Top Marginal Tax in 1944 and 1945 Was 94%

In 1944, the top marginal tax rate in the United States hit 94%.

The justification? In 1942, President Franklin D. Roosevelt said that the country needed "steeply graduated taxes.. to keep the cost of the war out of the pockets of the common man." World War II required a tremendous amount of money to finance, and FDR looked to the top 0.01% in the country to help foot the bill.

The 94% marginal tax applied to any income over $200,000, which works out to roughly $3.3 million in today's dollars.

The top marginal tax rate would remain at 94% for 1944 and 1945. After World War II ended, the top rate would be reduced to 91%, where it would remain until 1963. The justification to keep rates this high was: servicing the debt accrued during WW2, funding post-war programs and financing the Korean War.

Now, some people in this day and age will point to the 90% marginal tax rates paid in the 1940s, 1950s and 1960s and wonder why we can't do that now.

It should be mentioned that the very rich who were impacted by 90%+ marginal tax rates usually ended up paying around 40-45% for their taxes.

While the highest marginal tax rate was astronomically high, there were many deductions and loopholes available to the richest people in the country, which dramatically lowered their bill.

To start, write-offs weren't really scrutinized like they are today. Executives often had company cars and apartments that they used personally. The writing off of travel expenses and "business dinners" was rampant.

Next up, capital gains were taxed at a much, much lower rate, so the wealthiest in the country would simply re-structure their compensation packages. Salary was minimized, while stock and other assets were awarded instead.

Starting in 1948, couples were allowed to split their incomes, which meant that high-earning executives could split their incomes with their wives, greatly reducing their tax bills.

In those days, many wealthy people plunged as much money as they could into tax-exempt municipal bonds. As high as the marginal tax rate went, Uncle Sam couldn't tax any of the interest from these bonds.

Lastly, there was the "Oil Depletion Allowance", which many wealthy people took advantage of back in those days. This was called the "Golden Loophole" at the time.

The USA wanted to encourage investment in domestic oil exploration, and boy did they ever.

Under the Oil Depletion Allowance, companies could deduct 27.5% of their gross income from an oil. In addition, they could deduct 100% of their intangible Drilling Costs in the first year.

The thing is, the 27.5% deduction of gross income applied indefinitely, even after an investor recovered all of their investment.

So, investors, including the likes of Bing Crosby and Bob Hope, would invest (via a syndicate) in a domestic oil well, and they could pass through this 27.5% deduction to their own taxes, year after year, as well as the well kept producing.

Theoretically, an investor could buy into an oil well project for $20,000, get a 100% writeoff in their first year (intangible drilling costs write-off), and then flow through $27,500 in tax-exempt money to themselves every year, assuming that the well produced $100,000 annually in income. This would last forever under the scheme.

So, while marginal tax rates were certainly much, much higher in the 1940s, 1950s and 1960s, there were plenty of ways for rich people to dramatically lower their tax bills.

Source: History of Income Tax Rates in the United States

Filed under: General Knowledge