US income tax history and theory for dummies?

October 17, 2008 6:14 PM

With all the bickering over taxes in the election campaign, I'm trying to get a broader picture of US income tax history, theories behind past policies, and analysis of how they worked (in idiot friendly language).

I found this income tax rate history chart, and was surprised to see that 50 years ago, the wealthiest brackets were paying 70-90% taxes on income.

Then I found this tax history fact sheet, which is sort of what I'm looking for, but either with a little better explanation, or in simpler language. For instance, I'd like more explanation on passages like this:
Over the 22 year period from 1964 to 1986 the top individual tax rate was reduced from 91 to 28 percent. However, because upper-income taxpayers increasingly chose to receive their income in taxable form, and because of the broadening of the tax base, the progressivity of the tax system actually rose during this period.

All links, explanations, articles, anecdotes appreciated!

posted by p3t3 to law & government (4 comments total)

Roughly speaking, under an income tax, the tax rate is multiplied by a taxpayer's taxable income to determine the amount of tax due. The tax base, under an income tax, is the total taxable income of those subject to the tax.

As you can see, there are consequently broadly two ways to change the amount of tax collected: change the tax rates, or narrow or broaden the definition of taxable income, thus narrowing or broadening the tax base.

An income tax is progressive if persons with more income pay proportionally more tax than persons with less income.

What the excerpt is saying is that in 1964, the types of income that high-income persons disproportionately received tended to be excluded from taxable income. This is kind of a complicated concept.

Keep in mind that there are many different kinds of income: wages, interest, dividends, gifts, bequests, gains from the sale of property, non-wage income from personal services, and so on. Not all income levels earn income in the same "mix". For example, the total income of low-income persons is disproportionately composed of wages--high-income persons earn a smaller percentage of their total income from wages (even though they earn more altogether, and perhaps even earn more wages).

As a result, if wages were included in taxable income, but all other forms of income were excluded, then low-income persons would be taxable on a disproportionately large amount of their total income, so a nominally high top tax rate would not capture the actual relative tax burdens of high- and low-income persons.

Now, obviously the exclusions from taxable income were not this stark in 1964, but I think you can see the idea. Even though the nominal top tax rate was reduced, more of high-income persons total income was subject to tax, so they paid proportionately more tax.
posted by Mr. President Dr. Steve Elvis America at 6:58 PM on October 17, 2008

Then isn't it disingenuous, or at least confusing, to talk about economic theories and tax policy as directly affected by income taxes, and tax rates per income bracket, when the definition of "income" changes?

Or is there a way to look at historical income tax figures (like in my first link above) that DO take into account the monies that we now consider taxable income?

And then I know there are other non-income taxes like energy taxes, gas tax, sales.

I guess I just don't like how many variables there are, and was hoping there is some way to see more comprehensive historical tax facts/figures in easy to analyze graphical format (i.e. combining all incomes beyond IRS definition, what % of that was taxable, what other taxes people payed, etc), and how these correspond to the health of the national economy at the time. Maybe that's too much to ask for?
posted by p3t3 at 8:53 PM on October 17, 2008

Ah, I see now what you're looking for. The best data I know of isn't in an easy to analyze graphical format, unfortunately. The problem with easy-to-digest charts is that they disguise the assumptions that underly them, though, as you pointed out.

Anyway, the Census Bureau makes available on its historical income (experimental measures) page data tracking historical household income shares by quintile for 15 different definitions of income (some of which take taxes into account). Also available off the main page are quintile limits and Gini coefficients for the same periods.

A good start might be to compare the differences between the pre-tax and post-tax income measures over time, to get an idea of how the tax burden has or hasn't shifted among income quintiles. Of course, at the same time, you need to pick a reference income measure. This table kind of does that, but it's reference income measure excludes capital gains and losses, which seems odd to me.

Keep in mind, moreover, that census "households" don't all contain the same number of people, so the quintiles won't all contain the same number of people. This is going to be tricky to adjust for, but you'll need to somehow, because I'm not sure you care that single-person households (which by definition have only a single earner) make less than multi-person households with multiple earners, but this data set isn't going to make this effect (however big it is) clear, since both households will count as a single household for quintile grouping persons, even though one represents the aggregate income of multiple earners.
posted by Mr. President Dr. Steve Elvis America at 10:02 PM on October 17, 2008 [1 favorite]

Thanks, those links should keep me busy for a while, and yes, I think that's more what I was trying to ask.

I think I'm just slightly dissappointed that I can visualize the data I'm after in a dynamic graph format with nice little checkboxes for all the income and tax elements that you want plotted on the graph across income brackets over time, but nothing like that actually exists.
posted by p3t3 at 10:28 PM on October 17, 2008