Friday, April 23, 2010

Historical Income Taxes



I've taken the average weekly wages for production and nonsupervisory employees in the most recent employment situation report and multiplied it by 52 to come up with an average annual wage of $32,727.24. I've then taken that wage back in time (adjusted for inflation) to get a crude look at the income taxes in the past.

I'm ignoring all deductions and exemptions. The overall net tax rate is therefore lower (often much lower) than what it shows in the chart.

See Also:
Silly Roth IRA Math Revisited

Source Data:
U.S. Federal Individual Income Tax Rates History, 1913-2010
BLS: Employment Situation Summary
BLS: Historical CPI

21 comments:

EconomicDisconnect said...

Geez that huge spike right after the great depression has me worried about the aftermath of the great recession!

Anyways,
off to the Bahamas on Sunday for a week, you are alone on sarcasm duty till then. All my best.

Stagflationary Mark said...

GYSC,

Geez that huge spike right after the great depression has me worried about the aftermath of the great recession!

World War II saved us all!

"Sarcasm duty" for the win!

The American Economy during World War II

The Department of the Treasury, for instance, was remarkably successful at generating money to pay for the war, including the first general income tax in American history and the famous "war bonds" sold to the public. Beginning in 1940, the government extended the income tax to virtually all Americans and began collecting the tax via the now-familiar method of continuous withholdings from paychecks (rather than lump-sum payments after the fact). The number of Americans required to pay federal taxes rose from 4 million in 1939 to 43 million in 1945. With such a large pool of taxpayers, the American government took in $45 billion in 1945, an enormous increase over the $8.7 billion collected in 1941 but still far short of the $83 billion spent on the war in 1945. Over that same period, federal tax revenue grew from about 8 percent of GDP to more than 20 percent. Americans who earned as little as $500 per year paid income tax at a 23 percent rate, while those who earned more than $1 million per year paid a 94 percent rate. The average income tax rate peaked in 1944 at 20.9 percent ("Fact Sheet: Taxes").

mab said...

Stag,

I'm really excited that Obama and CONgress are looking to institute additional financial regulations. Wall St. and regulators clearly need more financial regulations that they can ignore.

I sure wish we could ignore taxes the way Wall St. ignores regulations.

I've been watching the financial inquiry hearings on cspan. Sickening.

Our financial system is not just wealth extraction system. It's a Government sponsored looting system. Through and through corruption.

Stagflationary Mark said...

mab,

It could be worse.

1. We can still openly discuss it.
2. We're slightly behind schedule (see below).

1984

"The book" explains that the purpose of the unwinnable, perpetual war is to consume human labour and commodities, hence the economy of a super-state cannot support economic equality (a high standard of life) for every citizen.

EconomicDisconnect said...

Enjoy the week!

Heard anything about the killer fungus in the Pacific Northwest? Sounds creepy!

Stagflationary Mark said...

GYSC,

Have fun!

GawainsGhost said...

Well, speaking strictly as someone self-employed, I just sent a rather large check to the IRS. And it was for a lot more than 15% of my income. The worst part of it is I'll probably have to send more later, even after all of my deductions are factored in.

Sigh. Life in America.

EconomicDisconnect said...

Gawains,
I do not even want to talk about taxes. I forgot some positions I sold early last year and, well, the IRS was well rewarded for my Goldman Sachs like profit, lol!

Dallas now has Austin and Bryant on the edges, I think Witten has a monster year as the whole middle of the filed will be wide open. Take care man.

EconomicDisconnect said...

Thanks Mark!

watchtower said...

Mark,

I picked up a used copy of 'Borderlands' yesterday, in a word, awesome.

Thanks for the recommendation, you were spot on.

AllanF said...

By the way Mark, thanks for this series. My Dad had been talking about converting his IRA to a Roth. He asked me what I thought. I told him I didn't know, that I'd have to sit down, put a spreadsheet together, run some scenarios, and see how the math looked. Well, you've saved me a lot of tedious effort I wasn't relishing. Thanks!

Stagflationary Mark said...

GawainsGhost,

Sigh. Life in America.

I hear you.

We may dream of this life in America someday though. Just imagine what the tax situation would look like if we actually paid for all that the government spends at the time they spend it OR the government cut spending to match the revenue it receives (i.e., a balanced budget).

This endlessly borrow from the future idea makes me cringe.

Sigh.

Stagflationary Mark said...

watchtower,

I'm still loving Borderlands. I've played it through many times so far. :)

Stagflationary Mark said...

AllanF,

I'm glad you found some usefulness in what I've written.

Here's another thought.

If you have $100,000 in savings to help fuel your retirement then here are two different ways to look at it.

1. Outside of a retirement account, at 5% interest that's $5k per year of taxable income.

2. Inside of a traditional retirement account that exactly keeps up with inflation, if you draw $5k per year, then it will last 20 years.

