What are the 'Federal Tax Brackets'

The Federal tax brackets are set by the Internal Revenue Service (IRS) and determine tax rates for individuals, corporations and trusts. These brackets are adjusted over time, often as a result of differing political philosophies on taxation’s effects on the overall economy.

Breaking Down 'Federal Tax Brackets'

Federal tax brackets are progressive, meaning that, in general, the higher one’s income, the higher the tax bracket that applies to their income. This does not necessarily translate into paying more in tax dollars given the large number of deductions and credits that can be applied against the tax rate. The goal of the Federal tax brackets when first created in 1913 was to fairly tax citizens of the United States, in large part to help fund wars. But as decades went by, special interest groups lobbied for more and more deductions until in recent times there have been several large corporations paying nothing in taxes.

Creating a fair taxation system is nearly impossible and what began as a simple form in 1913 has now reached hundreds of pages in some cases. President Donald J. Trump, with the backing of a Republican House and Senate, signed into law the Tax Cuts and Jobs Act in December of 2017.One of the stated goals is to close corporate loopholes and simplify the filing process. The Federal tax brackets will be lowered for income earned by individuals and corporations starting in the year 2018. The top individual tax bracket is coming down from 39.6 percent to 37 percent and the bottom rate remains at 10 percent. In tandem with these changes, the personal exemption rates will be increased while certain popular deductions are being removed.

The Tax Cuts and Jobs Act of 2017 permanently reduces the corporate tax rate while only temporarily reducing the individual bracket. This was the result of concern about how much additional debt these new tax reductions will add to the already large U.S. debt. Estimates at the time of the new law’s passing set those debt increases as high as $2 trillion over the coming decade. High-earners are expected to see the largest reduction in taxation, while low-wage earners could conceivably pay more when, and if, the individual tax changes expire as planned in 2025. Given the unpopularity of increasing taxes, as evidenced with the extension of the Bush tax cuts in 2010, despite their sunset provision when first passed in 2001, those individual rates could also continue past 2025.

Federal Tax Brackets Over Time

The 16th Amendment was ratified in 2013 and the Federal tax bracket was born. In 1913, the top tax bracket was 7 percent on all income over $500,000. But it didn’t take long for that percentage to dramatically rise. By 1918, as the costs of World War One became evident, the top tax rate was as high as 77 percent. Rates came down again during the prosperity of the 1920s, but then rose during the Depression. This became an example of what not to do during difficult times and was cited frequently during the TARP debates at the start of the 2008 Great Recession.

In many ways, the Federal tax brackets were created to fund expensive wars. For example, at the end of World War Two the top tax bracket reached 94 percent. The rate remained high in subsequent years averaging around 70 percent. Rates have been coming down ever since, beginning during the 1980s Reagan administration. And it may be no coincidence that the United States debt has ballooned during the modern era as the country is engaged in several wars while lowering tax rates, as opposed to raising them as done during previous wartimes.

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