Tax Rates an Historical Timeline 1">Marginal Tax Rate History
The concept of a Marginal Tax Rate, where different portions of income are taxed at varying percentages, is a relatively new implementation in American tax history. For much of the United States early existence, the Federal government largely avoided direct taxation on individual income, instead relying heavily on tariffs and excise duties to fund its operations. In fact, more years have past without income taxes than with income taxes. However, relying on Foreign trade for steady revenue proved challenging, and many argued that Tariffs were a tax that added to the price of consumer goods that was born disproportionately by the working class.
Shifting to Income Taxes
The large expenses of the Civil War necessitated a dramatic shift, introducing the nation’s first income tax from the Revenue Act of 1861, albeit without robust collection mechanisms, which was corrected in the Revenue act of 1862 with the introduction of the Commissioner of Internal Revenue, the predecessor to the Internal Revenue Service (IRS). Following its repeal, direct income taxation was dormant until the 16th Amendment in 1913, which paved the way for a permanent Federal income tax and the graduated progressive tax brackets we have today.
Income Taxes effect everyone
Both the rates and the number of Tax Brackets would fluctuate wildly throughout the 20th century, peaking at astounding heights during World War II to finance the monumental war effort, before gradually descending to the more varied and numerous tiers we recognize in today’s tax code. While the top marginal tax rates (MTR) get all the billing we often overlook the major shift of taxes from External (Tariffs) to Internal (Direct Income Taxes) and the responsibility placed on all citizens as a result.
Its also important to note that despite the sensationally high top marginal tax rates during the World War II era 1940’s and 50’s being in the 90% range the highest income earners during this period research has shown that their effective tax rate for was only 16.9% after all their exemptions, deductions, and write offs – not much different than today.[1] So while the tax tables show what income levels are taxed at, unfortunately they do not show how much of an individuals income is exposed to that rate even if their gross income qualifies them for higher rate brackets and hence understanding the tax burden for each income group is much harder to understand from looking at the Marginal Tax Brackets and Rates by themselves.
The number of tax brackets, from a high of 56 to a low of 2, also shows great variation in the thinking and the rates at which various income groups are levied. As you can see from the variations in both the number of tax brackets (Figure 2), and the variation in the rates (Figure 1) themselves US Tax Policy is an evolving canvas. Over each time period the canvas is colored by legislators perfecting the tax code, the political whims of the period, external events, and geopolitical unrest all while trying to maintain a steady, predictable, fiscally sound, fair, and balanced system to support our Government.
The following is the history of the Marginal Tax Rate, and the events and context for how and why they changed over time.
Significance:
- First Income tax to individuals in United States with passing of Revenue Act of 1861
- Issued as a Flat Tax (everyone pays the same rate) with only one Tax Bracket
- The Tax applied to all individuals with Income from all sources included in the tax
- First of many Tax increases to support War time spending
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The Revenue Act of 1862 updated the Revenue Act of 1861 with the goal of increasing government revenue, in large part to support the Civil War expenses. It also addressed a major weakness in the Revenue Act of 1861, no enforcement. The acts revenue fell far short of expectations because of the lack of enforcement and with the new act a collection mechanism in the form of the Commissioner of Internal Revenue was created. It also created the first Progressive Tax with different rates based on peoples ability to pay by Income level, later to be struck down as unconstitutional before the passing of the 16th Amendment in 1913. It created 3 tax brackets:
| Income | Tax | 2025 Dollars |
| $0-$600 | 0% | $ 18,998 |
| $600-$10,000 | 3% | $ 316,633 |
| > $10,000 | 5% |
Significance:
- First Progressive Income tax to individuals in United States with passing of Revenue Act of 1862
- Created a Commissioner of Internal Revenue, predecessor of the Internal Revenue Service (IRS)
- Progressive Tax implemented would later be ruled unconstitutional until the passing of the 16th amendment in 1913
The Wilson Gorman Tariff Act implemented, amongst others, a income tax on property. The Farmer’s Loan & Trust Company notified its clients that in compliance with the law they would pay the taxes on their clients behalf and notify the government of its clients liabilities. Charles Pollock, of Massachusetts, sued Farmer’s Loan & Trust and lost in lower court, but prevailed in the Supreme Court. The court ruled that tax on income from property was a direct tax and as a direct taxes were required to be levied in proportion to the states’ population or they were not legal.
