Historical Federal Tax Rates by Income Group

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In my last post on 2009 marginal tax rates, reader Alexandria (aka MonkeyMama) made a very good point that planning our retirements around future tax brackets is very difficult as they change all the time. But isn’t that what we are forced to do every time we contribute to a IRA and/or 401k? We can either pay tax now (Roth), or pay tax later (Traditional). In any case, I figured I should look into this more.

I previously explored this area in my post about historical marginal tax rates vs. median income. There, I concluded that at my current high income level, my personal tax rates would probably go up in the future. Now why might I change my mind?

Total Federal Tax Rate vs. Income Group
More recently, the NY Times published the following graph that plots the total federal tax rate vs. income starting from the 1960s. Total federal tax rate includes income taxes and also things like payroll taxes and capital-gains taxes.

As you can see, tax rates as a whole have been dropping recently and are relatively low compared to the past. I would also note that the total tax rate at the median income group (middle 20% line) has varied very little over the last few decades, hovering around 18-20%.

Federal Income Taxes For Median Family
Next, here is a 2006 chart from the Center on Budget & Policy Priorities, which is based on Treasury Dept. data. The Center estimates that the median-income family of four will pay only 5.6 percent of its income in federal income taxes in 2006, the lowest since 1955.

As you can see, the range for this median family has stayed between 6 and 12%.

My short take. Tax rates right now are historically low. Given this and all our future governmental obligations, they will most likely go higher. However, future tax hikes will probably be more heavily placed on high income earners as opposed to those earning at the median or below. The tax rate paid by the “middle class” tends to stay in a relatively low and narrow range.

Everyone’s situation is different. Right now, we are earning in the top 5% or so. But in retirement, I think we can easily fit into this median group, especially if the mortgage is paid off. So even though the future is unknown, my bet is that our tax burden will decrease upon retirement.

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  1. Hey Johnathan, do you do your own taxes or have a CPA?

  2. How much will some one get back, if he hasn’t work anything in 2008 ?
    Any idea?

  3. Well, always glad when I can shed some tax light on something.

    “But isn’t that what we are forced to do every time we contribute to a IRA and/or 401k?”

    No kidding. My general advice is when it comes to ROTH or 401k – do both. Hedge your bets, because who knows.

    On the flip side, I fully realize the opportunity to fund a ROTH in the 15% tax rate is absurd (taxes have historically never been quite this low) so we load up on our ROTHs right now. But if we were in the 25% tax bracket I’d probably just do both and call it a day. I could flip a coin on which would make more sense for the long run. No one really knows. ROTHs have the advantage of compounding tax free (particularly for the very young) BUT I am not convinced ROTHs are here to stay either. All the more reason to load them up though if you are young and in a low tax bracket. Most tax law changes are not retroactive, so the more you load up now, the better. I don’t think contributions will be allowed indefinitely.

    & I don’t think it’s a bad idea to take tax breaks when you can get them. That is what 401ks are all about really. Take the tax break now. You’ll cross our other tax bridges as you come to them.

    Just some other thoughts, but yeah, even when it comes to retirement vehicles, in general, best just not to put all your eggs on one basket and count too heavily on one income tax outcome. It’s a bit of a tax gamble no matter how you approach things.

  4. Shouldn’t “total taxes” be factored into this ? While federal taxes may have been going down haven’t social security, medicare, local, and State taxes generally increased ? Don’t these other taxes have a tendency to be much less progressive ? Do the economically enabled generally have more options to ‘choose’ their tax assessor ? ….and avoid social security and medicare taxes on all but a miniscule fraction of their income ?

    As for 401K’s …… why is it that local, State, Federal, and union pensions are backed by taxpayers, while 401K savers have been cut to the quick with no recourse. Doesn’t this leave the remaining assets of 401K contributors ripe for the picking ? Does this make it more reasonable to insure that local, State, Federal, and Union pensions are subject to the same risks (and regulation) as 401K’s and IRA’s? Is there some advantage and incentive in asking this segment of the population ‘invest in the country’ and share in the risk of their own decisions in a manner equivalent to those that they serve?

