Revisiting a History of Marriage in the Tax Code, Part 2

Back in 2014 and into 2015, I posted a multi-part series of posts about the history of marriage in the tax code. In 2016 I was asked to condense that series into a CPE presentation. Here are excerpts from that presentation. This series of posts will cover a lot of the same ground as was covered three years ago, but hopefully with a little bit fresher perspective.

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The modern-day income tax return has five options for filing status:

• Single
• Head of Household
• Married Filing Jointly
• Married Filing Separately
• Qualifying Widow(er)

Each filing status comes with its own tax bracket. Specific pieces of tax law and regulations vary depending on filing status as well.

But in the beginning, in 1913, there were no filing statuses. There was just one tax bracket that applied to all taxpayers.

As Yale Law School Professor Boris Bittker noted, the focus of the original tax code was on the individual:

(T)he tax legislation enacted by Congress was dominated by an individualistic approach at the outset. This focus on individuals rather than married couples, families, or households was implicit as early as 1913, when the introductory words of the first taxing statute based on the sixteenth amendment imposed a  tax “upon the entire net income  arising or accruing from all sources … to every  citizen  of the United  States … and to every person residing in the  United States, though not a  citizen thereof.” The Revenue Act of 1916 made the point explicit by taxing “the entire net income received … by every individual.”

Bittker, Boris I., “Federal Income Taxation and the Family” (1975). Faculty Scholarship Series. Paper 2291. http://digitalcommons.law.yale.edu/fss_papers/2291

Despite the individualistic focus of the original tax code, married couples had the option of filing a joint return in 1913. But unlike today, a joint return in 1913 was merely a reporting mechanism in which husband and wife could combine their income onto one tax return, rather than each filing their own separate returns. It was not a “filing status” in the modern sense and there was no special tax bracket associated with it.

The only place married couples received a benefit was in the exemption amount. Unmarried taxpayers received a $3,000 exemption (the equivalent of approximately $73,000 today) while a married couple received a $4,000 exemption (the equivalent of more than $97,000 today).

The tax brackets were broad from 1913 through 1916. For example, a tax rate of 1% applied to taxable income of $0-$20,000. Adjusted for inflation, a taxpayer could have income of more than $487,000 and still be in the 1% range of the tax bracket. The rate increased to 2% on income between $20,001-$50,000. The top rate was 7% and applied to taxpayers with taxable income of more than $500,000 (the modern-day equivalent of $12.1 million). Dual-income married couples had little reason to file separately, because the vast majority of them fell in the 1% range of the tax bracket.

Example 1:

Archie and Ethel are a married couple. Archie has taxable income of $10,000; Ethel has taxable income of $5,000. In 1913, their tax-filing options were: file a joint return showing $15,000 of taxable income, or file separate returns. Either way, they would arrive at the same amount of tax owed:

$10,000 x .01 =$100 tax; $5,000 x .01 = $50 tax; Total tax $150

OR

$15,000 x .01 = $150 total tax

In 1913, 97.6% of married couples filed joint returns (out of 278,835 tax returns filed by married couples in 1913, 272,153 were joint returns [or returns of one-income couples]; 6,682 were separate returns).

Not only were the tax brackets broad, but many Americans were exempt from owing taxes because of generous exemption amounts. As mentioned earlier, the exemption amounts were $3,000 for a single person or $4,000 for married couples. A person with income below those amounts owed no tax, and a person or married couple whose income was below $3,000 did not even have to file a tax return.

This was the simple (at least by today’s standards) beginnings of the U.S. Tax Code in 1913. But the low rates and large exemption amounts would change by 1917 when the United States entered World War I.