Significance:
- Declared direct taxation without apportionment to the states based on population was unconstitutional
- Prevented Progressive Taxation and hence any income tax that was not a flat rate limiting the income tax to one bracket.
- Limited income taxes to essentially flat taxes until the ratification of the 16th Amendment in 1913.
Prior to 1913 the majority of taxes were collected via Tariffs, and some Excise taxes. Several groups, including the Populist (aka People’s) Party, the Socialist Labor Party, and Democrat Party advocated for a graduated tax rate believing that Tariffs were disproportionately impacting the working class and that a graduated tax rate could shift the burden to wealthier businessmen. The 16th Amendment was passed by Congress in 1909, and ratified in 1913, the 16th amendment established a Federal Income Tax. The Amendment was ratified by 42 states with exception to Florida, Connecticut, Pennsylvania, Rhode Island, Utah, and Virginia. The Amendment allowed Congress to levy an income tax without apportioning it among the states on the basis of population making it legal to have the Progressive Tax system we have today. It was passed by Congress in response to the 1895 case of Pollock v. Farmers’ Loan & Trust Co.
Significance:
- First legal Progressive Tax system, took an Constitutional Amendment by Congress and ratified by the states to enact
- Allowed for taxation without apportionment, meaning taxes could be levied at different rates not according to population which in essence was a flat tax.
- Supported by a number of parties including Socialist Labor Party, Democrat Party, Populist Party
- Shifted the primary revenue source for Federal Revenue from Tariffs on other countries to Income Tax on American Citizens
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Somewhat counter intuitively, the income tax at the beginning was generally well received. It was championed by Democrats with only one Republican voting for the 1913 Revenue act. However, it was supported by Populists and Progressives including William Jennings Bryan and later Theodore Roosevelt. It was seen by the vast majority of Americans as a Fairness issue with the wealthy paying their fair share.
Significance:
- Less than 1% of population actually paid any income taxes
- For vast majority of Americans it had no impact
- Shift from regressive taxation on tariffs and excises
- Seen as a Progressive tax mainly on the wealthy
- Marginal Tax Rate 1% over $3,000 ($97,000 in 2025), and $4,000 ($129,000 in 2025) for married couples. The top marginal tax rate was 7% for incomes above $500,000 ($16.15M in 2025 dollars)
During World War I, Congress passed the 1916 Revenue Act, and then the War Revenue Act of 1917. The top marginal income tax rate jumped dramatically from 15% in 1916 to 67% in 1917 to 77% in 1918.
Significance:
- Significant increase in Income Tax rates in order to fund the war.
- Massive expansion in the Federal Governments taxation power
- Rates continued to escalate during the War
- Revenue went from $ in 1917 to $3.6 Billion in 1918.
- Increased the Governments knowledge of private financial affairs
- Paved way for Modern tax system, replacing Tariffs and Excise with Income as the top source of revenue
- Introduction of Corporate Excess Profit tax
- Marginal Tax Rates increased, limits were lowered, exemptions reduced, and Progressive nature all increased dramatically
In 1920s, marginal tax rates were significantly reduced, with the top rate falling from wartime highs to 25% by 1925 under policies championed by Treasury Secretary Andrew Mellon. However, as the Great Depression deepened in the 1930s, tax policies shifted under FDR, and marginal tax rates increased. In 1932, Congress raised taxes from 25% to 63% on the top earners. The Tax policies of the 20’s and 30’s were really a Yin and Yang opposite with the Roaring 20’s declining tax rates, and the Depression Era 30’s dramatic tax hikes.
