How did the US economy change after the Federal Income Tax was imposed? Did people spend less or just save less? Did the government put anything back in to the private sector? Did life change much at all?
This isn’t for a school essay or anything. I just was reminded yesterday that there hasn’t always been an income tax.
Well, the earliest income tax in the US was only a moderate levy on very rich people, and there was no payroll tax, so I would assume the effect was not great at first.
The first income tax rate was 1% for all income under $20,000 which is the equivalent of over $400,000 today, as this amazing set of tables of current and adjusted rates shows. That was raised to 4% and then 6% for WWI before being lowered again.
For the vast majority of people, this was a minuscule amount of money. It didn’t change anybody’s spending habits. The major effect was to allow Prohibition to be passed. IIRC, the majority of all tax revenue raised in the country had come from excise taxes on liquor. Without them, the government would have been bankrupt.
Table 1.1 on this Whitehouse.gov page shows revenues and spending and the huge distortion produced by WWI. The link produces an Excel spreadsheet that shows that for 1918 and 1919 revenues were less than $9 billion and spending was $31 billion. The difference came mostly from bond drives. After the war spending went under $5 billion in 1922 and stayed that way through 1933. The federal government, under the control of Republican businessmen in the White House and Congress, deliberately kept spending down and the need for tax revenue low.
It’s hard to know what you’re thinking of when you ask “Did the government put anything back in to the private sector?” Most of the spending during the war went to the private sector. Outside of the war-related spending, the government itself was unbelievably tiny by today’s standards. Some money went to government employees, probably mostly to postal workers, and some to basic government programs. That money flows to the private sector immediately after being spent: there are no government grocery stores (and PXs don’t count for this).
In today’s budget, the largest transfers to the private sector are military purchases, Social Security and Medicare and whatnot, and a smaller percentage of industry subsidies. That’s putting back, I suppose. Of these, only military expenditures existed back in the early days.
Tax rates didn’t get to be high enough in non-war times to affect average families until the 1950s.
How did it affect average families in the 50s?
The same way it does now.
But although taxes were high during the 50s, people didn’t notice that much because they had just lived through the 30s and 40s. After the depression and WWII, high taxes coupled with incredible new prosperty sounded great.