Feature
History in federal tax (1924-1949)
Issue 1
March 6, 2024
By Miranda L. Simpson, CPA
The federal income tax has changed radically since its inception in 1861 during the Civil War.
The tax rate was a flat 3 percent on income over $800, later repealed in 1872; then, the 16th Amendment took effect on February 25, 1913, which established Congress’ right to impose a federal income tax, which is still in effect today.
Ironically, the Titanic sank not even a year prior, on April 15, 1912. Even though the first tax return under the 16th Amendment was due March 1, I have always believed that the Titanic sinking on the ultimate IRS deadline may have foreshadowed how many taxpayers feel about this recognizable date each year.
Looking back over the last hundred years of the Accounting Profession in Kentucky, we want to highlight a few interesting facts in federal tax history, starting with the 1924–1949 era, compared to where we are now.
Tax rates
The federal tax rates started out harmless enough, with regular rates ranging from 1-8 percent. However, as has always been the case with Congress and tax laws, numerous caveats and other taxes such as “surtaxes” are frequently added.
In 1924, the regular tax rate was 6 percent, but coupled with the Surtax of 40 percent, top-income earners were looking at a marginal rate of 46 percent. By 1944, the Surtax soared to an astronomical 91 percent, making 94 percent the marginal tax rate of that year the highest in United States history.
View the progression of the tax rates from 1924-1949 below:
| Year | Regular rate | Surtax | Marginal tax rate |
| 1924 | 6% | 40% | 46% |
| 1925-1931 | 5% | 20% | 25% |
| 1932-1933 | 8% | 55% | 63% |
| 1934-1935 | 4% | 59% | 63% |
| 1936-1940 | 4% | 75% | 79% |
| 1941 | 4% | 77% | 81% |
| 1942-1943 | 6% | 82% | 88% |
| 1944 | 3% | 91% | 94% |
| 1945-1949 | 3% | 88% | 91% |
The 2024 marginal tax rate is 37 percent; however, when considering FICA, Medicare, and net investment income taxes, many taxpayers could pay taxes up to 50 percent of their income.
The standard deduction and personal exemptions
The Individual Income Tax Act of 1944 set forth a few of the more recognizable tax provisions known today, such as the standard deduction and personal exemptions. The standard deduction began not as a flat amount, but rather, for nearly 20 years, taxpayers could deduct 10 percent of their income as the “standard deduction” instead of itemizing various expenses.
The 2024 standard deduction is a flat amount, $29,200 for those filing married and $14,600 for singles.
Also, with the Tax Act of 1944, personal exemptions were standardized to $500 per person. Previously to the Tax Act of 1944, the standardized personal exemption amounts varied for the taxpayer, their spouse, or dependents. The temporary elimination of the standard personal exemptions took place when The Tax Cuts and Jobs Act of 2017 (TCJA) passed. In that “final” year, 2017, each personal exemption was worth $4,050 per person. Unless Congress extends or makes the TCJA change permanent, personal exemptions will rise from the dead on January 1, 2026.
Social security tax
The Social Security Act was famously signed into law in 1935 by Franklin D. Roosevelt, with the first taxes collected in 1937. The Medicare portion of the tax did not begin until 1965. Initially, paid benefits were only to the primary worker; in 1939, the law changed to add survivors, spouses and children.
Interestingly, the first person to receive a lump-sum payment in 1937 received a whopping 17 cents. The first recipient of monthly benefits was a woman. In 1937, the social security wage maximum was $3,000 compared to $168,600 in 2024.
Gift tax returns
First enacted in 1924, the gift tax was short-lived and repealed in 1926. The annual exclusion amount was $500 that first year, but by 1932, the revamped annual provision increased to $5,000. One hundred years after the preliminary period, the annual exclusion amount is $18,000 per individual for 2024.
Tax evasion
The infamous case of Al Capone started with an accountant who was an IRS Intelligence Unit agent who went undercover to gather evidence of tax evasion. As we all know (or should know), even illegal income is taxable.
Capone may not have served time for his more serious crimes, but leave it to the IRS to squeeze some jail time (and tax funds) out of this gangster. Nowadays, the IRS is using many of its investigative tactics to crack down on fraud related to the use of COVID relief funds like PPP loans and Employee Retention Credits.
Until next time
Of the things that are certain in life besides death, studying the history of tax laws shows us that although things twist and turn and change, in the end, we all pay; it is just a matter of how much.
About the author:
Miranda L. Simpson, CPA, can be reached at mirandaleighsimpson@gmail.com. Simpson is a self-employed CPA with extensive experience in tax. She has authored many federal tax articles for The Kentucky CPA Journal.
