OpEd | Economic history of the graduated income tax; YES, it’s fair!


Omaha, Nebraska was hot that July in 1892. But not as hot as the tempers of the farmers who descended upon it to form their own Populist Party. The Farmers Alliances of the south and west joined with Grangers from the Midwest to press for reforms that would save their farms and families. Caught between high costs (including interest rates and taxes) and falling prices for their crops, they knew they were being squeezed off their farms.

One cost they could address was the burden of the property tax. Farmers need property and this tax put the burden of taxation unfairly on them. The fairer alternative they proposed would be a tax on income to have the “fat cats” and “robber barons” pay their fair share for the government services they were obtaining. This income tax would be “graduated” to have those who could afford more pay more.

To explain “graduated,” it refers to levels: i.e., elementary school; high school; college.

The same can be done with income levels: i.e., $0 – $100; $101 – $200; $201-$300.

A graduated tax effects only each higher level: 1% (.01); 2% (.02); 3% (.03).

A small worksheet:

If income is $250 then 100 x .01 = $1;100 x .02 = $2; 50 x .03 =$1.50.

(Income is “split” into three levels. First $100 @ 1%. Second $100 @ 2%. The final $50 @3% with the total tax = $4.50)

The boon to farmers was enhanced by starting these levels at relatively high personal income. The income tax as of 1920 was collected only on income greater than $2,000 for a married couple. For reference, that would have been close to the average price of a new bungalow built on the West Bluff that year. That was the income of doctors and Wabco executives. Only 5% of Americans earned enough to pay it.

In the 1960s, Illinois faced a myriad of issues and revenues were among them. A constitutional convention met to address these. Economists from Chicago offered their advice. Milton Friedman was most influential. Sales taxes were most burdensome on the poor so there would be no state sales tax on food or medicine. In place, revenue would come from an income tax that would impose a “flat” 2.5% on all income above $2,000/$4,000 per couple.

Again, for reference the minimum wage was $1.60. At $2 an hour, total yearly wages would have come to $4,000.

As incomes have risen, this flat rate continues to take an ever-larger percentage of income from poor families. (The current poverty level is $25,000) And the rate has risen over time to 4.95%. And it makes Illinois rely heavily on property taxes for revenue. Lest you forget, renters are paying those as part of their rent.

The current Fair Tax proposal has 6 levels/rates:

$0 – $10,000 4.75% (down)
$10,001-100,000 4.90% (down)
$100,001-250,000 4.95% (same)
$250,001-500,000 7.75% (up)
$500,001-1,00,000 7.85% (up)
$1,000,001 and up 7.99%. (up)

This comes with an increase in the credit for property taxes from 5% to 6%.

The numbers are clear and plain: a small tax percent reduction for those making less than $100,000 and increases for those making over $250,000. This proposal does not give the state legislature the authority to raise taxes. They already have this authority and have used it many times. This only allows them to charge rates that increase on higher income amounts. A graduated income tax is in place in the vast majority of American states.

William Feipel was a professor of economic history at Illinois Central College; after his retirement he taught briefly at Bradley University.

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