The Income Tax Then and Now

The 13th Amendment to the U.S. Constitution was ratified in 1913, making the income tax a permanent feature of the tax law. The IRS (formerly the Internal Revenue Bureau) started publishing income tax statistics in 1916. Recent information in the IRS’s 2008 Winter Statistics of Income Bulletin provide a fascinating glimpse into your tax history over the past 90 years.

Returns grow with population and law changes

You’d expect that more returns would be filed as the population grew. But the need for additional revenue to finance wars over the
years has changed tax laws to cast an ever-widening net for filers. In the first four years of the income tax, the number of filers did not exceed 440,000. During World War I (which required increased revenue), the number of filers rose to almost 3.5 million.

During the 1940s, the tax law was expanded to apply to most workers. But starting in the 1960s, social objectives displaced some revenue objectives (e.g., the earned income tax credit was enacted to help low-income workers), which had the effect of removing some workers from the tax rolls.

The number of filers reached 100 million by 1985 and more than 134 million by 2005 (the last year for which statistics are available).

Taxable income

With the initial income tax, total income was only $3.9 billion. Total income dropped during the Depression years, but has risen
steadily since 1932 (there have been only four down years since that time). For 2005, total income topped $7.5 trillion.

Sources of income on which tax is levied have remained largely the same since the inception of the income tax; salaries, interest
income, and dividends are the main items. However, while the category of salaries was the largest component of total income, it accounted for only 26.72% of total income in 1917; today it is 68.45%.

Average tax rate

The average tax rate is figured by dividing income tax by total income. This is not the rate paid by a particular taxpayer; it represents a rate relative to all taxes paid by all filers. For much of the first 30 years of income taxes in the United
States, the average tax rate ranged from less than 1% to 7.1%. During the Great Depression, it was only slightly over 2.1%. During World War II, with the need for additional revenue, it rose to 14.2% by 1945. After the war, rates fell but
increased again during the 1950s and 1960s. The average tax rate reached an all-time high in 1981 at 16.1%. For 2005, the latest year for which statistics are available, the average tax rate was 13.1%.

Key dates in income tax history

1943: Wage withholding starts.

1944: The standard deduction and personal exemption are introduced.

1948: Joint filing allowed for married couples.

1969: Creation of a minimum tax for individuals.

1971: Creation of a maximum tax on earned income.

1984: Reduction in the holding period for long-term capital gains from more than one year to more than six months (increased back to more than one year in 1988).

1997: Creation of the child tax credit.