While filing the 1988 tax returns, many taxpayers will see the full impact of the Tax Reform Act of 1986. Perhaps the most important changes made by this Act altered the progressivity of the federal income tax. . Given these very significant changes to the U.S. income tax and also given that the full impact of this tax law is effective on the seventy-fifth anniversary of the 1913 adoption of the income tax, it is worth the time to look back and contemplate how progressivity of the income tax structure has changed over time. This paper summarizes the historical findings

Roberts, Michael L.

Samson, William D.

English

eGrove (Univ. of Mississippi)

The Accounting Historians NotebookVolume 12Number 1 Spring 1989 Article 61989Historical survey of the progressivity of the U.S.income taxMichael L. RobertsWilliam D. SamsonFollow this and additional works at: https://egrove.olemiss.edu/aah_notebookPart of the Accounting Commons, and the Taxation CommonsThis Article is brought to you for free and open access by the Archival Digital Accounting Collection at eGrove. It has been accepted for inclusion inThe Accounting Historians Notebook by an authorized editor of eGrove. For more information, please contact memanuel@olemiss.edu.Recommended CitationRoberts, Michael L. and Samson, William D. (1989) "Historical survey of the progressivity of the U.S. income tax," The AccountingHistorians Notebook: Vol. 12 : No. 1 , Article 6.Available at: https://egrove.olemiss.edu/aah_notebook/vol12/iss1/6HISTORICAL SURVEY OF THE PROGRESSIVITY OF THE U.S. INCOME TAX Summary of Paper Presented at the Tax History Conference at The University of Mississippi December 2, 1988 by Michael L. Roberts University of Alabama and William D. Samson University of Alabama While filing the 1988 tax returns, many taxpayers will see the full impact of the Tax Reform Act of 1986. Perhaps the most important changes made by this Act altered the progressivity of the federal in-come tax. Among these changes were (1) a reduction in the top marginal tax rate from 50% to 28%, (2) a compression of fourteen tax rate brackets into two: 15% and 28%, (3) larger exemption and stan-dard deducation amounts which remove many low income taxpayers from the tax rolls, (4) a "phase out" of the benefit of the first tax rate bracket and exemption amounts such that, for the first time tax-payers with high incomes did not benefit from these items, and (4) an inversion of the historic relationship between the top corporate and individual tax rate. One of the major criticisms of the Tax Reform Act of 1986 has been that the combination of rate reduction and bracket compression reduced ("flattens") the progressivity of the income tax and thereby reduced the vertical equity of the tax rate structure. However, this point is certainly debatable given the increase in the exemption and standard deduction amounts and the numerous changes to reduce the deduc-tions, exclusions, credits and other "leakage" from the computation of ability-to-pay (taxable income). Given these very significant changes to the U.S. income tax and also given that the full impact of this tax law is effective on the seventy-fifth an-niversary of the 1913 adoption of the in-come tax, it is worth the time to look back and contemplate how progressivity of the income tax structure has changed over time. This paper summarizes the historical findings. ANALYSIS OF HISTORICAL PROGRESSIVITY Comparing the income tax for different tax years is risky at best when changes in society, business, economics, inflation, etc., are considered. However, given the limitations, an attempt at assessing historical progressivity is made here. Pro-gressivity is a relative concept and involves making comparisons between different taxpayers as to their effective tax rates. However, in this analysis the historical statutory marginal tax rates, exemption amounts, etc., will be used instead. The progressivity