Tax Rates Have Increased

You will recall, from 3 weeks ago, the fiscal cliff and the discussion of income tax rates increasing and those higher rates having an adverse affect on the economy. People are concerned that either the rich people need to pay more, or they need to pay less. Perhaps we should look back at tax rates and then decide.

I recently came upon this site. Tax Foundation.Org. Their view of themselves is, “One of America’s most established and relied-upon think tanks, the Tax Foundation has since 1937 worked for simple, sensible tax policy at the federal, state, and local levels.”

While there, I found a pdf file about tax rate history adjusted for inflation. U.S. Federal Individual Income Tax Rates History, 1913-2011 (Nominal and Inflation-Adjusted Brackets). Prior to 1913 there were no income taxes. The table is instructive. It is a large file that shows the rate brackets year by year first in nominal dollars then inflation adjusted for each year. As 2013 is the 100th anniversary, I thought it would be interesting to see how it started.

In 1913, the Woolworth Building and Grand Central Terminal opened in New York. Henry Ford introduced the assembly line in Detroit. The Panama Canal officially opened. People were looking to the future. The government was big enough and capable enough to meet the needs of the people. The basics were in place and they worked.

The government of Woodrow Wilson introduced income taxes.

The inflation adjusted rate table is:

  • $0 to $453,292 Pay 1%
  • 453,292 to $1,133,230 pay 2%

all the way up to

  • over $11,332,304 pay 7%

You may have already noticed that the current rates are somewhat higher.

I might argue that some of the additional tax today is for “Optional Extras” that were not part of a government budget in 1913. I suppose some of them are not really optional today. Highways and airports were not too common in 1913 and not very optional today. Suppose the basics today would require double the tax rates. I am pretty sure that 2% up to $450,000 might be okay. What the heck, I am pretty ready to help. I’ll go for 4%.

On the tax policy front, the underlying problem is that tax policy is easier if you are trying to raise minimal amounts. Have a look here, Fair Tax, for an earlier blog on this topic.

I am not optimistic that the political class will decide that minimal taxation works better. Some could be raised by user fees and tolls. Helping other people works so long as they need the help. Doing expensive things that do not add at least as much value hurt everyone. Eventually!

The serious tax policy question should be, “Are the optional extras worth their price?” If they are not then we should not use taxation to pay for them. That removes productive assets from the folks who might use them better.

Low taxes are not on the horizon. That’s why you need to learn how to earn income tax-efficiently.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

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