How Tax Brackets Work


Tax Bracket History
U.S. President George W. Bush holds an Internal Revenue Service (IRS) letter that details the Economic Stimulus Act of 2008. Even the president pays taxes.
U.S. President George W. Bush holds an Internal Revenue Service (IRS) letter that details the Economic Stimulus Act of 2008. Even the president pays taxes.
Jim Watson/AFP/Getty Images

Colonial and early U.S. taxes went through various changes until the first income tax was established by the Revenue Act of 1861. The purpose of this income tax was to help the Union raise money to fight the Civil War against the Confederacy. This income tax affected incomes of $800 and up at a rate of 3 percent.

The first tax brackets came about in 1862. The lower tax bracket was 3 percent for income up to $10,000; the higher tax bracket was 5 percent for income over $10,000. In 1872, this income tax was repealed. Since the Civil War ended, the government no longer needed the money.

The U.S. Constitution gave the federal government the power to levy taxes "in proportion to each State's population" [source: U.S. Department of the Treasury]. When the federal government established an income tax in the 1890s, the Supreme Court declared the tax unconstitutional, because it disregarded state populations.

In 1913, the 16th Amendment to the Constitution gave the government the power to levy an income tax regardless of state population. The federal income tax has been in place ever since.

Here are some important dates in the history of the federal income tax and its tax brackets.

  • 1913: Tax brackets range from 1 percent on income of $0-$20,000 to 7 percent on income of $500,000 and higher.
  • 1916: Revenue Act increases rates. Tax brackets range from 2 percent to 15 percent.
  • 1917: War Revenue Act of 1917 increases rates. Tax brackets range from 2 percent on income of $0-$2,000 to 67 percent on income of $2 million and higher.
  • 1920s: Tax rates are cut because the economy is doing well. The highest marginal rate decreases to 25 percent.
  • 1930s: Big increases because of the Great Depression. Lowest rate is 4 percent. Highest rate is 79 percent. Income of $90,000-$100,000 is taxed at 59 percent. In 1933, there are 55 tax brackets, mostly in 1 percent increments.
  • World War II: Great tax increases to fund the war. The lowest rate in 1944 is 23 percent, for income of $2,000 or less. The highest rate is 94 percent for income of $200,000 or more.
  • 1981: Economic Recovery Tax Cut of 1981 lowers tax rates. Highest tax rate drops from 70 percent to 50 percent.
  • 1986: Tax Reform Act of 1986 reduces rates further and cuts the number of brackets. For the 1986 tax year there are 15 tax brackets. For 1987, there are five [source: The Tax Foundation].
  • 2013: American Taxpayer Relief Act of 2012 increases the highest income tax rate to 39.6 percent and also establishes seven tax brackets.
  • 2018: The Tax Cuts and Jobs Act kept seven tax brackets but lowered the rates for five of them. The highest tax rate is also lowered to 37 percent.

If you'd like to know more about tax brackets and related topics, you can follow the links below.

Last editorial update on Jan 17, 2019 01:45:51 pm.

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Sources

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  • IRS. "Form 1040-ES." http://www.irs.gov/pub/irs-pdf/f1040es.pdf (Accessed 4/26/08)
  • Lewis, Roy. "What's My Tax Bracket?" The Motley Fool. 1/9/08. http://www.fool.com/personal-finance/taxes/2008/01/09/whats-my-tax-
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  • MoneyChimp. "Federal Tax Brackets." http://www.moneychimp.com/features/tax_brackets.htm (Accessed 4/26/08)
  • The Tax Foundation. "U.S. Federal Individual Income Tax Rates History, 1913-2008." 1/7/08. http://www.taxfoundation.org/publications/show/151.html (Accessed 4/26/08)
  • U.S. Department of the Treasury. "History of the U.S. Tax System." http://www.treasury.gov/education/fact-sheets/taxes/ustax.shtml (Accessed 4/26/08)

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