This post is part of a long-term project I’ve been working on regarding the history of marriage in the tax code.
As I finish sections of the research paper I’m working on, I’ll post them here. This is a big project, one that will likely take years, literally, to finish, so I can’t guarantee when the next post on this topic will appear.
In Part 1, I talked briefly about how taxes worked back in 1913. In this part, I want to dive a little deeper.
The tax brackets were broad from 1913 through 1916. For example, a tax rate of 1% applied to taxable income of $0-$20,000. Adjusted for inflation, a taxpayer could have income of nearly $465,000 and still be in the 1% range of the tax bracket.
The rate increased to 2% on income between $20,001-$50,000. The top rate was 7% and applied to taxpayers with taxable income of more than $500,000 (the modern-day equivalent of $11.6 million).
Dual-income married couples had little reason to file separately, because the vast majority of them fell in the 1% range of the tax bracket.
John and Jane are a married couple. John has taxable income of $10,000; Jane has taxable income of $5,000. In 1913, their tax-filing options were: file a joint return showing $15,000 of taxable income, or file separate returns. Either way, they would arrive at the same amount of tax owed:
- $10,000 x .01 =$100 tax; $5,000 x .01 = $50 tax; Total tax $150
- $15,000 x .01 = $150 total tax
In 1913, 97.6% of married couples filed joint returns (out of 278,835 tax returns filed by married couples in 1913, 272,153 were joint returns [or returns of one-income couples]; 6,682 were separate returns). Source: a study by a certain “Miss Coyle” in a Treasury Department staff memo. Ms. Coyle’s complete memo can be found at this link: http://taxhistory.tax.org/Civilization/Documents/marriage/hst28695/28695-1.htm
Not only were the tax brackets broad, but many Americans were exempt from owing taxes because of generous exemption amounts. The exemption amounts were $3,000 for a single person or $4,000 for married couples (the equivalent of about $70,000 and $93,000 in modern-day dollars). A person with income below those amounts owed no tax and did not need to file a tax return.
Big Changes on the Horizon
America entered World War I in 1917. Wars take money. Congress changed the tax code with the Revenue Act of 1917.
Exemption amounts were slashed. The simple tax bracket of 1913 was replaced with a more progressive bracket with 21 marginal rates (yes, 21!) ranging from 2% to 67%.
Millions of people were drawn into the tax code, and taxes became more of a burden.
This ties into our discussion of marriage in the tax code.
We’ll dive deeper into the 1917 changes in Part 3.
“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”