Taxes on Income
The federal income tax came into effect in 1913 with ratification of the Sixteenth Amendment to the Constitution: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration." In the United States, tax rates are approved by Congress and signed into law by the president; the Internal Revenue Service (IRS), a bureau of the Department of Treasury, enforces the tax codes and collects tax payments, which are due each year on April 15. The IRS processed tax returns from 130.7 million individuals in 2003, as well as returns from 5.9 million corporations and 29.9 million employers.
INDIVIDUAL INCOME TAXES. The percentage of an individual's income that he or she pays in federal tax is based on his or her income level, which determines the individual's "tax bracket." Tax brackets change as Congress modifies the tax codes, but individuals with higher incomes are always taxed at a higher rate than individuals with lower incomes. Taxpayers who are not claimed as dependents on someone else's tax return are allowed to take "personal exemptions," that is, an amount excluded from their taxable income. Table 8.2 shows personal exemptions and the lowest and highest tax bracket rates for individual income tax in the tax years 1913 through 2003. In 1913 income over $3,000 ($4,000 for married couples) but less than $20,000 was taxed at a rate of 1%. The highest tax bracket that year was 7%, paid on income exceeding $500,000. By the 1950s personal exemptions had been reduced to $600 for a single person and $1,200 for a married couple, with effective tax rates for the lowest bracket of about 20% on income under $4,000. (The effective tax rate is the percentage derived by dividing the actual tax paid by total taxable income.) Taxpayers in the highest bracket during the 1950s—in other words, those with the most income—paid approximately 90% on income above $400,000. By 2000 personal exemptions were $2,800 for individuals and $5,600 for married couples, with a rate of 15% on income below $43,850. At the turn of the twenty-first century, the highest tax bracket paid 39.6% on income over $288,350.
According to the IRS in Your Federal Income Tax: For Individuals, for the 2004 tax year a single person making less than $7,150 paid just 10% of his or her income, while a single person making more than $319,100 paid $92,592.50 plus 35% of every dollar earned over $319,100. These numbers, however, are not based on the total salary a person earns; rather, they are based on adjusted income levels. Through a variety of tax credits and deductions, individuals can lower the amount of income on which taxes are calculated, thereby lowering the amount of tax they pay.
CORPORATE INCOME TAXES. The federal tax on corporate income has been in effect since 1909. Because corporations are owned, and individuals derive income from them, the potential exists for "double taxation," that is, the same income taxed twice, once as corporate income and, when the profits have been distributed to shareholders, again as individual income. To reduce the effects of double taxation, various credits and deductions have been
TABLE 8.1
| Tax rates in large advanced economies, 2003 | ||||||||||
| (2003 unless otherwise indicated) | ||||||||||
| Type of tax | Australia | Canada | France | Germany | Italy | Japan | Spain | UK | USA 2003 | USA 2000 |
| Corporate | 30% | 24.6–38.6% | 34.33%, | 27.9575% | 34% | 30% | 35% | 30% | 35% fed. + | 35% fed. + |
| Standard rate | fed. + prov. | territorial | 0–12% state | 0–9.99% state | ||||||
| Capital gains | Standard rate | Standard rate, 50% excluded | Standard rate | 0% | Standard rate | Standard rate | Standard rate | Standard rate | Standard rate | Standard rate |
| Dividend tax | Standard rate | 0% | 0% | 0% | Standard rate, 56.25% cred. | Standard rate, 50% ex. | Effectively 0% | 0% | Standard rate | Standard rate |
| Personal | 47% from | 39–48.2% | 49.58% from | 47% from | 45% from | 50% natl. + | 35.1–45% | 40% from | 35% fed. + | 39.6% fed. + |
