Happy Birthday Income Tax!

On October 3rd, 1913, President Wilson signed into law the income tax. The original rate was 1% on incomes over $20,000 and up to $50,000 per year. For those who made more than $500,000 per year, the top income tax rate was 6%!

Today's tax rates are a far cry from the original rates. In fact, with all the deductions that a person received in 1913, only ONE PERCENT of households paid income tax in 1913. Wow!

By the end of World War 1, the top income tax rate had soared to over 77% on net income over $1 million. Wow--what a change!

The history of the top marginal income tax rates is shown in the following chart.

We are at lows, at least compared to recent history, in the tax rate. One of the compelling arguments to "Go Tax Free" is to just look at history and make a wild guess. Do you think it will revert to the mean?

Another compelling argument for taking seriously your income tax planning is that both Congress and the White House have (as much as they can agree on anything) stated they have plans to raise taxes. We will know shortly whether Coloradoans will vote to raise the State income tax from 4.63% to a top rate of 5.9% on income over $75,000.

Finally, when you look at the US Federal Government deficit then you may have "sealed the deal" and be sure that the Federal income tax rate is likely to increase. A common question I hear is "How else are they going to pay for this?"

Next week, we'll totally turn the tables on this week's conversation of income tax. It might be disturbing, or it might be liberating, depending (really) upon your perspective.

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