Significance:
- Post War tax rates were reduced significantly, but not back to Pre War levels (Pre War 7%, Post War 25%)
- Rates sharply increased again to 63% for Top Earners at the advent of the Great Depression
- Treasury Secretary Andrew Mellon favored reduced tax rates in order to stimulate economy.
- Rates declined throughout the 1920’s
- Revenue Act of 1921: Reduced the top marginal rate from 73% to 58% for 1922-1923.
- Revenue Act of 1924: Further reduced the top marginal rate to 46%.
- Revenue Act of 1926: This was the most significant cut of the decade, lowering the top marginal rate to just 25% on incomes over $100,000. This rate remained in effect for the rest of the decade.
- Revenue Act of 1928: Maintained the top rate at 25%.
- Rates increased dramatically in the 1930’s
- Revenue Act of 1932: Raised the top marginal income tax rate from 25% to 63% on incomes over $1 million. This was the largest peacetime tax increase in U.S. history at the time.
- Revenue Act of 1935 (The “Wealth Tax” or “Soak the Rich” Act): It increased the top marginal income tax rate to 79% on annual incomes over $5 million.
- Revenue Act of 1937: Closed loopholes and increase Revenue generation efficacy
This period was characterized by massive tax increases and deficits to pay for the immense expenses and resources required for World War II. The Revenue Act of 1940 was a major piece of U.S. tax legislation. The Revenue Act was signed into law by President Franklin D. Roosevelt and it was designed to increase federal revenue in light of growing defense expenditures. The top marginal income tax rate hit 94% in 1944–1945.
Significance:
- Dramatic and massive increase in Tax Revenue and Marginal Tax Rates
- Highest National Debt to GDP ratio to data, dramatically higher than any other period, only rivaled by our current National Debt
- Corporate Marginal Tax Rates increased to 19%, and 33% over $25,000
- The Revenue Act of 1940 base individual Income Rate was 4% with a Surtax added with the top combined Marginal Tax Rate of 79%
- The Top Marginal Tax rates in 1944-1945 hit 94% for Income over $200,000 ($3.6 Million in 2025)
The 60’s began the period of Post War Tax Policy, and the start of a downward trend in the Top Marginal Tax Rate. At the start of the 1960s, the top marginal tax rate stood at 91%. This rate applied to the highest incomes and was justified as a tool for redistributive justice and National security financing. However, the Revenue Act of 1964, part of President Lyndon B. Johnson’s implementation of President John F. Kennedy’s economic agenda, reduced the top rate to 70% and started the slow decline of the Top Marginal Tax Rate.
Significance:
- Revenue Act of 1964, also known as the Tax Reduction Act, cut Marginal Tax Rates 20% across the board.
- The Top Marginal Tax Rate dropped from 91% to 70% over a 3 year period from 1963 to 1965
- Top Marginal Tax Rate of 70% for Income over $200,000 ( $2 Million in 2025)
- Lyndon Johnson was able to continue to champion and push through John F Kennedy’s Economic agenda after his assassination.
Throughout the 1970s, the top marginal rate was at 70% but inflation eroded the real value of income thresholds due to the lack of indexation for inflation. This phenomenon is known as “bracket creep” Congress enacted minor reforms, but there was no major reduction in the top marginal rate that occurred during that decade. The Tax Reform Act of 1976 adjusted deductions while the top marginal tax rate remained at 70%.
Significance:
- High inflation pushed wages up and introduced the concept of Bracket Creep pushing people into higher Marginal Tax Brackets
- While the Top Marginal Tax Rate was lower than its World War II peaks, it was still a significant 70%
- The 70’s saw a proliferation of uses of Tax Shelters by Wealthy and Corporations
- The Tax Reform Act of 1976 sought to close Tax Loopholes, and expand the Alternative Minimum Tax (AMT)
The Reagan Era saw a large reduction in tax rates, a continuation of post World War II trends, and a significant jump in Federal Revenue by the end of his first term. The Economic Recovery Tax Act of 1981 began a phased reduction of the top rate from 70% to 50%. The Tax Reform Act of 1986 cut the top rate further from 50% to 28% while dramatically reducing the number of brackets and simplifying the tax code.