of the income tax structure is a function of several variables: (1) the tax rate on the highest income brackets. (2) the tax rate on the lowest income bracket, (3) the level of income at which the highest tax rate is imposed, (4) the amount of income ex-empt from tax (exemption and standard deduction amounts), (5) the width of the various tax brackets, i.e., how much The Accounting Historians Notebook, Spring, 1989 11 1Roberts and Samson: Historical survey of the progressivity of the U.S. income taxPublished by eGrove, 1989income is taxed at each rate - how quickly is the top rate reached, and (6) the number of tax rates (the number of tax brackets). As Table 1 shows, the income tax has been used as a flexible economic device to increase or decrease tax revenues accor-ding to government need. Alternatively, the data indicate a trial and error approach to finding the "right" degree of progressivity. While the progressive rate structure and the income tax seem closely tied together, the U.S. income tax has had proportional rates during its history, particularly in the earliest years. Interestingly, the progressive rate structure had its beginnings with the property tax rather than the income tax. However, since 1913, the United States income tax has utilized a progressive rate structure, but the degree of progressivity has been changed numerous times. In ad-dition, the rates chosen for the top tax rate and bottom tax rate have also fluctuated widely over the last seventy-five years. As shown by Table 1, the statutory high-low rate differential has ranged from an initial 6% to a maximum of 91 % during World War Two to 13% currently. While the current high-low statutory rate differen-tial is not at the historical low, the ratio of high rate to low rate is. In 1988, this ratio stands at 1.87 %. In other words, the top tax rate in 1988 is less than twice the lowest tax rate. From an historical perspec-tive this ratio is remarkable because it is so small. In part, this current low ratio is due to a relatively high initial rate (15 %) coupled with a quickly achieved, relatively low top tax rate (28%). This ratio reveals a measure of rate structure progressivity and the ratio supports the criticism that the 1986 Tax Reform Act drastically reduced progressivity.1 It should be noted that the highest rate ratio occurred not during World War Two, although the ratio was very high (30), but during the time of the 1929 stock market crash when top bracket tax rate was 48 times the lowest tax bracket rate. In conclusion, the search for the perfect tax has led to constant changes to taxation throughout the history of civilization. The frequency of the changes in the income tax represents a continuation of this search. The historical variation in pro-gressivity variables reflects a trial and er-ror approach to refining tax equity. The income tax does represent a tax base that is flexible to the needs of government and society's concept of fairness. Thus, given the fluctuations in rates, brackets, and levels of exempt income, it seems safe to conclude that the changes will continue in the future in the continuing search for the elusive goal of the perfect tax system. 12 The Accounting Historians Notebook, Spring, 1989 MANUSCRIPTS AND SHAGGY DOG STORIES Anyone wishing to submit article manuscripts, short notes, cartoons, shaggy dog stories, letters to the editor, or other filler to THE ACCOUNTING HISTORIANS NOTEBOOK should send the material to be editor, Dale L. Flesher, School of Accountancy, University of Mississippi, University, MS 38677 2The Accounting Historians Notebook, Vol. 12 [1989], No. 1, Art. 6https://egrove.olemiss.edu/aah_notebook/vol12/iss1/6TABLE I THE GREAT EXPERIMENT: PROGRESSIVITY FROM A HISTORICAL PERSPECTIVE YEAR INDIVIDUAL INCOME TAX TOP-BOTTOM RATE NUMBER TOP INCOME LEVEL EXEMPT LOWEST COMPARISON: OF TAX RATE FOR TOP RATE INCOME RATE HI-LOW 1861 1862 1863 1864 1865 