By Steven Clyde
In the 1940’s, efforts to boost tax revenues reached moral lows. The general public, being duped from all angles, managed to file taxes in higher proportions by the end of World War II then in all of prior history. The effects of the propaganda of the 1940’s was that it got nearly every worker on board with the idea that paying their taxes was a duty, and more eerily a “privilege”.
This clip from December 9th, 1941 has FDR on record saying quote:
“It is not a sacrifice for the industrialist or the wage earner, the farmer or the shopkeeper, the praying man or for the doctor to pay more taxes, to buy more bonds, to forego extra profits, to work longer and harder at the task for which he is best fitted; rather, it is a privilege.”
We see a similar pattern in World War I with regards to an increase in people filing for taxes, but focusing on the era of World War II and Franklin Delano Roosevelt’s presidency we notice something completely different.
At the start of his first term in 1933, 7.2% of citizens were filing taxes, while by the end of his presidency in 1945 there were 84.6% of citizens that had filed. By 1947, 91.7% of citizens were on record for filing taxes.[1]
Instead of focusing attention directly at the 84.5% increase over the span of these 14 years, if we simply look at what happened year to year we notice that:
1.) The percentage of people filing taxes increased every year!
2.) The biggest increases happened during wartime. 71% out of the 84.5% of the increase in the tax filings between 1933 and 1947 occurred between 1939 and 1945, with these specific increases per year:
- From 1939-1940 there was a 12.1% increase from 13.6% to 25.7%
- From 1940-1941 there was a 19.3% increase from 25.7% to 45%
- From 1941-1942 there was a 18.3% increase from 45% to 63.3%
- From 1942-1943 there was a 11.6% increase from 63.3% to 74.9%
- From 1943-1944 there was a 5.1% increase from 74.9% to 80%
- From 1944-1945 there was a 4.6% increase from 80% to 84.6%
So how could this be? What were the incentives for more people to file taxes, aside from being in a state of war in which citizens are already pressured to do so and aside from FDR basically declaring that paying taxes is in the nature of any good samaritan?
When assessing the lowest and highest marginal tax rates from 1939 -1945 using data from The Tax Foundation for nominal tax rates[2] and rates adjusted for inflation[3], we find that:
- In 1939, the lowest marginal rate was 4% on income between $0 and $4000[4], while the highest marginal rate was 79% on income over $5,000,000.[5]
- In 1940, the lowest marginal rate was 4% on income between $0 and $4000[6], while the highest marginal rate was 79% on income over $5,000,000.[7]
- In 1941, the lowest marginal rate was 10% on income between $0 and $2000[8], while the highest marginal rate was 81% on income over $5,000,000.[9]
- In 1942, the lowest marginal rate was 19% on income between $0 and $2000[10], while the highest marginal rate was 88% on income over $200,000.[11]
- In 1943, the lowest marginal rate was 19% on income between $0 and $2000[12], while the highest marginal rate was 88% on income over $200,000. [13]
- In 1944, the lowest marginal rate was 23% on income between $0 and $2000[14], while the highest marginal rate was 94% on income over $200,000.[15]
- In 1945, the lowest marginal rate was 23% on income between $0 and $2000[16], while the highest marginal rate was 94% on income over $200,000.[17]
Understanding Tax Brackets and Marginal Tax Rates:
The first thing to understand is what these numbers mean, which is crucial because it’s a widely held myth that from the early 1930’s up until the days of Reagan the citizens paid incredibly high tax rates and therefore that resulted in a prosperous economy.
What the intelligent yet misleading economists would have the public believe is that, for example in 1945 when the top marginal tax rate was 94%, if you earned a million dollars in 1944 your tax burden would be $940,000. Not only is this intellectually dishonest, but it’s used as an endless talking point for why paying taxes is not only patriotic but “empirically efficient at high levels”.
I’ll examine the year 1939 to help illustrate this:
For the lowest tax brackets, you would be taxed 4% on any income you made up to $4000, so if you made $4000 in 1938 you would own $160 on tax day in 1939.
The middle tax brackets, taking for example the 25% rate on income between $32,000 to $38,000, means that any amount of income earned between $32,000 and $38,000 would be taxed at 25%. For example, if one person made $35,000 their tax burden would be $8,750 and if another person made $37,000 their tax burden would be $9,250. Both would’ve paid a rate of 25% if they are in that income range, and this applies for all middle brackets.
The highest tax bracket being 79% on income over $5,000,000 means that I have to first earn at least $5,000,000 a year, but every dollar after that amount would be taxed at 79%. For example, if someone made $6,000,000 in 1938, they would be taxed at a rate of 79% on the extra million dollars over $5,000,000 for a tax burden of $790,000. If however, they made $5,000,001 their tax burden would be $0.79.
What Conclusions Can Be Derived From The Tax Rates From World War II?
In layman’s terms, by the start of the war the poorest workers in society were paying 4% of their income to the government (if they filed taxes at all), while by the end of the war the poorest were paying a whopping 23% of their income if they made any amount of income at all!
The richest in society were a different story completely. To be subject to the highest marginal tax rate, you would have had to make over $5,000,000 in 1939, while in 1945 to pay the highest rate you would only have to make $200,000, so by the end of the war not only did you have to make much less to be subject to the highest tax rate, but the highest tax rate jumped from 79% to 94%!
[1] https://eml.berkeley.edu//~saez/piketty-saezOUP04US.pdf, Table A0
[2] https://www.scribd.com/doc/190499803/Fed-U-S-Federal-Individual-Income-Tax-Rates-History-1862-2013
[3] https://www.scribd.com/doc/190500966/Federal-Individual-Individual-Income-Tax-Rate-Adjusted-for-Inflation
[4] $66,070 adjusted for inflation
[5] $82,585,770 adjusted for inflation
[6] $65,598 adjusted for inflation
[7] $81,997,857 adjusted for inflation
[8] $31,237 adjusted for inflation
[9] $78, 093,197 adjusted for inflation
[10] $28,171 adjusted for inflation
[11] $2,817,104 adjusted for inflation
[12] $26,543 adjusted for inflation
[13] $2,654,266 adjusted for inflation
[14] $26,090 adjusted for inflation
[15] $2,609,023 adjusted for inflation
[16] $25,510 adjusted for inflation
[17] $2,551,044 adjusted for inflation