    Seems like the tax policy, including the Obama bail out continues rooted in the ‘trickle down’ theory that upper end taxpayers ‘spend’ more responsibly than those in the bottom 99%. If the average Joe spends his tax cut on debt reduction doesn’t that help both him/her and the creditors ? Is there any reason to believe that the really smart people who didn’t see this coming and who can’t quite put their finger on how to fix it deserve 400 or 500 more times in retained earnings than those who labor in a less oportune time and place? In reality the immigrants in America seem to have demonstrated that ‘trickle up’ works a lot better than ‘tricke down’. ………got to give Regan credit for reversing the Horatio Alger myth and catapulting the country towards a 21st Century depression.

  5. Will Obama reduce the tax bracket for the middle class as promise?

  6. Hope so. He’s on his seat setting up things. Let’s see is he reduces tax bracket for middle class persons. But he has promised to do so.!!!

  7. “My short take. Tax rates right now are historically low.”

    I respectfully disagree. True, they are low compared to where they were in 1960, but they are not “historically low”.

    Until about 100 years ago–for the first 60% of our national history–the marginal income tax rate on all Americans was 0%! In order for the Feds to even start the income tax shuffle there had to be a constitutional amendment (16th amendment, ratified in 1913).

    And the top marginal tax rate at that time? 7% on incomes over $500,000.

    See these links for more info:



  8. Yes, for a long time income tax was only applied to the very very rich. The tax on the median income family was basically zero. However, I don’t think we have to worry about that happening again…

  9. Brian Karpuk says

    Klidl66 Says: “Shouldn’t “total taxes” be factored into this ? While federal taxes may have been going down haven’t social security, medicare, local, and State taxes generally increased?”

    In 2005, the Average Federal Income Tax Rates broke down as follows:
    Total: 12.45%
    Top 1%: 23.13% (Effective Overall Rate: 31%)
    Top 2-5%: 17.36% (25.7%)
    Top 6-10%: 12.37% (22.4%)
    Top 11-25%: 9.27% (~21.4%)
    Top 25-50%: 6.93% (14.2%)
    Bottom 50%: 2.98% (4.3%-9.9%)

    The first percentage is just federal income taxes, the Efffective Overall Rate in parenthesis includes all federal taxes.

    In 2005, the total State-Local tax burdens in the U.S. averaged 10.10%, ranging from 6.40% in Alaska to 13% in Maine.

    If you want to understand what future tax rates are going to look like then you need to first understand how the federal government currently funds its operations. Put simply, we have an Income Tax Deficit and a Payroll Tax Surplus. We’re using the excess social security taxes to pay for the deficit in day-to-day spending, and writing our children an IOU . As baby boomers retire the Payroll Tax Surplus will diminish and then reverse itself.

    Some form of future tax increase will be necessary.

  10. Taxes will probably not be lower when you retire. By that time you have paid off your mortgage and you will be taking out of your 401k instead of putting in.

    You will also be getting a Social Security benefit. If you make over $42,000 you have to pay taxes on 85% of your Social security benefit.

    Then if you have a part time job that pushes what you withdraw from your 401k into a higher bracket.

    At this time you have about $18,700 standard deduction and exemptions for a couple. The way I figured it, if you can stay below $87,600 total earnings, you will stay in the 15% bracket.

    Some think you may be just as well off to take it all out at once, but I don’t see it that way.

  11. I see a few of you asking if Obama is going to fullfill his promise to reduce taxes for the middle class. Are you serious? Do you track or fill out your own federal taxes?

    Unless you had a jump in your income in the past year you should have seen the reduced tax rate in last year’s filing. And unless you don’t put anything into FICA (Social Security) your deduction to FICA for this year (2011) went down by 2% of total salary.

    Now if that isn’t considered a drop in taxes, then I just don’t understand your concept of a tax decrease. The same figures apply to the very rich, and they are laughing all the way to the bank.

    All of this means our national deficit will increase, and our kids, or their kids, will get to pick up the tax-tab for us being in three wars at the same time. Doesn’t seem right that we aren’t paying a special war tax (like during WWII) to pay for these foriegn policy decisions. My kids should not have to pick up the tab.

  12. Anyone can play with the statistics, leave out one kind of tax or use percentages vs actual $ figures to “prove” their point of view. Rather than listen to these idealogues, look for yourself at http://www.usgovernmentrevenue.com/revenue_history

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