After the President’s recent State of the Union speech it might be a good time to refresh our knowledge of the history of income tax rates. Given the massive deficit that the government is creating it is inevitable that income tax rates will go up. But by how much? History should provide a clue as to how high they can go.
History of Income Tax Rates
Question: How long ago was the marginal income tax rate double today’s rate of 35%? Answer: 29 years ago or 1981!
Question: What is the highest marginal tax rate in history? Answer: 94% in 1945!
Question: What was the beginning marginal tax rate in what year? Answer: 7% in 1913 for incomes over $500k!
Income taxes have been in existence for almost 100 years in the United States. They are presently the lowest they have been during that time period. So, what are the chances of them staying this low in the future?
During this 100 year period the taxable income threshold has dropped after being adjusted for inflation. Furthermore, income taxes have increased or taxable income thresholds have dropped after every major war time period. In other words, the government has had to pay for WWI, WWII, Korean and Vietnam Wars with higher taxes. We now have two wars to pay for; Afghanistan & Iraq!
The question faces us in not whether income taxes will increase but how high will they go? It is entirely possible that the marginal tax rates could go back up to a 70% bracket in the next 5 years.
For the past 25 years we have tended to ignore the tax effect of Federal income taxes on our investments. Going forward taxes will have a bigger impact on the economics of our deals. In the future business is going to be buffeted by strong headwinds: higher taxes and higher interest rates!
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