A Century of The Federal Income Tax

The federal income tax is the handmaiden of big government. Before the income tax was created in 1913 the federal government collected three percent of GDP in taxes. A century later, it collects between 15 and 20 percent of GDP.

Chart 3.31: Federal Income Taxes in 20th Century

The federal income tax was passed by Congress in the Revenue Act of 1913, just in time to contribute to the funding of World War I. Total income tax receipts from the personal income tax and the corporate income tax reached over 4.5 percent of GDP in 1920 and 1921. But Congress cut tax rates during the 1920s and revenue from the income taxes amounted to a little over 2.0 percent of GDP until the collapse of the Great Depression; income tax revenue was a little over 1.5 percent of GDP in 1933.

Income tax revenue recovered to 2 percent of GDP in the late 1930s and then soared in World War II to as much as 15 percent of GDP in 1944-45 as Congress lowered the income threshold to capture income tax from ordinary wage-earners. Income tax collections declined rapidly after World War II with the corporate income tax collections declining fastest.

Taxes were increased to fight the Korean War, and personal income tax collections have remained at about 7 to 8 percent of GDP ever since, except during the 1990s boom. However corporate income tax collections have declined consistently over the years, from 5.9 percent of GDP in 1952 to around 2 percent in the mid 2000s. The financial meltdown of 2008 reduced corporate income tax collections in half to 1 percent of GDP.

Income Tax and the Top One Percent

Since the mid-1980s the top one percent of income tax filers has paid an increasing share of federal income tax, except during recessions.

Chart 3.32: The Top One Percent’s Share
of Federal Income Tax

The top one percent of income tax filers has seen its income increase from 11.3 percent to 22.8 percent of GDP in the period from 1986 to 2007. But the share of federal income tax paid has increased from 25.8 percent of all individual income taxes in 1986 to a 40.4 percent share of the total in 2007.

When recessions hit, the rich earn less income and pay a smaller share of taxes. The income of the richest 1 percent dipped from 20.8 percent of GDP in 2000 to 17.5 percent of GDP in 2001, while their federal income tax payments dipped from 37.4 percent in 2000 to 33.7 percent in the recession year of 2002. In the Great Recession of 2007-09, the top one percent share of income fell from 22.8 percent of GDP to 16.9 percent of GDP. Their income tax share fell from 40.4 percent to 36.7 percent. See SOI Tax Stats - Individual Income Tax Rates and Tax Shares, SOI Bulletin article–Individual Income Tax Rates and Tax Shares Table 5.

The Poor Pay Less

In good times and bad, the poor report less income and pay less federal income tax.

Chart 3.33: The Bottom Half’s Share
of Federal Income Tax

The lower half of income tax filers have reported a smaller and smaller share of income over the period 1986 to 2007. In 1986 they reported 9.4 percent of GDP on their federal income tax forms; by 2007 this had shrunk to 7.7 percent of GDP. Income tax share declined by over 50 percent, from 6.5 percent share of total federal personal income tax paid in 1986 to 2.9 percent share of tax paid in 2007.

In the Great Recession of 2007-09 the share of federal income tax paid by the lower half has continued to decline. Income of the lower half declined to 7.40 percent of GDP in 2009 and federal income tax share declined to 2.25 percent of total collections.

See also here for more information on federal income tax rates and federal income tax shares.