What Mattered in Money: The Big 10


In 1900, you kept what you earned--every penny of it. U.S. income taxes, which had been imposed as a temporary effort to fund the Civil War, had been ruled unconstitutional in a 1895 Supreme Court case.

But that ruling didn’t stand for long. By 1913, a national income tax system was created and ratified by the states. Still, it didn’t have much impact on the average citizen: Only about 1 in every 270 people paid tax and only at a 1% base rate.

Then came the Great Depression, and with it the beginning of a complex federal tax system that would reshape Americans’ finances as the tax code itself was repeatedly reshaped by Congress over the century.


President Franklin D. Roosevelt’s New Deal in the 1930s included a series of costly social programs, creating jobs for the unemployed and providing pension income for the elderly, among other things. Suddenly, the government needed money, and lots of it.

In the 1930s, income taxes were not only imposed on more Americans--and at higher rates for the better off--but rules were also put in place to stop people from dodging taxes by creating personal trusts or corporations. Taxes were levied on investment gains too.

By 1939 the rules were complicated enough that the government had to put them all together in the first formal tax code, says Mark Luscombe, principal tax analyst with CCH Inc., a tax research and publishing firm.

For the next several decades, the tax code expanded and the tax base climbed steadily. In the 1930s, 1 in every 32 citizens was paying income tax. By the mid-1940s, taxes were imposed on 1 of every 3 Americans. By the 1980s, virtually everyone paid tax. The top marginal federal tax rate was 70%, lower than during the World War II years but high enough to be a source of increasing political and societal debate.

With high tax rates and a growing upper class, tax-avoidance schemes proliferated. The tax code became a repository for special deals for special interest groups that had enough money to push legislation.

The result: The really rich invested in partnerships that bought real estate, oil drilling rights, windmills and other such assets. Those investments threw off such huge tax write-offs that no one seemed to mind that the wells rarely struck oil or that the windmills and real estate lost money. The tax code had become a complex morass that virtually exempted the rich and the poor from paying any significant amount while it socked the middle class, critics argued.


Voters’ anger helped sweep Ronald Reagan into the White House in 1980. A pillar of Reagan’s economic policy was the idea of cutting, and simplifying, taxes.

In 1981, Congress and Reagan agreed on a bill that cut the top tax rate from 70% to 50%.

In 1986, Reagan signed a far more radical rewrite of tax laws that cut tax rates again and simplified the tax code. All but a handful of tax shelters and deductions were eliminated or phased out. The few remaining tax breaks in the code--mainly deductions for mortgage interest and retirement-plan contributions--were aimed specifically at helping the middle class.

Although the top tax rate was raised again in 1993, the 1980s reforms did have one lasting impact: The middle class was no longer ignored. Indeed, in recent years, most tax breaks have been targeted specifically at average Americans.

A 1997 tax reform act promised Americans some $90 billion in tax breaks, ranging from $1,500 tax credits for college expenses to expanded individual retirement accounts to lower capital-gains tax rates.

With the government now running a budget surplus, the issue of taxes--how much should be paid, and by whom--will of course remain a key political and economic issue for the future.


Top Tax Rates

The top marginal federal tax rate, which is paid by the highest-income Americans, today is well below what prevailed for much of the century. Top rate for each year:


1999: 39.6%

Source: CCH Inc.