Are More Taxes in Your Future? To Find Out Look at Yesterday's Tax Rates.

It may sound like a dull thing to do, but stop and take a look at what has happened to federal tax rates over many years. You might just say "Aha!"

Some economists argue that President Roosevelt lengthened the Great Depression by raising federal tax rates. Could that be? I'm no economist but I have gone to the Tax Foundation's website where I was able to scan through federal tax rates going back to 1913 when the 16th Amendment to the Constitution made the federal income tax permanent. I was surprised by what I found.

For the sake of consistency, I looked at federal tax rates for the highest levels of income listed in the charts and for an income of $60,000. I limited my search to rates for taxpayers who are married and filing jointly.

One of the things that jumped out is how widely incomes in the highest tax bracket have varied over the years. For example, in 1936, during the Great Depression, the income level for the highest tax bracket was $5 million. Nine years earlier, in 1925, during a period of prosperity, it was $100,000. 1982 saw one of the lowest numbers for the high bracket, $85,600.

What was most interesting were the dramatic increases in tax rates at very critical moments. In 1916, a year before the U.S. entered World War I, the highest tax rate was 15% on incomes of $2 million or more. For an income of $60,000 the rate was 4%. But in 1917 tax rates jumped dramatically as the U.S. had a major war to finance. The highest rate leaped to 67%. For those with an income of $60,000, the tax rate quadrupled to 16%.

In the mid-1920s rates at the upper end of the range moved back down precipitously accompanied by dramatic changes in the income brackets. The highest rate in 1925 was 25% on incomes of $100,000 or more. For $60,000 the rate was 20%. These rates stayed in place through 1931.

Could it be that the prosperity of the roaring 20s was due at least in part to a dramatic lowering of tax rates? I'm sure economists will point to several causes. But I submit that tax rates play a major role in determining how people feel about the economy and the economic choices they make. If true, does the economy contract when rates are expected to go up?

That's where the economists come in who claim that the Great Depression lasted longer than necessary because government increased taxes. In 1932, under President Herbert Hoover, rates jumped to a whopping 63% from 25% for incomes of $1 million or more. The $60,000 rate went from 20% to 35%.

Then rates really took off. Starting in 1936, President Franklin Roosevelt increased rates until in 1944 the top rate was an astounding 94%--on income of $200,000 or more. The $60,000 rate was also in the stratosphere at 78%.

Fast forward to 1964. That's when President John Kennedy lowered rates to 77% (from 91%) at the highest bracket (income of $400,000 or more) and 56% (from 62%) for the $60,000 level. By 1965 these rates were 70% and 53% respectively. President Reagan lowered them dramatically in 1982 to 50% and 44%. Rates dropped even lower as the economy took off.

President George H. W. Bush raised rates in 1993 to 39.6% at the high end. President George W. Bush lowered them in 2003 to 35% for the highest bracket and 25% for $60,000. Today the rates are 35% and 15%.

What might we conclude from all this? It suggests that:

• There is credence to the argument that lowering tax rates helps bring about economic prosperity.
• We can expect the federal government to raise rates dramatically now that it has begun to spend money at a vastly accelerated pace. It happened during World War I, the Great Depression and World War II.

We'll have to wait and see to be certain. Perhaps we will soon find ourselves saying "Aha!"

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Key federal tax rate increases - $60,000 Income Bracket:

• 1917 - World War I - 4% to 16%
• 1932 - Start of Great Depression - 20% to 35%
• 1936/44 - Great Depression & World War II - 37% to 78%