Home » Economy » Income Taxes Then and Now – Why All the Fuss?

Income Taxes Then and Now – Why All the Fuss?

I came across a 1963 tax return the other day that belonged to a 63-year-old, self-employed tradesman named Edward.  For context, that was the year John F. Kennedy was assassinated.  Historically speaking, it wasn’t that long ago.  In 1963 Edward’s income was $6,806.  He paid $933 in income tax plus $259 in self-employment tax for a total of $1,192 dollars.

My own father was a Sears repairman and my mother a bookkeeper back then.  Together they made around $5,000 and paid about $1,020 in taxes.  But what struck me most about Edward’s income tax return were the rate tables for that year.  The top income listed was only $400,000.  The tax on that was a whopping $313,640 while income over that amount was taxed at a rate of 91% .  Did the rich really pay that much more back then?  (Imagine the stir today if we called for a return to the 1963 tax rate.)

It’s hard to put this into perspective because inflation rose by over 700% since then.  What wondered what these numbers would look like in today’s dollars?  How does the tax rates today compare with the tax rates back then?

The Inflation Adjustment

When we adjust for inflation, Edward made $ 50,247 in todays dollars and paid $8,800 in taxes.  He paid $1,912 in self-employment taxes and $6,888 in income taxes (a 13.7% income tax rate, close to what Presidential candidate Mitt Romney paid in 2010).

My parents, with two children, made $ 36,956 in today’s dollars, and paid $ 7,531 in taxes (a 20% income tax rate).

Someone making only $700 then would make $4,988 in today’s dollars and pay about $28.50 in taxes (a 0.6% income tax rate).

The guy who made $400,000 in 1963 was making $2,850,405 in today’s dollars.  He paid  $2,235,003 in taxes (a 78%  tax rate).  That sounds like a lot, yet it seems the rich in American some how always seem to getting richer.

(Bureau of Labor Statistics Inflation Calculator at: http://www.bls.gov/data/inflation_calculator.htm)

The Tax Rate Adjustment

Today, someone making $4,988 is taxed at 10% , or $49.88,  That’s $16.88 more than in 1963.

Both Edward, and my parents would be taxed at 15% today.  Edward would also pay a 15.3% self-employment tax for a total of  $14,087.  That’s an increase of $5,287 from the ‘63 tax rates.  Edward would pay slightly lower income taxes, $6,384  vs. $6,888, but self-employment taxes rose dramatically.  Since 1963, Edward’s self-employment tax jumped from $1,912 to $7,703.  So much for helping the small business man.

My folks would have to paid $5,344 in taxes at today’s rate, or $1,924 less than the 1963 rate. That’s surprising.  We keep hearing how high our taxes are, yet we are paying less now than we did 46 years ago.

The top income tax rate today is 35%.  President Obama wants to raise the top marginal income tax rate on salaries and other ordinary income from 35 percent to 39.6 percent by letting the extended temporary Bush tax cuts expire at year-end.  The income tax rates on millionaires has already been cut in half for some.  Someone making $2,850,405 pays  $997,642 in taxes at today’s rates.  That is $1,237,361 less than they would pay at the 1963 rate.

(US 2010 tax rates: http://taxes.about.com/od/preparingyourtaxes/a/tax-rates_2.htm)

So what’s the point?

America is still a very wealthy nation.  There is plenty of wealth.  We can afford to be a much better country than we are.  When the income tax code was first implemented in 1913 it was intended to tax only people who were financial well off.  Adjusted for inflation, the bottom rate at which a person had to start paying income taxes was about $100,000 in today’s dollars.  It was because the income tax rates weren’t indexed to inflation that income taxes eventually reached the middle and lower income households.  Our financial crisis has a lot to do with the decline of income taxes for the richest Americans.  We are asking those who have benefited most from this great American system to pay a tiny fraction more.  It is hard to see how so much resistance to this small ask is justified.  What’s all the fuss?

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