U.S. Federal Tax Rates (1913 - 2011) & Capital Gains (1988 - 2011)

by Ben Lorica (last updated Sep/2011)

Below is a graph of U.S. Federal Individual Income Tax Rates History from 1913-2011. Beside the marginal rates for the top/bottom tax brackets, I included a color-coded band at the top to indicate which party had control of the White House. Far from being "class warfare", a return to Clinton era rates isn't as extreme as detractors claim. The question for policy makers is whether there are more efficient alternatives. In terms of changes to the top marginal rate, here are a few periods that stand out:
  • Major Tax Cuts: 1921-1922 & 1924-1925 (Harding & Coolidge), 1963-1965 (Johnson), 1981-1982 & 1986-1988 (Reagan)

  • Major Tax Increases: 1916-1917 (Wilson), 1931-1932 (Hoover) & 1935-1936 (Roosevelt),
  • [ NOTE: I also discuss Tax rates for Capital Gains (see below) and the Combination of Income & Payroll Taxes (jump to the Buffett Rule). ]

    U.S. Federal Individual Income Tax Rates History, 1913-2011

    So how does the tax burden in the US compare with other countries? In the scatterplot below, I compare 25 countries using two metrics:
    Horizontal Axis: Total taxes as percentage share of GDP (for the US this includes federal, state, and local taxes).

    Vertical Axis: Corporate income taxes as percentage share of GDP.

    In addition I highlighted regions within one standard deviation of the means ("dashed lines") of each of the axes. At least for the year 2009, among developed countries the US was among the least taxed.

    2009 Taxes as Share of GDP:
    Total Taxes & Corporate Income Taxes

    [ Citizens for Tax Justice, 2011 ]


    Long-term Capital Gains Tax: 1988 - 2011

    Another issue that frequently comes up in political negotiations are capital gains tax rates. Capital gains tax rates are more complex than (ordinary) income tax rates, and is generally split according to how long a seller has owned an asset: usually short-term rates apply when the seller owned the asset for a year or less, and long-term rates apply when the holding period is over 5 years. But the rates and definition of short/long term holding periods change even more frequently than income tax rates (as the graph above shows, income tax rates tend to stay the same over extended periods).

    In general the short-term capital gains tax rate is the same as the sellers marginal income tax rate for the year of the sale. Progressives complain when long-term capital gains tax rates are lower than income tax rates -- an oft-cited example is Warren Buffet (income mainly from investment profits) vis-a-vis his secretary (income mainly from salary). Setting aside considerations pertaiining to fairness, fixing this "loophole" might actually work better than raising marginal rates1 on "millionaires":

    The millionaire's tax, depending on how it was implemented, would almost certainly make the tax code less efficient while raising little additional revenue. The same aim could be achieved simply by taxing capital gains and dividends at ordinary income rates, as they were before Bill Clinton and George Bush lowered the rates. Coupled with a corporate-tax reform that lowered the top corporate rate, such a proposal would both make the system more progressive and more efficient.
    With this in mind let's compare the following two values:
    1. Long-term Capital Gains Tax Rate, of individuals in the Highest Income Tax Bracket

    2. MEDIAN Income Tax Bracket => Take the DISTINCT income tax rates & calculate their median value.

    Note that it was under Clinton that (1) became lower than (2). It has stayed that way since then:

    Long-term Capital Gains Rate and Federal Income Tax Rate (1988 - 2011)
    [MEDIAN Income Tax Bracket = the MEDIAN value of all DISTINCT income tax rates.]


    The Buffett Rule & the Distribution of Effective Individual Income and Payroll Tax Rates

    The next two charts use data from the Tax Policy Center and combines Individual Income and Payroll Tax Rates, under current laws. A recent report suggests that roughly 335,000 taxpayers with income above $500,000 have effective individual income & payroll tax rates below 12.6%, while roughly 16.3 million taxpayers with income below $50,000 pay more than 12.6%. Given the substantial difference in incomes between these groups, do we really want a Federal Income & Payroll tax system that lets that happen? (Note that these tax rates do NOT account for state and local taxes.)

    The estimates for the number taxpayers with rates below & above 12.6% can gleaned from the Dot Plot below.
    1. A quarter of all taxpayers with incomes above $500,000 paid at most  12.6% of their income in income and payroll taxes (the 25th percentile is 12.6% for the both the "500-1,000" & "More than 1,000" groups). To emphasize their maximum  tax rate is 12.6%. In comparison, for the next three items we identify the minimum  tax rates paid by groups of lower income taxpayers.

    2. A quarter of all taxpayers with incomes between $20,000 - $30,000 paid at least  15.7% of their income in income and payroll taxes (the 75th percentile is 15.7% for the "20-30" group).

    3. A quarter of all taxpayers with incomes between $30,000 - $40,000 paid at least  18.4% of their income in income and payroll taxes (the 75th percentile is 18.4% for the "30-40" group).

    4. Half of all taxpayers with incomes between $40,000 - $50,000 paid at least  13.1% of their income in income and payroll taxes (the Median is 13.1% for the "40-50" group).

    Distribution of Effective Individual Income & Payroll Tax Rate, by Income Group
    [ Income Groups: Cash Income Level (thousands of 2011 dollars) ]

    Related resources:
  • U.S. Income Inequality: Share of Top Earners (1917-2010)

  • Wall Street Bonuses by the numbers

  • 2010 U.S. Census Survey: Income by Ethnicity and Gender

  • (1) In a recent study Diamond & Saez suggest that "... very high earners should be subject to high and rising marginal tax rates on earnings".
    (2) Federal Income Tax and Capital Gains Tax data are from the Tax Foundation.

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