Personal Income Tax
The tax on individual incomes traces its origins to the Sixteenth Amendment to the Constitution in 1913, but it was inconsequential until the beginning of World War II. Then the tax was raised substantially to finance the war, and it has been the major source of federal revenue ever since. The personal income tax has been at the top of the news since 1980. President Reagan made phased reductions in personal tax rates the cornerstone of his economic policy; the tax code was thoroughly rewritten in 1986; and President Bush has pledged not to increase taxes.
Many taxpayers have little or no tax to pay when the annual April 15th day of reckoning comes around, because income taxes are withheld from payrolls by employers and forwarded to the U.S. Treasury. In fact, many taxpayers are, “overwithheld” during the year and receive a refund check from Uncle Sam. Nevertheless, most taxpayers dread the arrival of their Form 1040 because of its legendary complexity.
The personal income tax is progressive. Average tax rates do indeed rise as income rises, but that progrcssivity nearly disappears at very high income levels. In a departure from past practice, the Tax Reform Act of 1986 made the income tax almost proportional beyond some point-about $200,000 for a family of four. However, few families have such high incomes; so most live under a progressive tax structure.
Two features are notable. First, they display a curious pattern-rising to a peak of 33 percent and then dropping back to 28 percent. This happens because Congress placed a special tax surcharge on incomes within certain ranges-for a family of four, between about $90,000 and about $200,000. Second, marginal income tax rates in the United States are now quite low, especially for high-income familiesfar lower than they used to be and much below those prevailing in other advanced countries.
