Even democratic governments need funding, and tariffs were the precursor to modern day income taxes. Tariffs on goods continued to be the main source of state and federal revenue until the early 20th century. Unsurprisingly, people were upset by the tariffs then and continue to be upset about it today.

The first tax on a domestic product (distilled spirits) was imposed in 1791. Its purpose was to recoup losses from the Revolutionary War. Distilled spirits were a crucial source of income for certain rural farmers, because they were easier to transport than grain. Resentment came to a head in the 1794 Whiskey Rebellion, which required an army of 13,000 to suppress the insurgents.

Actual ‘Income Taxes’ got their start in 1861 and once again the expense of war was the justification, this time The American Civil War. However, it was determined that the tax was unconstitutional and the law was repealed after only ten years. Forty-two years later, in 1913, that pesky Constitutional restriction was removed as the 16th Amendment was passed, stating that “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

So, here’s the part that I find interesting. People have always complained that income tax rates were too high but have a look at the changes in rates since the original income tax of 1913. While it’s true that most people do not pay taxes at the top rates, it is instructive that those rates have been all over the map!

The original US income tax, in 1913, levied a 1% tax on net personal incomes above $3,000, with a six percent surtax on incomes above $500,000. By 1918, the top rate of the income tax was increased to 77% (on income over $1,000,000) : this time to finance World War I. The top marginal tax rate was reduced to 58% in 1922, to 25% in 1925, and finally to 24% in 1929. In 1932, the top marginal tax rate was increased to 63% during the Great Depression but then it steadily increased.

Moving forward, the top income tax rates became:

1936 – 79%

1940 – 81.1%

1942 – 88%

1944 – 94%

Top rates for the rest of the 1940’s were in the mid 80% range, but the 1950’s took rates back up to 91%. The 1960’s saw a precipitous drop to the mid 70% range.

Taxes — as we know them — continued to develop throughout the 20th century. Reagan’s tax act in 1981 was considered historic for lowering all individual tax brackets by 25%. That took the top bracket way down to 50%! Famously George H.W. Bush had to backtrack on a campaign pledge and raise the top rate from 28 to 31 percent. In 1993, Bill Clinton’s act of 1993 saw taxes raised yet again. Then, in 2001 George W. Bush reduced tax rates but continued to increase tax credits. And, as you know, in 2017 Trump signed the most recent tax act which eliminated many itemized deductions but increased the standard deduction, and adjusted tax brackets yet again.

So, here’s the good news: Congrats to you if you’re in the top bracket for 2018 as the rate will only be 37%. Whoo-hoo!

(Most information on tax brackets from the US Tax Policy Center)

Market Minute 4/20/2018 – VIX is Ticking Lower

You may recall my caution a few weeks ago when I discussed the changes in the VIX (a measure of the volatility in the S&P 500 Index used to price options). This week we continued to see a slow creep downward in the VIX – and Thursday it closed at a price under 16. Although in early trading on Friday it has bounced up a bit we still see the lowering of the VIX to be a good sign. As the VIX drops we expect to see less volatility in market indexes and thus lower prices on stocks.  We are hopeful that we’ll continue to see the VIX stick below 17, and with the stability in the VIX measurement, that we will see stocks resume their upward longer-term trend.

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk

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