March 22, 2024
By: Travis Watts, Director of Investor Development
How the History of Taxes Shapes Today’s Investment Opportunities
Taxes have been intertwined with America’s story since its early days, evolving significantly over the centuries. Understanding the history of taxes can shed light on today’s investment landscape and the advantages awaiting investors in 2024.
The History of Taxes: A Journey Through Time
The Roots of Taxation:
Dating back to the 1700s, the U.S. taxation journey began with tariffs and excise taxes. In this article, we’ll fast forward to a more recognizable tax system that began to take shape later.
Civil War Era Taxation:
In 1862, the IRS was established under President Lincoln and the Revenue Act was passed. Lasting a decade, this marked the advent of the first progressive tax structure, with tax rates ranging from 3% to 5%. Tax withholding was first introduced, which essentially turned employers into tax collectors on behalf of the government. This was to settle Civil War debts, and the taxation was intended to be temporary until these debts were cleared.
Permanent Income Tax:
Fast forward to 1913, we witnessed the birth of the first permanent income tax structure in the U.S., featuring progressive rates from 1% to 7% based on income brackets. This was the first modernized taxation system in the U.S.
World Wars and Tax Changes:
During World War I, the top marginal tax rate surged from 7% in 1913 to 67% by 1917 to alleviate World War I related expenses. The Great Depression era saw FDR’s presidency introduce Social Security and minimum wage, causing tax rates to climb to 79% in 1936. By the end of World War II in 1945, the top tax bracket peaked at a staggering 94%. The U.S. maintained high top tier tax rates for 24 years that ranged between 81% to 91%.
Shifts in Taxation Policy:
In 1963, President Kennedy proposed major tax cuts, culminating in the Revenue Act of 1964, reducing the top tax bracket down to 70%. President Reagan’s tenure in 1981 further slashed these rates to 50%, marking significant reductions in top line and bottom-line tax brackets as well as reducing corporate taxes and capital gains rates.
Modern Taxation and Investor Advantage:
As we fast forward to today, the top tax bracket for earned income stands at 37%, and many Americans pay rates much lower than that. For investors, today’s landscape is an even more favorable scenario. Long-term capital gains rates range from 0%, 15%, and 20% (based on income level) for investments held over a year and real estate investments also offer depreciation benefits, which can be a valuable tool offering immediate and significant tax relief for investors.
2024 Investors: Key Takeaways from the History of Taxes
- Today’s tax rates are historically low, compared to many U.S. periods of time.
- There are strategies and investments that can help reduce tax burdens.
- Long-term investing can be tax-efficient (holding longer than 1 year)
- Real estate investment offers tax benefits such as depreciation that you may be able to utilize.
If you’re looking to learn more about multifamily real estate investments in 2024, please reach out to learn more.
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