The current focus on tax reform is creating a lot of noise and uncertainty. To help understand where we are and where we might be going, let's examine the history of taxes and debt in the US.
A Brief History of Estate Taxes
Estate taxes, as we know them today, were enacted in 1916. Before that, Congress passed an estate tax three times to raise money to fund war efforts. The first was in 1797 for an undeclared war against France, the second in 1862 for the Civil War, and the third in 1898 for the Spanish-American War. Congress repealed the estate tax in all three cases when the war ended.
Fast forward to 1916. The US manufacturing sector was booming, and a handful of individuals concentrated wealth. Progressives were not happy with this inequity of wealth, and the 16th Amendment was ratified, adding a federal income tax to the law. 1917, the US entered World War I, and Congress enacted an estate tax. This time, when the war ended, Congress did not repeal the estate tax, which remains in place today.
Current Tax Rates in Historical Context
We are currently in a relatively low tax rate environment. The top individual income tax rate is 37%, the top individual estate tax rate is 40%, and the top corporate income tax rate is 21%.
The National Debt
The current US debt is over $36 trillion, which as a percentage of GDP exceeds 120%. The chart below shows historical US debt levels expressed as a percentage of that year's GDP.
World War II is an interesting parallel to the deficit incurred since COVID. In 1945, the percentage of US debt to GDP was 113%. Two decades later, in 1965, it had been reduced to 40%. This deficit reduction was accomplished in part by high taxation. Look at the tax rates from 1945 to 1965. They were significantly higher than today: 91% for individual income, 52% for corporate income, and 77% for estate tax.
The Path Forward
While we don't think that tax rates will revert to 91% for individuals, it is important to realize the reality of the tax and debt conditions today. Our tax rates are historically low, and debt levels are historically high.
The graph below shows the history of US debt compared to income and estate taxes. You can see clearly that starting in 2008, the debt has soared and taxes have not kept up as in prior years.
If history repeats itself, and numbers don't lie, it is reasonable to expect that taxes must increase.
