Posted by The TaxAdvocate Group, LLC

Are Taxes Today Really Too High?

Are Taxes Today Really Too High?

Tax reform was President Donald Trump’s campaign cornerstone. The general idea of Trump’s plan is his pledge to consolidate the number of tax brackets from seven to three. He also wants to lower most of American’s tax rates and remove the marriage penalty as well as simplify our tax code. 

For many Americans, taxes now are indeed higher than they were under, for instance, President George W. Bush’s tax cuts and if we look at it at a historical standpoint, federal income taxes really aren’t that high as well as the high number of tax brackets. To put things into perspective, let’s do a quick history lesson. It wasn’t too long ago that high earners paid federal income tax rates of 70%, 90% or even more anyway.

The Federal Income Taxes for the Last 65 Years

Let’s study the top federal income tax rates since 1952 and the income threshold above which they were applies so we can put things in perspective. For a simpler understanding, we’ve only included the income thresholds for married couples filing joint tax returns but all filing statuses are based on the same top tax rates.

Data source: Tax Foundation. Inflation calculator from U.S. Bureau of Labor Statistics.

As per the above table, you will see that the high end of recent history is where the current top tax rate of 39.6% has been recorded. In fact, for the past 30 years, it was tied for the highest tax bracket. The top income tax rates in the U.S however before 1987, were significantly higher. As recently as 1981, the top federal tax rate was 70% and before 1963, it was above 90% all the way back to year 1944.

Please keep in mind that the top income tax rate was only applied to the richest Americans in those days. In fact, taxable incomes of more than $3.18 million in today’s dollars were under the 91% tax rate in 1963. The assumption that a very low percentage of Americans actually paid such a high rate can, therefore, be fair. And since this is a marginal tax rate, it only was applied to taxable income above this amount. Even if that’s the case, compared to today, the rest of the tax spectrum was still rather high. For instance, an inflation-adjusted $255,000 in 1963 earned by a married couple was in the 50% tax bracket.

The Assumption that the Present Tax Brackets Are Too Complex

The assertion that tax rates are too higher isn’t the only aspect of Trump’s plan. It also involves condensing the present seven tax brackets into just three and taking other steps for the tax code to be simplified.

Here’s a fair statement - majority of both sides of the political spectrum agree that our tax code has become a little too complex. The marginal tax rates were used to be so much simpler. For instance, there were just two tax brackets in 1989 - 15% and 28%.

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There were periods in the chart where the top rate sounds much higher and there were much more complicated tax brackets. There were 24 different tax brackets in 1955 for instance with ranges of 20% to 91% rates. Determining the federal income tax of a person with $95,000 of income in 1955 is way much harder because it’s a 20-step process. So if you think calculating taxes now is a complicated process, think again.

What makes our tax system complicated is not just the tax brackets themselves. Historically, many deductions, credits, and other tax items are far more complicated than they have been. However, the point is that it really isn’t too excessive to have seven tax brackets if you look at it in a historical context.

The question now is what will President Trump and the Republican leaders in Congress do with regards to taxes? How the actual tax reform package will look depends on time but many of the main points is being agreed upon by the president and congressional leaders. This means there’s a good something will happen. For now, always pay attention to the current tax structure since you don’t have to worry about any type of 92% tax rate and 24 different brackets anyway.

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