1866 1867 1868 1869 1870 1894 1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 BRACKETS 1 2 2 3 2 2 1 1 1 1 1 7 7 7 13 21 56 56 56 50 50 50 43 23 23 23 23 23 23 25 57 57 30 30 33 33 33 33 35 31 23 25 25 25 25 25 25 25 25 24 27 27 24 24 24 24 24 24 24 24 24 24 28 25 25 25 25 25 25 25 25 25 25 25 25 25 25 15 15 15 12 13 13 14 14 5 2 3.0% 5.0% 5.0% 10.0% 10.0% 10.0% 5.0% 5.0% 5.0% 2.5% 2.0% 7.0% 7.0% 10.0% 14.0% 82.0% 77.0% 71.0% 71.0% 58.0% 58.0% 58.0% 46.0% 25.0% 25.0% 25.0% 25.0% 24.0% 25.0% 25.0% 63.0% 63.0% 63.0% 63.0% 79.0% 79.0% 79.0% 79.0% 89.0% 81.0% 88.0% 93.0% 94.0% 86.5% 86.5% 86.5% 82.1% 82.1% 84.3% 91.0% 92.0% 92.0% 91.0% 91.0% 91.0% 91.0% 91.0% 91.0% 91.0% 91.0% 91.0% 91.0% 77.0% 70.0% 70.0% 70.0% 75.0% 77.0% 73.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 50.0% 50.0% 50.0% 50.0% 50.0% 38.5% 28.0% $0 $10,000 $10,000 $10,000 $5,000 $5,000 $0 $0 $0 $0 $0 $500,000 $500,000 $500,000 $2,000,000 $2,000,000 $1,000,000 $1,000,000 $1,000,000 $200,000 $200,000 $200,000 $500,000 $100,000 $100,000 $100,000 $100,000 $100,000 $200,000 $200,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000 $150,000 $200,000 $200,000 $200,000 $200,000 $200,000 $400,000 $400,000 $400,000 $400,000 $600,000 $600,000 $400,000 $400,000 $400,000 $400,000 $400,000 $400,000 $400,000 $400,000 $400,000 $400,000 $400,000 $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 $203,200 $203,200 $215,400 $215,400 $215,400 $85,600 $109,400 $162,400 $169,020 $175,250 $90,000 $29,750 Family of $600 $600 $600 $600 $600 $600 $1,000 $1,000 $1,000 $2,000 $4,000 $4,000 $4,000 $4,000 $4,000 $2,000 $2,400 $2,400 $2,400 $3,300 $3,300 $3,300 $3,300 $4,300 $4,300 $4,300 $4,300 $4,300 $4,300 $4,300 $3,300 $3,300 $3,300 $3,300 $3,300 $3,300 $3,300 $3,300 $2,800 $2,800 $2,300 $1,900 $2,400 $1,500 $2,500 $2,500 $3,400 $3,400 $3,400 $3,400 $3,400 $3,400 $3,400 $3,400 $3,400 $3,400 $3,400 $3,400 $3,400 $3,400 $3,400 $3,400 $3,400 $3,400 $3,400 $3,400 $3,400 $3,400 $3,500 $4,200 $5,000 $5,000 $5,000 $5,000 $5,800 $6,200 $6,200 $7,400 $7,400 $7,400 $7,400 $7,400 $7,400 $7,700 $7,990 $11,360 $12,800 4 3.0% 3.0% 3.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 2.5% 2.0% 1.0% 1.0% 2.0% 2.0% 4.0% 6.0% 4.0% 4 .0% 4.0% 4.0% 4.0% 2.0% 1.5% 1.5% 1.5% 1.5% 0.5% 1.5% 1.5% 4.0% 4.0% 4.0% 4.0% 4 .0% 4.0% 4.0% 4.0% 4.0% 4.0% 6.0% 11.0% 3.0% 2.9% 2.9% 2.9% 16.6% 16.6% 17.4% 20.4% 22.2% 22.2% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 16.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14 .0 % 14.0% 14.0% 12.0% 11.0% 11.0% 11.0% 11.0% 11.0% 15.0% RANGE 0.0% 2.0% 2.0% 5.0% 5.0% 5.0% 0.0% 0.0% 0.0% 0.0% 0.0% 6.0% 6.0% 8.0% 12.0% 78.0% 71.0% 67.0% 67.0% 54.0% 54.0% 54.0% 44.0% 23.5% 23.5% 23.5% 23.5% 23.5% 23.5% 23.5% 59.0% 59.0% 59.0% 59.0% 75.0% 75.0% 75.0% 75.0% 85.0% 77.0% 82.0% 82.0% 91.0% 83.7% 83.7% 83.7% 65.5% 65.5% 66.9% 70.6% 69.8% 69.8% 71.0% 71.0% 71.0% 71.0% 71.0% 71.0% 71.0% 71.0% 71.0% 71.0% 61.0% 56.0% 56.0% 56.0% 61.0% 63.0% 59.0% 56.0% 56.0% 56.0% 56.0% 56.0% 56.0% 56.0% 56.0% 56.0% 56.0% 56.0% 38.0% 39.0% 39.0% 39.0% 39.0% 27.5% 13.0% RATIO 1.00 1.67 1.67 2.00 2.00 2.00 1.00 1.00 1.00 1.00 1.00 7.00 7.00 5.00 7.00 20.50 12.83 17.75 17.75 14.50 14.50 14.50 23.00 16.67 16.67 16.67 16.67 48.00 16.67 16.67 15.75 15.75 15.75 15.75 19.75 19.75 19.75 19.75 22.25 20.25 14.67 8.45 31.33 30.35 30.35 30.35 4.95 4.95 4.85 4.46 4.14 4. 14 4.55 4.55 4.55 4.55 4.55 4.55 4.55 4.55 4.55 4.55 4.81 5.00 5.00 5.00 5.36 5.50 5.21 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 4. 17 4.55 4.55 4.55 4.55 3.50 1.87 The Accounting Historians Notebook, Spring, 1989 13 3Roberts and Samson: Historical survey of the progressivity of the U.S. income taxPublished by eGrove, 1989

Historical survey of the progressivity of the U.S. income tax

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Historical survey of the progressivity of the U.S. income tax

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