| Income tax, top rate | A$60,000 | fed. + prov. fr. C$103,000 | ?47,131 | ?52,293 | ?70,000 | local from ¥18 mn. | natl. + local from ?45,000 | £30,500 | 0–11% state fr. US$311,950 | 0–9.3% state fr. $288,350 |
| Payroll tax on employee | 1.5% | 4.95%, max. C$1,802 fed. | 10% | 13.65%, max. ?7,610 | 9.89% to ?80,391 | 0.7% no max. + 13.46%, ¥1.2mn. max. | 6.35–6.4% to ?31,824 | 11% to £30,420, then 1% | fed. 1.45% no max. + 6.2% to US $87,000 | fed. 1.45% no max. + 6.2% to US $76,200 |
| Payroll tax on employer | 0% federal, ~6% state | 7.05%, max. C$2,621 fed. | 4.25–13.6% | 13.65%, max. ?7,610 | 23.81% to ?80,391 | 1.6% no max. + 13.46%, ¥1.2mn. max. | 30.6–32.3% to ?31,824 | 12.8% | fed. 1.45% no max. + 6.2% to US$87,000 | fed. 1.45% no max. + 6.2% to US$76,200 |
| Sales or value added tax | 10% | 7% fed. + 0–10% prov | 19.6% | 16% | 20% natl. + 4.5% local | 5% | 16% | 17.5% | 0% federal + 0–7.25% state | 0% federal + 0–7% state |
| Interest tax | Income rate | Income rate | 17.6%, ?15,000 ex. | Income rate, ?1,550 ex. | 12.5% | 20% | Income rate | Up to 40% | Income rate | Income rate |
| Dividend tax | Income rate | 24.1–37.3% fed. + prov. | Income rate | Income rate, 50% excluded | 12.5% | Income rate | Income rate | 10%, 32.5% fr. £30,500 | 5–15%; double taxed | Income rate; double taxed |
| Long term capital gains | Income rate, 50% ex. | Income rate, 50% excluded | 17.6%, ?15,000 ex. | 0% | 12.5% | 10% | 15% | Income rate, £7,900 ex. | 5–15% | 10–20% |
| Short term capital gains | Income rate | Income rate, 50% ex. | 17.6%, ?15,000 ex. | Income rate, 50% ex. | 27% | 20% | Income rate | Income rate, £7,900 ex. | Income rate | Income rate |
| Retirement savings tax | 15% to A$109,924*, then 30% | 0% | 0% | Income rate, 70% average excluded | 12.5% on capital gains | 0% | 0% | 0% | 0% | 0% |
| –limit on contribution | A$87,141 | C$13,500 | ?24,000 | ?918 | ?5,165 | ¥180,000 | ?8,000–24,250 | UK£3,600–36,720 | US$3,000–3,500 (IRAs) | US$2,000 (IRAs) |
| Tax on retirement income | 15% first A$1.12 mn. lifetime, then income rate | Income rate | Income rate | Income rate, sliding ex. (73% for 65-year old) | Income rate, 40% excluded | Favorable rates, up to ¥3.49mn ex. | Income rate on interest | Income rate, 25% excluded | Income rate | Income rate |
| Inheritance tax, top rates | 0% | 0% | 5–60%, ?1,500 ex. | 17–50%, ?1,100 ex. | 0%, but other taxes, ?150,000 ex. | 20–50%, ¥25mn. excluded | 7.65–81.6% | 40%, £242,000 excluded | 18–49% fed., US $1.1mn. ex., + state | 18-55% fed., US $675,000. ex., + state |
| Wealth tax | 0% | 0% | 0.55–1.8%, ?720,000 ex. | 0% | 0% | 0% | 0.2–2.5%, ?08,182 house ex. | 0% | 0% federal 0–0.15% state | 0% federal 0–0.15% state |
| Notes: *In taxable income. All the countries listed tax personal income on a worldwide basis. "Income rate" means that the rates of the income tax apply. Rates are for single filers and apply only to national taxes unless indicated. Abbreviations: cred. = credit; ex. = excluded; fed. = federal; fr. = from; max. = maximum; min. = minimum; mn. = million; natl. = national; prov. = provincial. Currency symbols: A$ = Australian dollar; C$ = Canadian dollar; ? = euro; £ = British pound; ¥ = Japanese yen. | ||||||||||
| SOURCE: "Table 1. Tax Rates in Large Advanced Economies (2003)," in How Competitive Is the U.S. Tax System? Joint Economic Committee, United States Congress, April 2004, http://www.house.gov/jec/tax/04-20-04.pdf (accessed March 12, 2005) | ||||||||||
| Forbes index | 41.57% | 38.07% | 40.75% | 50.47% | 41.95% | 24.9 | 36.67% | 33.03% | 28.93% | |
| Govt./GDP | 36.4% | 40.1% | 54.4% | 49.4% | 48.5% | 38.3% | 39.3% | 42.8% | 35.9% | 33.6% |
| Growth 00–03 | 1.8% | 1.6% | 1.2% | 0.7% | 1.3% | 1.4% | 1.7% | 1.9% | 1.4% | 1.4% |
TABLE 8.2
| Personal exemptions and lowest and highest tax bracket rates for individual income tax, tax years 1913–2003 | |||||||
| [Amounts are in dollars] | |||||||
| Tax rates for regular tax— | |||||||
| Personal exemptions | Lowest bracket | Highest bracket | |||||
| Tax year | Single persons (1) | Married couples (2) | Dependents (3) | Tax rate (percent) (4) | Taxable income under—(5) | Tax rate (percent) (6) | Taxable income over—(7) |
