One of the components of a progressive income tax is the tax bracket where taxes increase proportionally as income increases.
This is different from flat tax. A system levies on every taxpayer at the same rate. For example, both taxpayer A’s and B’s income will be taxed at the same rate, say, 10 percent even if taxpayer A’s income is $100,000 and taxpayer B’s income is $2 million.
The underpinning idea for tax bracket is a socialized taxing where high-income taxpayers should pay more than the low-income ones. In this way, low-income taxpayers will have more money to spend on basic services than spending on tax payment.
A tax bracket can mean marginal tax rate, which is the tax levied for every additional income. Such additional income is called the “last dollar,” which is the part of an income that does not go beyond the upper limit of certain bracket. The bracket is a range of incomes taxed at a specific rate.
Tax bracket was first implemented in 1862 during the first income tax. The first income tax was created in the Revenue Act of 1861. The creation of income tax was aimed to help the Union raise money to fight the Civil war. Starting from the $8,000 earners and up, income tax was levied at a rate of three percent. A higher tax bracket was five percent for income more than $10,000. This income tax was repealed in 1872.
Only in 1913 that the 16th Amendment to the Constitution provided the power to collect income tax regardless of state population. This marked the beginning of federal income tax. During this time, the tax brackets range from one percent on income of $0-$20,000 to seven percent on income of $500,000 and higher.
The Revenue Act in 1916 increased the tax bracket rates from two percent to 15. After a year, the War Revenue Act increased the tax bracket rates from two percent on income of $0-$2,000 to 67 percent on income of $2 million and higher.
In 1930′s, there was a big leap in rates because Great Depression. The highest rate became 79 percent. Again, the tax bracket rates increased during the World War II to fund the war. This time the lowest rate reached 23 percent for income $2,000 or less.
In 1981, the highest tax rate drops to 50 percent because of the Economic Recovery Tax Cut. The Tax Reform Act of 1986 reduced rates and cut the number of brackets until in 1987, there were five. Since then, tax bracket rates have fluctuated and they probably will continue to for some time.