Significance:
- Top Marginal Tax rates dropped from 70% to 28% during this period.
- Reduction and simplification of rates from 34 Tax Brackets in 1978 to just 2 in 1989 at 15% and 28% for incomes over $30,950 ($79,820 in 2025)
- This period reduction saw in Volker Era period of high interest rates from a peak of 21% in 1980 to ~9-12% in the Reagan’s first term
- Inflation peaked in 1980 at 14.8%
- The period saw a increase in Cold War Era spending, and deficit increases
The 1990’s maintained the relatively low Marginal Tax Rates with slight increases by two Presidents. President George H. W. Bush signed the Omnibus Budget Reconciliation Act of 1990 (OBRA 1990) in 1990 raising the Top Marginal Tax Rate from 28% to 31% . In 1993, President Bill Clinton increased it further from 31% to 39.6% for high-income earners through the Omnibus Budget Reconciliation Act of 1993 (OBRA 1993), aiming to reduce the deficit and to increase fairness.
Significance:
- Gradual increases in the Marginal Tax Rates in both the OBRA 1990 and OBRA 1993 Acts from 28% to 39.6%
- The Bush tax rate increase came after he famously was quoted as “Read my lips. No new taxes.“
- AMT was increased to a top tier of 28%
- OBRA 1993 created a Top Marginal Tax Rate of 39.6% on Income over $250,000 ($553,000 in 2025)
The Obama administration allowed the Bush-era tax cuts to expire for top earners as part of the American Taxpayer Relief Act of 2012. Beginning in 2013, the Top Marginal Income Tax Rate reverted to 39.6% for individuals earning over $400,000 and couples earning over $450,000.
Significance:
- Majority of early 2000’s Bush Tax cuts set to expire in “Fiscal Cliff” with expirations in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA)
- The American Tax Payer Relief Act of 2012 (ATRA) extended many Bush Tax cuts while letting some expire avoiding the full effects of the Fiscal Cliff.
- The ATRA significantly increased the AMT exemption amounts and indexed them for inflation
- Top Marginal Tax Rate increased from 35% to 39.6% for incomes over $400,000 ($557,000 in 2025)
- Despite significant financial events from the 2008 Great Recession, those were mostly handled through credits and not reductions in Marginal Tax Rates
The Tax Cuts and Jobs Act (TCJA) of 2017 can be seen as a major overhaul of the U.S. tax code, signed by President Donald Trump. It lowered the corporate tax rate from 35% to 21% in addition to reducing individual income tax rates across most brackets. The Tax Cuts and Jobs Act (TCJA) lowered the top marginal rate from 39.6% to 37%. It also raised the thresholds for higher tax brackets.
Significance:
- Trump’s Tax Cuts and Jobs Act (TCJA) lowered the Top Marginal Tax Rate from 39.6% to 37% for Income above $600,000 ($763,000 in 2025)
- TCJA eliminated the Affordable Care Act’s Individual Mandates tax penalty
- TCJA kept the bottom bracket the same at 10%, lowered the rest of the brackets, kept the 35% bracket the same, and lowered the Top Marginal Tax Bracket to 37%
- Major reduction to the Corporate tax rate from 35% to 21%
- Moved indexes from CPI to Chained CPI, in essence a slow tax increase allowing Bracket Creep over time
- Limited State and Local Tax (SALT) deductions to $10,000 a move largely impacting high income states
Citation
1 Tax Foundation https://taxfoundation.org/data/all/federal/taxes-on-the-rich-1950s-not-high/