| 1913 | 3,000 | 4,000 | N/A | 1.0 | 20,000 | 7.0 | 500,000 |
| 1914 | 3,000 | 4,000 | N/A | 1.0 | 20,000 | 7.0 | 500,000 |
| 1915 | 3,000 | 4,000 | N/A | 1.0 | 20,000 | 7.0 | 500,000 |
| 1916 | 3,000 | 4,000 | N/A | 2.0 | 20,000 | 15.0 | 2,000,000 |
| 1917 | 1,000 | 2,000 | 200 | 2.0 | 2,000 | 67.0 | 2,000,000 |
| 1918 | 1,000 | 2,000 | 200 | 6.0 | 4,000 | 77.0 | 1,000,000 |
| 1919 | 1,000 | 2,000 | 200 | 4.0 | 4,000 | 73.0 | 1,000,000 |
| 1920 | 1,000 | 2,000 | 200 | 4.0 | 4,000 | 73.0 | 1,000,000 |
| 1921 | 1,000 | 2,500 | 400 | 4.0 | 4,000 | 73.0 | 1,000,000 |
| 1922 | 1,000 | 2,500 | 400 | 4.0 | 4,000 | 58.0 | 200,000 |
| 1923 | 1,000 | 2,500 | 400 | 3.0 | 4,000 | 43.5 | 200,000 |
| 1924 | 1,000 | 2,500 | 400 | 1.5 | 4,000 | 46.0 | 500,000 |
| 1925 | 1,500 | 3,500 | 400 | 1.125 | 4,000 | 25.0 | 100,000 |
| 1926 | 1,500 | 3,500 | 400 | 1.125 | 4,000 | 25.0 | 100,000 |
| 1927 | 1,500 | 3,500 | 400 | 1.125 | 4,000 | 25.0 | 100,000 |
| 1928 | 1,500 | 3,500 | 400 | 1.125 | 4,000 | 25.0 | 100,000 |
| 1929 | 1,500 | 3,500 | 400 | 0.375 | 4,000 | 24.0 | 100,000 |
| 1930 | 1,500 | 3,500 | 400 | 1.125 | 4,000 | 25.0 | 100,000 |
| 1931 | 1,500 | 3,500 | 400 | 1.125 | 4,000 | 25.0 | 100,000 |
| 1932 | 1,000 | 2,500 | 400 | 4.0 | 4,000 | 63.0 | 1,000,000 |
| 1933 | 1,000 | 2,500 | 400 | 4.0 | 4,000 | 63.0 | 1,000,000 |
| 1934 | 1,000 | 2,500 | 400 | 4.0 | 4,000 | 63.0 | 1,000,000 |
| 1935 | 1,000 | 2,500 | 400 | 4.0 | 4,000 | 63.0 | 1,000,000 |
| 1936 | 1,000 | 2,500 | 400 | 4.0 | 4,000 | 79.0 | 5,000,000 |
| 1937 | 1,000 | 2,500 | 400 | 4.0 | 4,000 | 79.0 | 5,000,000 |
| 1938 | 1,000 | 2,500 | 400 | 4.0 | 4,000 | 79.0 | 5,000,000 |
| 1939 | 1,000 | 2,500 | 400 | 4.0 | 4,000 | 79.0 | 5,000,000 |
| 1940 | 800 | 2,000 | 400 | 4.4 | 4,000 | 81.1 | 5,000,000 |
| 1941 | 750 | 1,500 | 400 | 10.0 | 2,000 | 81.0 | 5,000,000 |
| 1942 | 500 | 1,200 | 350 | 19.0 | 2,000 | 88.0 | 200,000 |
| 1943 | 500 | 1,200 | 350 | 19.0 | 2,000 | 88.0 | 200,000 |
| 1944 | 500 | 1,000 | 500 | 23.0 | 2,000 | 94.0 | 200,000 |
| 1945 | 500 | 1,000 | 500 | 23.0 | 2,000 | 94.0 | 200,000 |
| 1946 | 500 | 1,000 | 500 | 19.0 | 2,000 | 86.45 | 200,000 |
| 1947 | 500 | 1,000 | 500 | 19.0 | 2,000 | 86.45 | 200,000 |
| 1948 | 600 | 1,200 | 600 | 16.6 | 4,000 | 82.13 | 400,000 |
| 1949 | 600 | 1,200 | 600 | 16.6 | 4,000 | 82.13 | 400,000 |
| 1950 | 600 | 1,200 | 600 | 17.4 | 4,000 | 84.36 | 400,000 |
| 1951 | 600 | 1,200 | 600 | 20.4 | 4,000 | 91.0 | 400,000 |
| 1952 | 600 | 1,200 | 600 | 22.2 | 4,000 | 92.0 | 400,000 |
| 1953 | 600 | 1,200 | 600 | 22.2 | 4,000 | 92.0 | 400,000 |
| 1954 | 600 | 1,200 | 600 | 20.0 | 4,000 | 91.0 | 400,000 |
| 1955 | 600 | 1,200 | 600 | 20.0 | 4,000 | 91.0 | 400,000 |
| 1956 | 600 | 1,200 | 600 | 20.0 | 4,000 | 91.0 | 400,000 |
| 1957 | 600 | 1,200 | 600 | 20.0 | 4,000 | 91.0 | 400,000 |
| 1958 | 600 | 1,200 | 600 | 20.0 | 4,000 | 91.0 | 400,000 |
| 1959 | 600 | 1,200 | 600 | 20.0 | 4,000 | 91.0 | 400,000 |
| 1960 | 600 | 1,200 | 600 | 20.0 | 4,000 | 91.0 | 400,000 |
| 1961 | 600 | 1,200 | 600 | 20.0 | 4,000 | 91.0 | 400,000 |
| 1962 | 600 | 1,200 | 600 | 20.0 | 4,000 | 91.0 | 400,000 |
| 1963 | 600 | 1,200 | 600 | 20.0 | 4,000 | 91.0 | 400,000 |
| 1964 | 600 | 1,200 | 600 | 16.0 | 1,000 | 77.0 | 400,000 |
| 1965 | 600 | 1,200 | 600 | 14.0 | 1,000 | 70.0 | 200,000 |
| 1966 | 600 | 1,200 | 600 | 14.0 | 1,000 | 70.0 | 200,000 |
| 1967 | 600 | 1,200 | 600 | 14.0 | 1,000 | 70.0 | 200,000 |
| 1968 | 600 | 1,200 | 600 | 14.0 | 1,000 | 75.25 | 200,000 |
| 1969 | 600 | 1,200 | 600 | 14.0 | 1,000 | 77.0 | 200,000 |
| 1970 | 625 | 1,250 | 625 | 14.0 | 1,000 | 71.75 | 200,000 |
| 1971 | 675 | 1,350 | 675 | 14.0 | 1,000 | 70.0 | 200,000 |
| 1972 | 750 | 1,500 | 750 | 14.0 | 1,000 | 70.0 | 200,000 |
| 1973 | 750 | 1,500 | 750 | 14.0 | 1,000 | 70.0 | 200,000 |
| 1974 | 750 | 1,500 | 750 | 14.0 | 1,000 | 70.0 | 200,000 |
| 1975 | 750 | 1,500 | 750 | 14.0 | 1,000 | 70.0 | 200,000 |
enacted throughout the years to allow income to pass through a corporation without being taxed until it reaches the individual.
