Tax Rates Then and Now

06.03.08 | Taxes | 0 Comments | by Fred Siegmund

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Savers usually think saving means saving and investing money. Some people save all sorts of things, which is why I happen to have the complete federal income tax forms and tax schedule for 1975, even though I am not the one who saved it.

I think 1975 taxes have relevance today because I saw an article in The Washington Post on May 15th entitled "Democrats War-Funding Bill Adds Surtax on Wealthy." Someone in Congress called it the "Patriots Premium."

The Patriots Premium would tax couples earning $1 million dollars or more at a new tax rate which is one half percent higher than the current rate. For single people, the half percent applied to income over $500,000.

Current tax rates call for couples earning over $349,000 to pay a top tax rate of 35 percent so the new tax rate must be 35.5 percent on wage and salary income. If we take a couple earning $1 million and we apply a new 35.5 percent rate to gross income of $1 million, they will pay $31,980 dollars more than they are liable for now.

The calculation uses two exemptions, the standard deduction and also assumes the couple earns all their income as wages and salaries and therefore without dividends taxed at lower rates.

In 1975, couples paid a 70 percent tax rate on every dollar of taxable earnings over $200,000. Today's top tax rate is just half of what it was in 1975.

Now we all know there has been lots of inflation since 1975 so that $1 million today is not the same as $1 million in 1975. Actually, the Bureau of Labor Statistics consumer price index (CPI-U_RS) shows a 342 percent increase since 1975.

If we adjust the $1 million today to compare with 1975, the result is $292,397.66. We could also say $292,397.66 of income in 1975 is the equivalent to $1 million of income in 2007.

Compare the 2007 income tax for a couple who earns $1 million with the income tax for a couple earning $292,397.66 in 1975. Today's couple above would pay $318,461.00 of taxes. That is 31.85 percent of $1 million gross income.

Apply the 1975 taxes to the 1975 equivalent of $292,397.66. The 1975 tax comes to $173,838.36. The amount is 59.3 percent of gross income. Apparently Congress and the country had much different ideas about the duties and tax responsibilities of the well-to-do in 1975.

The proposal to raise the rate from 35 to 35.5 percent is to fund educational benefits for returning Iraq veterans, but it has outspoken opposition and it is not expected to pass. The times they are a changing.

What about that, savers?

Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at

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