Either way, that's $5k per year of taxable income. $5k per year of taxable income should not put you in a high tax bracket. If that's all you had in retirement savings, then you probably won't owe a penny of income taxes in retirement (after deductions and exemptions).

It takes numbers considerably higher than $100k before the Roth IRA even begins to make sense to me. Jamming all of my taxes into one or two years on any investment is the very thing I try to avoid. It's generally better to spread them out, if only to keep myself in a lower tax bracket.

A Roth IRA could make a lot of sense for someone really wealthy though. Locking in 30% taxes now would be a great plan for those who might someday get taxed at 90%. I don't personally know anyone nearly that wealthy though.

I have savings considerably higher than this example, and the Roth doesn't even seem to make sense for me.

And lastly, the math looks even worse if the government opts for a national sales tax and/or VAT. It's not like the Roth IRA can protect against tax increases that are not income related.

Things could change in the future though. I have no proof that the Roth IRA will be bad in the future. I'm simply basing it on what we know right now as it applies to a typical middle-class American.

mab said...

Stag,

http://blogs.wsj.com/economics/2010/04/24/number-of-the-week-103-months-to-clear-housing-inventory/?

It's beyond me that so many "professionals" are still clinging to bubble-eCONomic valuations and metrics. What part of supply and demand don't they get?

And the notion that the Fed & Gov't can permanently prop up prices is idiocy too. At best, the Gov't and Fed will further spread the pain from Wall St. and the irresponsible to the prudent. Hardly a greenshoot.

Not only do all bubbles pop, they overshoot so as to return the trend to the mean. The housing bubble will be no different.

Frankly, I'm not sure the system can survive the credit bubble returning to the mean let alone overshooting.

Those cheering the meteroic rise in the stock market are courting disaster imo. Curing bubbles with bubbles is insanity as is subsidizing and bailing out fraud.

Stagflationary Mark said...

mab,

It's beyond me that so many "professionals" are still clinging to bubble-eCONomic valuations and metrics. What part of supply and demand don't they get?

The professionals have had important meetings though. They've worked all this out.

Meetings

mab said...

The professionals have had important meetings though.

Stag,

I hear you on the meetings. Those are critically important. I'm sure that's why the Euro Countries keep having so many meetings regarding Greece.
http://blogs.telegraph.co.uk/finance/edmundconway/100003661/britains-quarter-of-a-trillion-pound-exposure-to-the-piigs/

I'd be worried if a trillion was still CONsidered a lot of money.

What can't be paid, won't be paid. Piling on more debt will only make matters worse. I fear the end game has begun.

Stagflationary Mark said...

mab,

I fear the end game has begun.

Great news! The pawns will soon become even more important.

Chess endgame

The line between middlegame and endgame is often not clear, and may occur gradually or with the quick exchange of a few pairs of pieces. The endgame, however, tends to have different characteristics from the middlegame, and the players have correspondingly different strategic concerns. In particular, pawns become more important...

Nothing says pawn power like subprime pawn power.

GM misleading with debt claim

Exhibiting quite a lot of gall, General Motors is trying to spin the public with an ad campaign launched last week based on breathtakingly misleading information.

As partial owners of the company, the American taxpayers who saved it from economic ruin deserve better.

Shown strolling down an assembly line, GM's new chief executive brags that the company has repaid its government loans "in full, with interest, five years ahead of the original schedule."

mab said...

GM misleading with debt claim???

You're going to love this blast from the recent past:

http://www.nysscpa.org/cpajournal/2007/307/infocus/p16.htm

From the link:

While General Motors is the obvious standout, with retained earnings reduced by an astounding 1,885%....

Hmmm, 1,885% sounds statistically significant.

And GM wasn't/isn't the only firm with a misleading balance sheet. Check out exhibit 2 from the link:

http://www.nysscpa.org/cpajournal/2007/307/images/ex2p16.pdf

Funny we heard about CAT's "better than expected" earnings today, but we didn't hear boo about their book value being overstated by 33%!

Today's money managers and analysts are a joke. Fannie and Freddie were fine until they weren't. Same with AIG, Enron, WorldCON, Lehman, Bear, Lucent, Nortel, Wamu, WAC, Indy Mac, etc.

Just wait until it dawns on everyone that they DON'T PRINT MONEY and that all these debts can't possibly be paid even at low interest rates.

Stagflationary Mark said...

mab,

Caterpillar turns 1Q profit, sees growing economy

"We're in a revival. There's no doubt about it," Chief Financial Officer Dave Burritt said. "We're heading up, and it's driven by the emerging markets. No doubt."

I tend to "doubt" when people feel the need to tell me the same thing more than once.

Perhaps it stems from a comment I read in a magazine by one of my company's higher ups.

We have a fun environment with creativity and fun.

"Fun" must have been a euphemism for poor morale, a tanking stock price, never ending layoffs, and front page of the Wall Street Journal level corporate fraud. Fun times indeed!

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