Table 8.3 lists corporation income tax brackets and rates from 1909 through 2002. The rates presented in the table are standard rates that do not take into account the credits and
| N/A—Not applicable. | |||||||
| SOURCE: Adapted from "Table A. U.S. Individual Income Tax: Personal Exemptions and Lowest and Highest Bracket Tax Rates, and Tax Base for Regular Tax, Tax Years 1913–2003," in Statistics of Income Bulletin—Historical Tables and Appendix, Internal Revenue Service, Fall 2004, http://www.irs.gov/pub/irs-soi/03inta.xls (accessed March 9, 2005) | |||||||
| 1976 | 750 | 1,500 | 750 | 14.0 | 1,000 | 70.0 | 200,000 |
| 1977 | 750 | 1,500 | 750 | 14.0 | 3,200 | 70.0 | 203,200 |
| 1978 | 750 | 1,500 | 750 | 14.0 | 3,200 | 70.0 | 203,200 |
| 1979 | 1,000 | 2,000 | 1,000 | 14.0 | 3,400 | 70.0 | 215,400 |
| 1980 | 1,000 | 2,000 | 1,000 | 14.0 | 3,400 | 70.0 | 215,400 |
| 1981 | 1,000 | 2,000 | 1,000 | 13.825 | 3,400 | 69.125 | 215,400 |
| 1982 | 1,000 | 2,000 | 1,000 | 12.0 | 3,400 | 50.0 | 85,600 |
| 1983 | 1,000 | 2,000 | 1,000 | 11.0 | 3,400 | 50.0 | 109,400 |
| 1984 | 1,000 | 2,000 | 1,000 | 11.0 | 3,400 | 50.0 | 162,400 |
| 1985 | 1,040 | 2,080 | 1,040 | 11.0 | 3,540 | 50.0 | 169,020 |
| 1986 | 1,080 | 2,160 | 1,080 | 11.0 | 3,670 | 50.0 | 175,250 |
| 1987 | 1,900 | 3,800 | 1,900 | 11.0 | 3,000 | 38.5 | 90,000 |
| 1988 | 1,950 | 3,900 | 1,950 | 15.0 | 29,750 | 28.0 | 29,750 |
| 1989 | 2,000 | 4,000 | 2,000 | 15.0 | 30,950 | 28.0 | 30,950 |
| 1990 | 2,050 | 4,100 | 2,050 | 15.0 | 32,450 | 28.0 | 32,450 |
| 1991 | 2,150 | 4,300 | 2,150 | 15.0 | 34,000 | 31.0 | 82,150 |
| 1992 | 2,300 | 4,600 | 2,300 | 15.0 | 35,800 | 31.0 | 86,500 |
| 1993 | 2,350 | 4,700 | 2,350 | 15.0 | 36,900 | 39.6 | 89,150 |
| 1994 | 2,450 | 4,900 | 2,450 | 15.0 | 38,000 | 39.6 | 250,000 |
| 1995 | 2,500 | 5,000 | 2,500 | 15.0 | 39,000 | 39.6 | 256,500 |
| 1996 | 2,550 | 5,100 | 2,550 | 15.0 | 40,100 | 39.6 | 263,750 |
| 1997 | 2,650 | 5,300 | 2,650 | 15.0 | 41,200 | 39.6 | 271,050 |
| 1998 | 2,700 | 5,400 | 2,700 | 15.0 | 42,350 | 39.6 | 278,450 |
| 1999 | 2,750 | 5,500 | 2,750 | 15.0 | 43,050 | 39.6 | 283,150 |
| 2000 | 2,800 | 5,600 | 2,800 | 15.0 | 43,850 | 39.6 | 288,350 |
| 2001 | 2,900 | 5,800 | 2,900 | 10.0 | 12,000 | 39.1 | 297,350 |
| 2002 | 3,000 | 6,000 | 3,000 | 10.0 | 12,000 | 38.6 | 307,050 |
| 2003 | 3,050 | 6,100 | 3,050 | 10.0 | 12,000 | 38.6 | 311,950 |
depreciation schedules that reduce the amount of revenue subject to tax. After beginning with a modest 1% tax between 1910 and 1915, corporate tax rates for the highest income bracket hovered near the 50% level between the 1940s and 1970s before beginning a downward trend in the late 1980s. As of 2002, the lowest corporate income bracket had been taxed at the same level (15%) since 1983. For the highest bracket in 2002, a 35% tax was levied on income above $18,333,333.
SOCIAL INSURANCE TAXES. Social insurance taxes (also known as "FICA taxes" in reference to the Federal Insurance Contributions Act that authorizes them) are collected from employers and employees and are used primarily to fund Social Security payments for retirees and disabled workers, as well as their survivors and dependents. In addition to Social Security, these taxes (which are sometimes referred to as "payroll taxes") are used to finance unemployment compensation and Medicare. Half of FICA is paid by wage earners and is deducted from their paychecks; the other half is paid directly by employers. In 2005 the tax withheld for Social Security amounted to 6.2% on the first $90,000 of income. This meant that the maximum Social Security tax withheld from an employee's paycheck for 2005 was $5,580. Medicare taxes were withheld at a rate of 1.45% with no annual maximum. Altogether in 2005, the employee and employer contributions for FICA taxes totaled 15.3%, which was the amount paid by self-employed individuals.
Payroll tax revenue is deposited into two accounts: the Old Age and Survivors Insurance (OASI) Trust Fund (which pays retirees and their survivors) and the Disability Insurance (DI) Trust Fund (which pays benefits to disabled workers). When more money is collected in taxes than is paid out to beneficiaries, the surplus funds are invested in Treasury securities, which earn interest and can be redeemed if needed. According to the 2005 Social Security Trustees Report (March 23, 2005), assets of the combined OASDI trust funds in 2004 totaled $1.7 trillion. By law the government is prohibited from spending surplus Social Security funds on other programs, in order to ensure that retirement money will be available for future retirees.
