No other function of government exposes a nation’s real priorities like taxation. At a time when the issue of tax policy has come to a head, it’s instructive to look back at the history of the income tax in America.
The current debate in Congress hinges on a relatively tiny percentage of tax on the very, very, very wealthy: a difference between the 35 percent they now pay and a proposed rise to 39.6 percent. Historically, that’s miniscule. The National Archives has just released a 67-year-old Treasury Department report that shows how miniscule—and how the government in days gone by saw what the share of taxes paid by the most affluent layer of society should be.
The report grew out of a request by President Franklin Roosevelt in 1943 that the Internal Revenue Service find out how many Americans were making more than $67,000 a year (a sum that would have been equivalent to about $1 million today). The IRS made a list of those people—there were 2,090—and added something else: the percentage of their income they were paying in taxes. The information was under wraps for decades because it’s illegal for the government to disclose how much tax particular citizens pay.
The report shows that the chief executive of IBM in 1941, Thomas Watson, made $517,221 (equivalent to about $7.7 million today). He paid 69 percent of it in income tax.
And Carl Swebilius, the head of a defense firm, High Standard Manufacturing, who made even more—over $9 million in today’s dollars—paid a higher percentage, 73 percent, in income tax.
In 1941, Americans in the very top tax bracket paid up to 81 percent in taxes. As the war went on, the rate rose—to 94 percent by 1944 and 1945. Some would argue that that was unfair, that the rich earned their money. But as people in government know, many large fortunes are earned with some help from the government—subsidies, services, patronage—help paid for by taxpayers earning far less than those making the big money.
During the Korean “police action” and the Vietnam War, the top tax rate was 91 percent. Late in the Cold War it fell steeply, from 70 percent to 28 percent. Under Bush I and Clinton it rose to 39.6 percent; under Bush II, though he constantly emphasized that the nation was at war, it fell to 35 percent. According to the Congressional Budget Office, Bush-era tax policy has contributed more to the national deficit than entitlement programs and even the post-9/11 wars.
