chart needs to show rates relative to adjusted gross income. If my AGI is zero than my rate is zero. Someone with an AGI of 30k pays a different rate than someone at 1 Million AGI.

    Additionally, the Korean war did, according to your graph, have an impact. The rate didn’t go down after WWII ended. It was the cold war. Funny thing is that Johnson’s war on poverty and Vietnam forced the rate down. See 1964-1967. Nixon didn’t show up until 1968.

    Clinton had surpluses that kept the rate flat. Lower than Reagan’s small government.

    Analytics are a dicey thing…..

  15. I’m gonna have to agree that this is not a very good indication of how we are taxed in today’s USA. Nor is it a good indicator of the kind of financial tyranny that our government imposes on it’s citizens. With the alternative minimum tax, death tax, property tax, corporate taxes, gas taxes, sales tax, the other hundreds of taxes, and in general progressive tax systems, there is no way anyone will ever really show how Americans are taxed (at what rates, amounts, etc). The tax code is simply too complex and dynamic.

    This is all beside the point for the tea parties. The tea parties are about Americans who made good choices by getting home loans that they could afford and build businesses that work being forced to pay for the homes and businesses of other Americans who did not make such good choices. This is about me paying for my neighbors mortgage, even though my neighbor makes less money, bought a bigger house than me, has more bathrooms than me, and spent 40 thousand dollars refinishing his kitchen (on a loan taken out against his mortgage). The tax parties were organized directly after Obama indicated that he intends to take a large portion of the “bailout” money and spend it on refinancing homes going into foreclosure. The tax parties are about government spending. The kind of spending that puts some Americans at a position of slavery to another set of Americans. This is not necessarily the entire focus, but rather the tipping point. The tea parties are protests of the bailout mentality of the current government. It is protest of the idea that the government can take my money by force and give it to someone else who screwed up.

    There’s a whole 1000 page book written about this called, “Atlas Shrugged,” if anyone would like to have this further clarified.

    All of this aside, I think it is rational to say that the very act of providing bailout funding IS a taxation in and of itself. Spending money that does not exist will directly result in inflation. If the government introduces “new” money into the money supply without an asset to represent it, then this simply devalues the rest of the money. This is how the government can “take” your money from you and “give” it to someone else without actually passing a law that gives them the authority to tax you. Call it what you want, but it’s still a tax in my book. Of course, to curb the massive inflation, we’ll be told that the government MUST raise taxes, “or else!”

  16. fzz says:

    The lesson the people running the US have failed to learn from the Vietnam War is that we can’t afford a half-hearted war and massive social spending at the same time. I haven’t heard them saying we’ll end the half-hearted war, just scale it down.

    The half-hearted war is due to one party, and the need for the massive social spending is due on balance more to the other party. So who would we elect to fix things? And once elected, would they fix anything?

    If the currently proposed bailout succeeds in averting a depression and/or return to crime levels of the 1970s (or worse), then it’ll be cheap. Time to read up on the state of US society in the early 1930s, just before the last great bout of stimulus spending and tax rate increases.

  17. sds says:

    RE:Speedothebrief: The government was at fault yes, and I agree that we who lived within our means lost more. However, the thing the government really failed at was regulating the banks, who were giving mortgages to people who couldn’t afford them with the assumptions that a. They could sell the loan on the secondary market, and b. that the housing market would continue to rise, and those who had trouble could just sell the home. In addition, they didn’t get anything from the banks for the bailout money, like making sure they would use the money for something other than boosting their financial statements (i.e. loaning out money again.)

    I definitely think the government needs to tighten its belt, and therefore am sympathetic to the cause, but what I saw in this last election is people who were bought and paid for by corporations interested in less regulation and tax breaks for businesses. That costs the government (and therefore the taxpayer) more in the long run when they have to do things like pay medicare and clean up environmental messes for companies that screw things up.

  18. The top US marginal tax rate is in no way ever a representation of the people’s average tax rate or even a reasonable standard to quantify anything except the maximum allowable tax rate over time. No one working for a living before Reagan took office was paying 70% of their paycheck to taxes.

    Additionally people involved in these tea parties may couple taxation and government spending because the government has no money, they merely have the ability to take the money from the people through inflation or taxation.

    http://nationaleconomist.blogspot.com/

    Have a great day.

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