According to the Social Security Administration (SSA) in "Social Security Basic Facts" (March 23, 2005),
TABLE 8.3
| Corporate income tax brackets and rates, 1909–20021 | ||
| Year2 | Taxable income brackets3 | Rates (percent) |
| 1909–1913 (February 28) | First $5,000 | — |
| Over $5,000 | 1.00 | |
| 1913 (March 1)–1915 | All taxable income | 1.00 |
| 1916 | All taxable income | 2.00 |
| 19174 | All taxable income | 6.00 |
| 19184 | First $2,000 | — |
| Over $2,000 | 12.00 | |
| 1919–19214 | First $2,000 | — |
| Over $2,000 | 10.00 | |
| 1922–19244 | First $2,000 | — |
| Over $2,000 | 12.50 | |
| 1925 | First $2,000 | — |
| Over $2,000 | 13.00 | |
| 1926–1927 | First $2,000 | — |
| Over $2,000 | 13.50 | |
| 1928 | First $3,000 | — |
| Over $3,000 | 12.00 | |
| 1929 | First $3,000 | — |
| Over $3,000 | 11.00 | |
| 1930–19315 | First $3,000 | — |
| Over $3,000 | 12.00 | |
| 1932–1935 | All taxable income | 13.75 |
| 1936–19375, 6 | First $2,000 | 8.00 |
| Over $2,000, not over $15,000 | 11.00 | |
| Over $15,000, not over $40,000 | 13.00 | |
| Over $40,000 | 15.00 | |
| 1938–19395 | Taxable income $25,000 or less: | |
| First $5,000 | 12.508 | |
| Next $15,000 | 14.008 | |
| Next $5,000 | 16.008 | |
| Taxable income over $25,000 | 19.00 | |
| 19405, 7 | Taxable income $31,964.30 or less: | |
| First $5,000 | 14.858 | |
| Next $15,000 | 16.508 | |
| Next $5,000 | 18.708 | |
| Next $6,964.30 | 38.308 | |
| Taxable income over $31,964.30, not over $38,565.84: | ||
| First $5,000 | 15.408 | |
| Next $15,000 | 16.908 | |
| Next $5,000 | 18.908 | |
| Next $13,565.84 | 36.908 | |
| Taxable income over $38,565.84 | 24.008 | |
| 19415,7 | Taxable income $38,461.54 or less: | |
| First $5,000 | 21.009 | |
| Next $15,000 | 23.009 | |
| Next $5,000 | 25.009 | |
| Next $13,461.54 | 44.009 | |
| Taxable income over $38,461.54 | 31.009 | |
| 1942–19455, 7 | Taxable income $50,000 or less: | |
| First $5,000 | 25.009 | |
| Next $15,000 | 27.009, 10 | |
| Next $5,000 | 29.009, 10 | |
| Next $25,000 | 53.009, 10 | |
| 195011 | First $25,000 | 23.00 |
| Over $25,000 | 42.0010 | |
| 195111 | First $25,000 | 28.7512 |
| Over $25,000 | 50.7512 | |
| 1952–196311 | First $25,000 | 30.0013 |
| Over $25,000 | 52.0013 | |
| 1964 | First $25,000 | 22.00 |
| Over $25,000 | 50.0013 | |
| Taxable income over $50,000 | 40.009, 10 | |
| 1946–1949 | Taxable income $50,000 or less: | |
| First $5,000 | 21.009 | |
| Next $15,000 | 23.009 | |
| Next $5,000 | 25.009 | |
| Next $25,000 | 53.009, 10 | |
| Taxable income over $50,000 | 38.009, 10 | |
| 1965–1967 | First $25,000 | 22.00 |
| Over $25,000 | 48.0013 | |
| 1968–196914 | First $25,000 | 24.2015 |
| Over $25,000 | 52.8013,15 | |
| 197014 | First $25,000 | 22.5516 |
| Over $25,000 | 49.2016, 17 | |
| 1971–197414 | First $25,000 | 22.00 |
| Over $25,000 | 48.0018 | |
| 1975–197814 | First $25,000 | 20.00 |
| $25,000–$50,000 | 22.00 | |
| Over $50,000 | 48.0019 | |
| 1979–198114 | First $25,000 | 17.00 |
| $25,000–$50,000 | 20.00 | |
| $50,000–$75,000 | 30.0020 | |
| $75,000–$100,000 | 40.0020 | |
| Over $100,000 | 46.0020 | |
| 1The rates shown are the "standard" or "ordinary" rates, applying to all taxable corporate net income unless otherwise provided. However, there have always been numerous exceptions and special rates based on the type of corporation, the type of income, and other factors. In addition, there have been, at various times, additional taxes related to income that increased the statutory rates. When possible, these are noted in other footnotes to this table for the years for which they were effective. Credits, deductions, and other alterations in the definition of taxable income also effectively alter the tax rate, but these are too numerous and too frequent to include in a table such as this. | ||
| The most important types of corporations to which these rates have not always applied, or not applied as they did to other corporations, are: Section 501(c) and similar nonprofit corporations: Corporations not organized or operated for profit are generally exempt from the corporation income tax except, since 1950, on business income unrelated to their exempt purposes. Mutual and cooperative organizations: Most of these were treated as nonprofits in the early days of the income tax. Most have long since been made taxable as ordinary corporations, but there are still some exceptions. Credit unions and small mutual property insurance companies are exempt. Rural electrical and telephone cooperatives are exempt on income generated in transactions with their members. Farmers' cooperatives are not taxed on income distributed to their members. Insurance companies: Because of the nature of insurance, determining taxable income has often been a problem for the tax system. Insurance companies have been subjected to a number of different tax structures since 1921, including special rates and complete exemption of premium income. They are currently taxed at the same rates as other corporations on income calculated using reserve deductions (which other corporations are not allowed). Regulated investment companies (since 1936) and Real estate investment trusts (since 1961): These investment companies are not taxed on profits distributed to shareholders if they distribute substantially all of their incomes annually. S corporations: Since 1958, certain closely held corporations could elect to be taxed through their shareholders, as partnerships are, and not pay the corporate tax at all (except in special, unusual circumstances). Foreign corporations: Companies incorporated outside the U.S. are taxed on business income earned in the U.S. at the regular corporate rates, but may be taxed on investment income at special statutory or treaty rates. U.S. corporations with foreign-source income: The U.S. taxes the worldwide income of U.S. corporations; however, since 1918, taxes paid to foreign governments on foreignsource income can be credited against the U.S. tax otherwise due on that income. (Before 1918, the foreign taxes were allowed as a deduction against worldwide income.) U.S. possessions corporations: Since 1921, corporations earning most of their incomes in a U.S. possession were subject to reduced taxes. From 1921 to 1976, they were taxable only on U.S.