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About Tax Rates

© John A. Tyler

One of the major questions in this year’s presidential politics is about tax rates. The highest individual tax rate this year is 35%, scheduled to go to 39.6% in 2013 for taxpayers with the highest income. However this rate does not include the increased Medicare taxes which take effect in 2013.

When the constitutional amendment passed in 1913 to allow income taxes again (they had first been enacted in 1863), the income tax rate started at 1% and topped out at 7%. The rate hit 7% at taxable income of $500,000, adjusted for inflation at today’s dollar value at $11.3 million.

The highest marginal tax rate was 94%, reached during World War II in 1944.

In order to get a more complete understanding of tax rates, one needs to know more. The highest tax rate is not the same as the average tax rate. There are some interesting analyses published on the internet by “The Tax Foundation” which show the individual tax brackets for every year from 1913 to 2011.

Also one needs to know what the effective tax rate for a taxpayer is after allowed deductions and exemptions. As an illustration let’s look at a hypothetical tax return.

Gross Income Before Adjustments, Deductions, and Exemptions(Married File Jointly) $250,000
Adjustments to Gross Income (25,000)
Adjusted Gross Income 225,000
Itemized Deductions (27,000)
Income after Itemized Deductions 198,000
Personal Exemptions (11,300)
Taxable Income 186,700
Federal Income Tax $40,055
Effective Federal Tax Rate on Gross Income ($40,055 / $250,000) 16.02%
Highest rate on Taxable Income 28.00%


Thus, the effective Federal Tax Rate on Gross Income is much lower than the highest bracket rate on taxable income after deductions and exemptions.