September 25, 2017

Would Trump’s Tax Cut Be the Biggest Ever? Fat Chance

The bar for achieving that lofty goal was set almost 150 years ago when Congress cut taxes from as high as 10 percent to zero over two years.

Posted on 04/26/17
By Jay L. Zagorsky | Via The Conversation
Treasury Secretary Steve Mnuchin announcing massive tax reforms at a briefing in White House on April 26.

Treasury Secretary Steve Mnuchin announcing massive tax reforms at a briefing in White House on April 26.

President Donald Trump has long been known for his fondness for superlatives when describing his projects and policies. His administration’s proposal for a tax cut is certainly no exception.

 

In a recent interview with the Associated Press he declared:

“It will be bigger, I believe, than any tax cut ever. Maybe the biggest tax cut we’ve ever had!”

Americans just got their first taste of some of the details of his tax overhaul. Treasury Secretary Steve Mnuchin repeated his boss’ boast about the tax cut’s size and said it would slash the top corporate rate to 15 percent from 35 percent. It would also simplify individual income rates and reduce them a little, while doubling the standard deduction and eliminating certain itemized deductions.

 

In assessing whether his cuts might be the biggest ever, many pundits have pointed to President Ronald Reagan’s tax overhaul in 1981, which reduced government revenue by 2.9 percent of GDP.

 

But was that really the biggest U.S. tax cut ever? Hardly. In fact, we have to go back almost 150 years – immediately after the Civil War and the beginning of the income tax – to find the American whopper of tax cuts. Put simply, it would be very hard for Trump to exceed that cut.

 

The costs of war

During the 1860s, President Abraham Lincoln needed money to finance the Civil War. To do so, his administration levied the first national income tax in 1862 to help pay northern troops. The tax was very successful since it paid for one-quarter of the North’s Civil War expenses.

 

To ensure poor people were not affected by the tax, it was levied only on families with income of US$600 or more. Prices have climbed about 23 times since the Civil War. Adjusting for this inflation means people were taxed only if their income was above $13,800 in today’s money.

 

The tax at first was very simple to compute. Families had to pay 3 percent of what they earned from $600 to $10,000. Those earning over $10,000 had to pay 5 percent of their income. The amount people paid in state and local taxes was deductible.

 

However, other common deductions used today in the U.S. such as deductions for mortgage interest and charitable contributions were not included in the first income tax.

 

Because the Civil War lasted longer and proved more costly than expected, in 1864 tax rates were raised. The modified tax bill also introduced a third income bracket. People earning $600 up to $5,000 now paid 5 percent, those earning $5,000 to $10,000 paid 7.5 percent and the wealthiest, those earning over $10,000, paid 10 percent.

 

The income tax raised quite a bit of money. In 1866 it brought in over $73 million, which was about one-fifth of the federal government’s total revenues.

 

The mother of all tax cuts

The Civil War ended in 1865, and the costs to pay for the war began to wind down shortly thereafter.

 

Like today, the income tax was not popular, and so Congress voted in 1870 to slash it. The bill immediately reduced income tax rates to 2.5 percent across the board – from as high as 10 percent – and raised the exemption to $2,000 from $600. Just two years later, all income taxes were eliminated entirely.

 

The income tax was not brought back until 1894.

 

At the moment, Trump’s ambitions are decidedly more modest, reducing today’s seven brackets, ranging from 10 percent to 39.6 percent, to three brackets, 10 percent to 35 percent. While the increase in the standard deduction would help some, the elimination of popular itemized deductions such as state and local taxes would hurt others.

 

From what I can tell, the total elimination of the income tax is not on the table. That bar is the one Trump would need to beat to enact the “biggest tax cut we’ve ever had.”

 

 is an Economist and Research Scientist at The Ohio State University

This article first appeared at The Conversation. Click here to go to the original.


Filled under: U.S.

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