-source income; since 1976, they have received a credit for manufacturing income earned in a possession (including Puerto Rico). The credit is now being phased out and is scheduled to end after 2005. Affiliated groups: Corporations that are closely affiliated through stock ownership have usually been allowed to consolidate their financial statements for tax purposes and file one return for the group, but there have always been restrictions and, sometimes, they have been charged an additional tax for the privilege. In 1932 and 1933, consolidated returns were subject to an additional tax of .75 percent. In 1934 and 1935, only railroad companies were allowed to file consolidated returns, and the additional tax was 1 percent. From 1936 to 1941, there was no additional tax, but the privilege was restricted to railroads and a few other companies. From 1942 to 1964, most domestic affiliated groups that met the stock ownership and other requirements could file consolidated returns, but the surtax on such a group was increased by 2 percentage points. The additional tax on consolidated returns was repealed, effective December 31, 1963. | ||
| The most important type of income to have received special rates was "long-term" capital gains. From 1942 through 1987, the tax rate was capped at a maximum rate lower than the highest corporate rate. (The rates are noted in footnotes to the table.) Although there is currently no special rate for corporations' capital gains, longterm capital gains are still treated separately from other income in the tax code. | ||
| During World War I, the Great Depression, World War II, and the Korean War, additional taxes were imposed on what were called "war profits" or "excess profits." These are noted in the table in footnotes to the applicable years. | ||
| In addition to taxes based on net income, there have been from time to time taxes based on accumulated earnings that were not distributed to shareholders, designed to limit tax avoidance at the individual stockholder level. Taxes on "undue" accumulations have been imposed (though seldom paid) since the inception of the income tax. These were supplemented, since 1934, by a "personal holding company" tax, equal to the highest individual income tax rate, on the undistributed earnings of closely held companies accumulating investment income. There was also a Depression-era tax on accumulated earnings (noted below). | ||
| In recent years, there have also been "minimum taxes" designed to supplement the regular taxes. These have the effect of a separate set of tax rates. These are noted in footnotes to the table. | ||
| 2Calendar year unless otherwise noted. Taxpayers whose fiscal years spanned years with different rates were required to prorate the year's income between the two rate structures. Before 1933, the proration was based on the number of months in each year; after 1932, it was based on the number of days in each year. | ||
| 3"Taxable income" is used here to mean the amount of income to which the rates shown were applied. The concept has had various names and various meanings over the years covered; so, brackets for one year are not necessarily comparable with those for another. | ||
| 4An additional tax on "excess profits" and/or "war profits" was in effect from 1917 to 1922. It was allowed as a deduction in computing income tax. | ||
| 5An additional "declared value" excess profits tax, based on profits in excess of a percentage of the value of corporate stock, was in effect from 1933 through 1945. It was a deduction for income tax purposes. | ||
| 6An additional surtax ranging from 7 percent to 27 percent was imposed on undistributed profits. | ||
| 7From June 1940 to the end of 1945, a tax on profits in excess of average prewar earnings was also imposed. It was taken into account, as either a deduction or a credit, for the income tax and the other excess profits tax. | ||
| 8The rates for 1940 include extra "defense tax" rates that are integrated with the regular rates in later years. | ||
| 9These rates are the sum of the "normal tax" rates and the "surtax" rates, which actually applied to slightly different definitions of taxable income. | ||
| 10Beginning with tax year 1942, gains on the sale of assets held for more than 6 months (long-term capital gains) could be treated separately from other taxable income and taxed at a maximum rate of 25 percent. | ||
| 11An excess profits tax was also in effect from July 1950 through calendar year 1953. The tax was 30 percent of an adjusted profits figure reduced by credits for the level of prewar profits. It was not offset against income tax, but the sum of income and excess profits taxes was capped at a given percentage of income (from 62 percent to 70 percent). | ||
| 12These rates reflect a tax increase (for the Korean War), effective March 31, 1951. The maximum capital gains tax rate was also increased to 26 percent. From April 1, 1954, through calendar year 1969, the maximum tax rate on capital gains was 25 percent. | ||
| 13From April 1, 1954, through calendar year 1969, the maximum tax rate on capital gains was 25 percent. | ||
| 14From 1969 through 1986, corporations were also subject to an "add-on minimum tax" on certain "tax preference" items (such as percentage depletion, accelerated depreciation, etc.) above a certain amount. For tax years 1969 through 1976, the tax was 10 percent of tax preferences in excess of $30,000; after 1976, the tax was 15 percent of preferences in excess of the greater of $10,000 or regular income tax. | ||
| 15Rates include the Vietnam War surcharge of 10 percent. | ||
| 16Includes a 2.5-percent Vietnam War surcharge. | ||
| 17The maximum tax rate on long-term capital gains was increased to 28 percent. | ||
