The Income Tax in 1913: A Way to ‘Soak the Rich’
A copy of the original IRS form from 1913. Image from the National Archives.
So how heavy is the income tax burden these days, especially on those in the upper reaches of the income range?
One comparison is with the original IRS form for the year 1913, when the federal income tax was first permanently introduced. (There had been a temporary income tax during the Civil War.)
The original form exempted all income below $3,000 a year if you were single, $4,000 if married. Those were the standard exemptions.
In 2013, some critics of the tax code complain that nearly half of all Americans are exempt from paying any income taxes at all, and are therefore less connected to the rest of the polity. So what was the situation when the income tax was first introduced?
It would take more time and patience than you’ve got, I would imagine, to explain all the various ways to convert 1913 dollars into dollars a century later. The best I can offer, then, is a range.
At the very least, $3000 in 1913 is the equivalent of $52,100, using the lowest possible measure of inflation, something called the GDP deflator and relying on measuringworth.com for our numbers, as we typically do.
Using the GDP deflator, the $4000 floor for married couples filing jointly would be $69,500.
Okay, what percentage of Americans make less than these amounts? For starters, the median household income in this country is about $51,000. So half of us make less than that. I can’t find a quick number for those making $69,500, but a guess would be: no more than a third. (To locate yourself in the income distribution, you might try this “What Percent Are You?” interactive graphic from The New York Times.)
The bottom line: At least 60 percent or so of Americans were exempt from the income tax when it was first introduced. But that’s the most conservative possible estimate.
If you convert 1913 dollars to dollars today using the highest measure of equivalence — how much was a dollar worth back then as a percentage of the overall economy, compared with today — $3,000 was worth more than $1 million.
If you read the 1913 form, you’ll see that the tax brackets went up progressively from there: above $20,000 (today’s half a million dollars, at the very least), $50,000 (more than a million) and so on up to the top marginal rate $500,000 1913 dollars, which would be at least $10 million today.
So clearly, the income tax was designed at the start to be a tax on the wealthy, a way to “soak the rich.”
As the Oxford English Dictionary put it: “the description of highly progressive taxation as ‘soak-the-rich’ taxation was common in both America and England. The term had emerged in the U.S. in the late 1890s, accompanied by the introduction of a new meaning of ‘soak’: ‘to impose upon by an extortionate charge or price.’”
On the other hand, the marginal tax rates themselves were, by today’s standards, startlingly low, rising from a mere 1 percent to only 7 percent for income above $500,000. By far the most of the (much smaller) federal government’s revenues came from tariffs on imported goods. That began to change in World War I, when the income tax had been made permanent and government expenditures soared briefly to 30 percent of GDP, not that far below the ratio for 2013.
This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions