A History of United States Tax Brackets

The United States employs a progressive income tax system where higher income levels are taxed at increasing rates. This structure uses tax brackets, which are ranges of income subject to a particular tax rate. When an individual’s income enters a higher bracket, only the income within that new range is taxed at the higher rate, not their entire earnings. The history of these tax brackets reflects the country’s shifting economic priorities, political philosophies, and national needs over the last century.

Establishment of the Modern Income Tax

The federal government’s first income tax was a temporary measure to finance the Civil War, starting with the Revenue Act of 1861. This tax system was repealed in 1872, and for several decades, the government funded its operations primarily through tariffs and excise taxes. The idea of a permanent income tax remained a contentious political issue throughout the late 19th century.

A constitutional challenge arose in 1894 when Congress passed another income tax, but it was struck down by the Supreme Court in the 1895 case Pollock v. Farmers’ Loan & Trust Co. The Court ruled that it was a “direct tax” that was not apportioned among the states according to population, as required by the Constitution. This decision made it clear that a constitutional amendment would be necessary to authorize such a tax.

Political will for a permanent income tax grew, fueled by a populist movement arguing that tariffs and excise taxes disproportionately burdened working-class Americans. This momentum culminated in the ratification of the 16th Amendment in 1913, which gave Congress the power to levy a tax on incomes without apportionment among the states.

Following the amendment’s ratification, Congress passed the Revenue Act of 1913. This act established a system of tax brackets that imposed a 1% tax on net personal incomes above $3,000. It also included a surtax that reached a maximum of 6% on incomes over $500,000. Due to these high exemption levels, the vast majority of Americans did not earn enough to be subject to the income tax.

World Wars and Mid-Century Highs

To finance the United States’ entry into World War I, tax rates increased substantially. By 1918, the top marginal tax rate had soared to 77% on income over $1 million. The number of tax brackets also expanded, creating a more complex, graduated system than the one established in 1913.

Following the war, the 1920s saw a reversal in tax policy under Treasury Secretary Andrew Mellon. Tax rates were reduced across the board, with the top marginal rate falling in several stages to 24% in 1929. This period of tax reduction was driven by the economic prosperity of the Roaring Twenties and a philosophy that favored lower taxes to stimulate investment.

The Great Depression and President Franklin D. Roosevelt’s New Deal programs brought an end to the era of low taxes. To fund government relief and recovery efforts, tax rates began to climb once again. In 1932, the top rate was increased to 63%, and by 1936, it had reached 79% on income over $5 million.

The need to fund World War II led to unprecedented tax rates and a broadening of the tax base. The top marginal tax rate reached its all-time high of 94% in 1944 and 1945 on all income over $200,000. The introduction of payroll withholding and quarterly tax payments brought the income tax to the majority of working Americans for the first time, transforming it from a tax on the rich to a mass tax.

Even after the war ended, top marginal tax rates remained high for nearly two decades. From the late 1940s through the early 1960s, the top rate consistently stayed above 90%. This sustained period of high taxation was a legacy of the war and the prevailing economic consensus that such rates were necessary to fund the government.

The Great Tax Reforms of the Late 20th Century

The high-tax paradigm of the mid-20th century began to shift with the tax cuts enacted under President John F. Kennedy in 1964. These cuts were the first major step away from the World War II-era rate structure. The top marginal rate was reduced from 91% to 70% by 1965, based on the argument that the reductions would stimulate economic growth.

A more significant transformation occurred during the Reagan administration with the Economic Recovery Tax Act of 1981 (ERTA). This legislation initiated major tax reductions, lowering the top marginal rate from 70% to 50% and cutting individual income tax rates by approximately 23% over three years. This was grounded in supply-side economics, the theory that lower tax rates encourage work, saving, and investment.

The culmination of this reform movement was the Tax Reform Act of 1986 (TRA ’86), a bipartisan effort aimed at simplifying the tax code. The philosophy of TRA ’86 was to “broaden the base and lower the rates.” This involved eliminating many deductions and loopholes to use the resulting revenue to reduce marginal tax rates.

TRA ’86 simplified the tax bracket structure by collapsing the existing system of over a dozen brackets into just two, with rates of 15% and 28%. This created the simplest tax rate schedule since the income tax’s inception. The top marginal rate of 28% was the lowest it had been since the 1920s. The reform was intended to be revenue-neutral, promoting economic efficiency and fairness by ensuring individuals with similar incomes paid a similar amount of tax.

The Tax System from the 1990s to Today

The simplified, low-rate structure of the Tax Reform Act of 1986 did not last long. In 1993, the Clinton administration passed the Omnibus Budget Reconciliation Act to address the budget deficit. This legislation added two new higher tax brackets of 36% and 39.6%, reintroducing a more progressive rate structure at the top of the income scale.

The early 2000s saw another shift with tax cuts under the Bush administration. The Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 lowered rates across all brackets, reducing the top rate to 35%. These laws also introduced a new 10% bracket and reduced taxes on capital gains and dividends, but were enacted with “sunset” provisions set to expire at the end of 2010.

The scheduled expiration of the Bush-era tax cuts led to a policy debate during the Obama administration. The American Taxpayer Relief Act of 2012 made most of the cuts permanent for lower and middle-income earners but allowed the top marginal rate to revert to 39.6% for high-income individuals. This compromise established a new baseline for the tax code.

The Tax Cuts and Jobs Act (TCJA) of 2017 was the next overhaul of the tax system. This legislation retained the seven-bracket structure but lowered the rates for most brackets, with the top rate falling from 39.6% to 37%. The TCJA also nearly doubled the standard deduction and made other changes to deductions and credits. Many of the individual income tax provisions of the TCJA are temporary and are set to expire at the end of 2025, setting the stage for future debates about the structure of the U.S. tax system.