| 18The maximum tax rate on long-term capital gains was increased to 30 percent. | ||
| 19The holding period for long-term capital gain treatment of assets was increased from 6 to 9 months in 1977 and 12 months in 1978. The rate remained at 30 percent. | ||
| 20The maximum tax rate on long-term capital gains was 28 percent. | ||
| 21Beginning in 1983, incorporated professional practices ("personal service corporations") have been taxed on all taxable income at the corporate tax rate applicable to the highest income bracket. | ||
| 23The Tax Reform Act of 1986 (TRA86) established a new rate structure effective for tax year 1988 and made the rates for transition year 1987 an average of the pre-TRA rates for 1986 and the post-TRA rates for 1988. A new "alternative minimum tax" (AMT) replaced the add-on minimum tax, effective in 1987. It required a calculation of an alternative measure of taxable income that reduced or eliminated many tax preference items. The tax was 20 percent of the excess of this "alternative minimum taxable income" (AMTI) over $40,000. The $40,000 exemption was reduced by 25 percent of the excess of AMTI over $150,000. AMT in excess of regular tax could be carried over as a credit against regular tax in future years. In 1998, "small" corporations (generally, those with average gross receipts of less than $5 million) were exempted from the AMT. | ||
| 24The maximum tax rate on capital gains was capped at 34 percent for 1987, which was to be the rate on the highest corporate tax bracket in 1988 and after, according to TRA86. The maximum capital gain rate was raised to 35 percent when the highest corporate rate bracket was increased in 1993. | ||
| SOURCE: "Table 1. U.S. Corporation Income Tax: Tax Brackets and Rates, 1909–2002," in Corporation Income Tax Brackets and Rates, 1909–2002, Internal Revenue Service, Fall 2003, http://www.irs.gov/pub/irs-soi/02corate.pdf (accessed March 10, 2005) | ||
| 19415, 7 | Taxable income $38,461.54 or less: | |
| First $5,000 | 21.009 | |
| Next $15,000 | 23.009 | |
| Next $5,000 | 25.009 | |
| Next $13,461.54 | 44.009 | |
| Taxable income over $38,461.54 | 31.009 | |
| 1942–19455, 7 | Taxable income $50,000 or less: | |
| First $5,000 | 25.009 | |
| Next $15,000 | 27.009, 10 | |
| Next $5,000 | 29.009, 10 | |
| Next $25,000 | 53.009, 10 | |
| 195011 | First $25,000 | 23.00 |
| Over $25,000 | 42.0010 | |
| 195111 | First $25,000 | 28.7512 |
| Over $25,000 | 50.7512 | |
| 1952–196311 | First $25,000 | 30.0013 |
| Over $25,000 | 52.0013 | |
| 198722, 23 | First $25,000 | 15.00 |
| $25,000–$50,000 | 16.50 | |
| $50,000–$75,000 | 27.50 | |
| $75,000–$100,000 | 37.0024 | |
| $100,000–$335,000 | 42.5024 | |
| $335,000–$1,000,000 | 40.0024 | |
| $1,000,000–$1,405,000 | 42.5024 | |
| Over $1,405,000 | 40.0024 | |
| 1988–1992 | First $50,000 | 15.00 |
| $50,000–$75,000 | 25.00 | |
| $75,000–$100,000 | 34.00 | |
| $100,000–$335,000 | 39.00 | |
| Over $335,000 | 34.00 | |
| 1993–2002 | First $50,000 | 15.00 |
| $50,000–$75,000 | 25.00 | |
| $75,000–$100,000 | 34.00 | |
| $100,000–$335,000 | 39.00 | |
| $335,000–$10,000,000 | 34.00 | |
| $10,000,000–$15,000,000 | 35.00 | |
| $15,000,000–$18,333,333 | 38.00 | |
| Over $18,333,333 | 35.00 | |
in 2005 approximately $518 billion will be paid to forty-eight million Americans. As of December 2004, Social Security recipients included thirty million retirees, 6.2 million disabled workers, 4.9 million dependents, and 6.7 million survivors. For retirees overall, Social Security represented 39% of their income, but two-thirds depended on Social Security for 50% or more of their income. The SSA estimates that 22% of retirees depend on Social Security for all of their income. The average monthly benefit check for retirees in December 2004 totaled $955; disabled workers received somewhat less, averaging $894 per month.
SOCIAL SECURITY REFORM. Since its inception during the Great Depression of the 1930s the Social Security program has been a source of partisan contention and debate. Signing it into law on August 14, 1935, President Franklin D. Roosevelt said, "We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age." Debates have centered on funding the program, on the role of the government in the financial planning of individuals, and on ways to maintain the program during future years as the population ages and fewer wage earners are contributing to the plan.
According to the Social Security Administration, in 2005, 3.3 workers were contributing to the program for each beneficiary. As workers born during the baby boom that followed World War II begin to retire, there will be fewer workers contributing to the plan, because the succeeding generations are smaller. The SSA estimated in Social Security Basic Facts that by 2031 there will be only 2.1 workers contributing for each beneficiary.
In their 2005 report the Social Security trustees projected that tax revenues will fall below program costs in 2017. At that point, the trust fund will be used to pay the shortfall so that payments to beneficiaries can continue at expected levels. The trust funds will be exhausted in 2041, and the program's annual income will only be able to fund 70% of the benefits currently available to beneficiaries. How best to prepare for that situation is a fiercely debated issue among conservatives and liberals. During early 2005 President George W. Bush campaigned for significant reform of the Social Security program, including allowing younger workers to opt out of the Social Security plan and establish their own retirement savings accounts. Democrats did not accept that a radical reform of the program was necessary to recover the shortfall, as the actual deficit over a seventy-five-year period, according to the 2005 Social Security Trustees Report, was expected to be only 1.92%. Democrats have suggested that such a sum could be recouped by removing the cap on income subject to FICA taxes, for instance, but President Bush adamantly dismissed any alternatives that could be construed as a tax increase.
