With the 16th Amendment solidifying the federal government’s ability to withhold taxation revenues, the income tax was here to stay. It was re-issued in 1894 as a one percent tax on incomes greater than $3,000, and a six percent surtax on incomes greater than $500,000. From this year forward, the top bracket income tax bracket has never been that low again:
In 1918, the top rate was 77% in order to pay for World War One. The government decreased the rate to 58% in 1922, and then to 24% in 1929. Surprisingly, the rate reached 63% during the Great Depression, and then was increased to 94% during World War Two. According to Wiki (be nice), President Franklin Roosevelt tried to increase the top bracket’s rate to 100% (on all incomes above $25,000) while Congress attempted to enact “payroll withholding.” The rates never left 90% too far until President Kennedy lowered it to 70%. The government lowered the rate again to 50% in 1982 and then to 28% in 1988 during the Reagan Administration. During the Clinton years, the rates hovered around 39% until they were lowered by the Bush administration to 35%, but that rate is set to expire in 2011.
At the present, according to the IRS, the top 0.1% of taxpayers pays 17.4% of federal income taxes, and the top 5% of taxpayers pays 57.1%.
Even though the federal income tax now represents the largest contributor to the monetary resources of the federal government instead of tariffs, taxation is more often than not used as a political tool to accomplish certain tools other than accrue fiscal resources. For example, the tax law can be rewritten to encourage consumers into purchasing certain goods or services, or to disincentivize people from engaging in certain economic activities.
Generally speaking, the American tax system is “progressive”, meaning that those with higher incomes respectively are required by the system to pay a higher percentage than those with a lower income. The system divides certain income levels into “brackets” that then determine at what rate that wage-earner pays his taxes.
However, why have a progressive tax system? What exactly is a progressive tax system? More on this in my next blog!