Taxes can often feel like a puzzle, especially when you’re running a small business and trying to make the smartest decisions for your bottom line. One question that often comes up when speaking to my clients is: Have taxes always been this high?!
I like this question because I love helping my clients understand their finances and taxes in general. Plus, learning more about what has influenced past tax rates can help us predict what may happen again. So in today’s post, I’ll take you on a short (promise!) journey through the history of the U.S. tax rate over the last 100 years to help you see the big picture about how our income is taxed.
Have taxes always been this high?
Actually, the current highest marginal income tax rate of 37% is much lower than it was 50 to 100 years ago.
What was the highest U.S. tax rate in history?
The highest marginal income tax rate in U.S. history was 94%! This was the rate in 1944 during World War II, but it wasn’t paid by average Americans. Instead, it applied to the very highest incomes at the time, which were equivalent to many millions of dollars in today’s money.
As you probably can guess, these sky-high tax rates were part of a wartime effort to raise revenue very quickly. But even after the war ended, the top marginal tax rates remained high. They were often well over 70% from the 1940s all the way through the 1970s.
What is a marginal tax rate?
An important concept to understand here is that the marginal tax rate isn’t the tax rate you actually pay on all of your income. Even when the top rate was 94%, that rate only applied to income above a very high threshold. Everything below that threshold was taxed at lower rates.
The concept of a marginal tax rate is closely related to the concepts of tax brackets and a progressive tax system, which is what we have in the U.S. Basically, our income is associated with a tax bracket, which corresponds to a tax rate. As your income increases into the next higher tax bracket, only the portion of your income that is in that higher bracket is taxed at the higher rate.
To fully understand this idea, you can read my free article How Do Tax Brackets Work? and watch the awesome YouTube video our Tax Manager, Anna Smith, made to help our clients clearly see how tax brackets work.
What was the marginal tax rate over the last 100 years?
It’s interesting to look at the top marginal tax rate throughout history to see how it’s changed and why:
| Years | Top Marginal Tax Rate | Historical Context or Legislation |
|---|---|---|
| 1925-1931 | 25% | Post WWI reductions |
| 1932-1935 | 63% | Revenue Act of 1932 (Great Depression era increase) |
| 1936-1940 | 79% | Revenue Act of 1935 (aka “Wealth Tax”) |
| 1941 | 81% | |
| 1942-1943 | 88% | WWII era increases |
| 1944 | 94% | Peak WWII era rate |
| 1945-1963 | 91% | Post WWII rate maintenance |
| 1964 | 77% | Revenue Act of 1964 |
| 1965-1981 | 70% | |
| 1982-1986 | 50% | Economic Recovery Act of 1981 |
| 1987 | 38.5% | Tax Reform Act of 1986 |
| 1988-1990 | 33% | |
| 1991-1992 | 31% | 1990 budget agreement |
| 1993-2000 | 39.6% | Omnibus Budget Reconciliation Act of 1993 |
| 2001 | 39.1% | Gradual reductions began |
| 2002 | 38.6% | |
| 2003-2012 | 35% | Economic Growth and Tax Reconciliation Act of 2001(aka “Bush Tax Cuts”) |
| 2013-2017 | 39.6% | American Taxpayer Relief Act of 2012 |
| 2018 – Present | 37% | Tax Cuts and Jobs Act of 2017 |
What are the current marginal tax rates?
For tax year 2025, these are the marginal tax rates for each tax bracket:
| Tax Rate | Single Filer | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 10% | $0 to $11,925 | $0 to $23,850 | $0 to $17,000 |
| 12% | $11,926 to $48,475 | $23,851 to $96,950 | $17,001 to $64,850 |
| 22% | $48,476 to $103,350 | $96,951 to $206,700 | $64,581 to $103,350 |
| 24% | $103,351 to $197,300 | $206,701 to $394,600 | $103,351 to $197,300 |
| 32% | $197,301 to $250,525 | $394,601 to $501,050 | $197,301 to $250,500 |
| 35% | $250,526 to $626,350 | $501,051 to $751,600 | $250,501 to $626,350 |
| 37% | Over $626,350 | Over $751,600 | Over $626,350 |
How does looking at historical tax rates help entrepreneurs today?
Takeaway #1: Don’t fear growth.
Unfortunately, since many people (yes, even business owners!) don’t understand how tax brackets and marginal tax rates work, they hesitate to grow or earn more money because they don’t want to “get pushed into a higher tax bracket.”
In reality, the financial hit is much smaller than people may think. In other words, you won’t lose money by making more money.
Takeaway #2: Plan for taxes.
Tax planning is the way to go, especially if you’re a business owner. Worrying about your tax rate or tax bracket won’t lower your tax bill, but taking full advantage of tax deductions or tax credits available to you sure can.
Thinking strategically about all money-draining and money-making areas of your business will impact your tax bill far more than if the tax rates swing. Small business owners who want to be strategic with their finances look at the big picture, which includes:
- Business deductions
- Retirement contributions
- Depreciation of fixed assets
- Health insurance
- Choosing the right business structure
- 20% QBI deduction (if you qualify)
Additionally, understanding how politics and economic conditions can greatly affect the tax rates can also help you make more informed decisions about how you save and distribute your money.
Abridged by Amy
Just like in any area of life, the more you understand about why things are the way they are, the better prepared you are to make smart and deliberate decisions that will affect both your short and long term goals.
If you need help figuring out how your income is taxed, how your business structure can save you tax money, or how to make sure you’re not missing out on any tax deductions or credits, then reach out to a CPA who is willing and able to speak to you on a personal level and walk you through the details you need.