Taxes on Consumption
EXCISE TAXES. Taxes on consumption include sales and excise taxes. Although there is no federal sales tax, the federal government does levy excise taxes on such items as airplane tickets, gasoline, alcoholic beverages, firearms, and cigarettes. Excise taxes on certain commodities are often hypothecated, meaning they are used to pay for a related government service. For example, fuel taxes are typically used to pay for road and bridge construction or public transportation, or a cigarette excise may go to cover state-supported health care programs. Excise taxes can be intended to generate revenue or to discourage use of the taxed product (as in high cigarette taxes that raise the per-pack cost in an attempt to discourage smoking).
Federal excise taxes during 2004 included:
- A 3% tax on amounts paid for local and long-distance telephone service
- A tax of 7.5% on the amount paid for an airline ticket, plus a flat fee of $3.10 for each domestic segment of an airline trip
- Taxes of 18.4 cents per gallon for gasoline and 19.4 cents per gallon for aviation fuel
- A 10% tax on the sale price of sport fishing equipment sold by the manufacturer
- A tax of 3% on the sale price of electric outboard motors and sonar devices
- A tax of 75 cents per dose on certain vaccines, including those used to prevent diphtheria, tetanus, polio, measles, mumps, hepatitis B, and chicken pox
- A tax of 12% of the sale price of truck chassis and bodies, semitrailer chassis and bodies, and tractors of the kind chiefly used for highway transportation
- A tax of $3 per passenger on certain ship voyages
Alcohol, tobacco, and firearms are also subject to federal excise taxes. As of January 2005, taxes on alcohol included five cents on each twelve-ounce can of beer, $2.14 on a 750 ml bottle of spirits, and twenty-one to sixty-five cents per bottle of wine, depending on the alcohol content. Cigarettes were taxed at thirty-nine cents or eighty-two cents per pack, depending on the size of the cigarette. Pistols and revolvers were taxed at 10% of the sale price, and all other firearms and munitions were subject to a tax of 11% of the sale price.
Taxes on Wealth
ESTATE TAXES AND GIFT TAXES. Large gifts and estates are subject to tax by the federal government. Arguments have been put forward that these taxes help economic growth by encouraging wealthy individuals to spend rather than save their money; critics, however, fear that such taxes discourage long-term savings and unfairly hurt family farms and family-owned businesses. According to Gary Robbins of the Heritage Foundation in "Estate Taxes: An Historical Perspective," a presentation delivered to the Department of Treasury's "Roundtable on Jobs, Growth and the Abolition of the Death Tax" in Washington, D.C., in November 2003, estate taxes date back to ancient Egypt, when transferred property was subject to a 10% tax. Civilizations ranging from ancient Rome to feudal England assessed duties on estates, and estate taxes were imposed in the United States for the first time during the period 1797 to 1802. During the nineteenth century estate taxes were in effect periodically to finance military costs associated with wars. However, in the early twentieth century the estate tax (and a similar "gift tax" imposed on transfers of property by the living) became fixtures in the U.S. tax code. The Revenue Act of 1916 imposed an estate tax that chiefly affected the wealthiest Americans, with a 1% tax on estates over $50,000 (approximately $11 million by modern standards, according to Robbins) and a 10% tax on estates over $5 million ($1 billion in 2003 dollars). The gift tax was added in 1924, and increases were approved in the 1940s that taxed the largest estates up to 77%. Throughout the twentieth century, the lowest bracket remained relatively steady for long periods, at 3% from 1943 through 1976, and at 18% since 1977.
Tax reform in 1981 led to a graduated reduction in the top rate to 55% and increased the amount exempt from estate taxes to $600,000, but rates edged upward again during the following two decades. Provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 gradually phase out the estate tax by 2010, but in 2011 rates will return to 1997 levels of 18% for estates over $1 million and 55% for estates over $3 million. During 2005, according to the IRS, only about 2% of estates actually owed taxes because credit amounts effectively eliminated the tax on estates smaller than $1.5 million and on gifts under $1 million.
Economic Growth and Tax Relief and Reconciliation Act of 2001
The Economic Growth and Tax Relief and Reconciliation Act of 2001 (EGTRRA, initiated by the administration of George W. Bush and so often known simply as the "Bush tax cuts") instituted a series of tax rate reductions and incentive measures to be phased in over several years. Included in the law were increases in income tax credits for families with children, raising the per-child credit from $500 to $1,000, and increasing the amount credited for childcare expenses. The act also provided credits for participation in savings plans, and it reduced estate, gift, and generation-skipping transfer taxes (GST; a special tax on property transfers from grandparents to their grandchildren) but did not address business taxes. Changes to the tax rates instituted in EGTRRA included the addition of a 10% income tax bracket for individuals with income up to $6,000, heads of households up to $10,000, and married couples filing jointly up to $12,000. The 28%, 31%, and 36% brackets were to be phased down by three percentage points by 2006, and the highest tax bracket was to be lowered from 39.6% to 35%. EGTRRA was designed to "sunset" (expire) in 2011 unless additional measures are passed to extend its provisions.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) accelerated implementation of EGTRRA, reduced taxes on capital gains and dividends, and increased deductions for property depreciation. Capital gains taxes were reduced from 20% to 5%–15% determined by overall income bracket, and the rate on dividends was similarly set at 5%–15% depending on income.
Following implementation of the tax cuts, total income tax receipts from individual and corporate taxpayers were at the lowest level as a share of GDP since 1942, and federal receipts from personal income taxes were at the lowest level since 1966, according to Isaac Shapiro in "Federal Income Taxes, as a Share of GDP, Drop to Lowest Level Since 1942, According to Final Budget Data" (Center on Budget and Policy Priorities, October 21, 2003).
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