INDIVIDUAL INCOME TAXATION SINCE 1948

Abstract

dividual rate cuts in the Economic RecovStill the largest and most important ery Tax Act of 1981 (sold mainly as a supsource of government revenues in the ply-side stimulus) and the individual rate United States, the individual income cuts and the base changes in the Tax Rehas been altered significantly over time by form Act of 1986 (promoted as reform) legislation, inflation, the maturation of re- each involved shifts of hundreds of biltirement systems, and other factors. This lions of dollars annually and made most article provides an historical analysis of other domestic enactments pale in commany aspects of this over the postwar parison. era: revenues collected, the size of the Legislated changes are only part of the base and the role of exclusions, deduc- story. The system interacts in importions, exemptions and credits in defining tant ways with economic forces and taxthat base, tax-exempt levels of income, and payer behavior. Inflation and real ecothe overall progressivity of the rate struc- nomic growth historically have exerted a ture. Many postwar trends are found to halt strong influence on both the marginal and or reverse themselves in the 1980s. average income rates faced by taxpayers. Shifts in the distribution of labor compensation between taxable and nonP ERHAPS no receives as much at- taxable sources, along with changes in the tention from both taxpayers and leg- allocation of among various islators as the individual income tax. For excludable, deductible, and taxable items, several decades, the federal individual in- not only affect the breadth of the base come has been the largest source of but are themselves influenced by incenfederal revenues, while state individual tives created through the code. Interincome taxes have grown rapidly in im- est rates, the performance of the stock portance. Partly because taxpayers file an market, demographic trends, and the individual income return at the end maturation of social institutions such as of the year, they appear to be more aware Social Security and private pensions also of this burden than any other. As one con- have a major impact on the income sequence, the federal individual income system. trades places often with the property This paper examines post-World War 11 for a position as the most unpopular.' changes in the burden, base, and rate Legislators have found it almost impos- structure of the federal individual income sible not to tinker constantly with this tax, in the context of long-term historical important revenue source and the tax trends, its role relative to other taxes, and expenditures and incentives hidden its interaction with economic and behavwithin its framework.' Since the mid- ioral forces.' Special focus here is given to 4 1970s, few years have passed without the recent changes. enactment of one or more major bills that contained changes in individual income taxes. Changes in the Tax Burden and the On occasion, individual income taxes Role of the Individual Income Tax have dominated the domestic agenda. The