A Short Modern History of Taxes

As today is April 15, the deadline for filing federal income tax returns, we are reminded of Barak Obama's proposed income tax increase. A brief survey of modern income tax policy should give him pause in proposing to raise the tax rate on the highest incomes and cause him instead to consider cutting this tax rate for the same reason he cut the lowest income rate: to promote the growth of the economy.

President Franklin Roosevelt raised income taxes during the Great Depression and especially during the Second World War. However, after the war, Presidents Harry Truman and Dwight Eisenhower kept income taxes high. President John Kennedy proposed income tax cuts that were implemented by his successor, Lyndon Johnson, after Kennedy’s death. The Kennedy tax cuts lowered the highest income tax rate to a still-high 70% from the wartime rate of over 90%. As a result, the 1960s were relatively prosperous.

The inflation of the 1970s necessitated increases in wages, but because the tax rates were not indexed to inflation, people became victimized by “bracket creep” during the administration of President Jimmy Carter, which effectively raised taxes for many in the middle class, which contributed to the recessionary economy of the period.

President Ronald Reagan signed tax cuts into law that lowered the highest rate, which by this point was being paid by a far higher percentage of the population than earlier decades, to 28%. He also reduced the number of tax brackets, thereby ending bracket creep, which also effectively prevented tax increases for the middle class. Reagan’s tax cuts sparked the then-longest peacetime expansion in U.S. history in the 1980s.

Although Presidents George H.W. Bush and Bill Clinton raised income taxes, the highest the rate reached was still just under 40%. And Clinton even cut some taxes (e.g. income tax credits and cuts in the capital gains tax) after the Republicans won the majority in Congress, which contributed to another period of prosperity in the 1990s.

President George W. Bush reduced tax rates for all income levels, back towards Reaganesque levels, which produced another period of economic prosperity in the 2000s. Thus, Reagan’s tax cuts, even on the highest income level, have remained mostly intact since 1981, which is why the period from 1982-2007 was the most prosperous and stable in American history.