Let’s take a quick journey down the path of the history of taxes. I’m a big fan of history, so I have to do everything I can to contain my temptation to expand upon what I want to talk about in this episode, so let me start a little more broadly than you might think is necessary, but much more narrowly than I would prefer.
Let’s start with the Revolutionary War! What’s the thing that you remember about the start of the Revolutionary War? Does it have something to do maybe with some people in Boston harbor throwing tea into the ocean? Does it have something to do with people getting tarred and feathered over something called the stamp tax?
Does the phrase “No taxation without representation” mean anything to you? If any of those things aren’t just sounding like random gibberish from an old history fan then you know what I’m getting at – the foundation of our country is based on tax and the justice or injustice of certain taxes being imposed.
Fast forward to Shays Rebellion, the Whiskey Rebellion, all about reactions to taxes from the government.
Think about the state of Illinois, property tax, and what that has done to our state.
Uncontrollable property tax growth is crippling the state of Illinois. It eats up the value of property ownership. It’s forcing people out of the state, preventing people from moving to the state, and it’s contributing to the inequity of education across the state. An episode of the tax realities of Illinois is for another time, however.
Our country has a very complicated and frankly combative history with taxation. Today, however, I want to talk about, not an excise tax, not a whiskey tax, not a stamp tax, not property taxes, what I want to talk about today is a very specific kind of tax – income tax.
In the United States, modern federal income tax started at the start of the 20th century, and through acts of Congress since then, the thresholds of when you pay and how much you may have changed.
If you look at a graph, you’ll see the income tax rates peaked after World War Two – where you had really really really high – 94% I believe – income tax brackets for any income over $200,000 earned in a year. I think inflation brings that kind of income to somewhere around $3,000,000 today, but if you earned that kind of money you got 90 percent of your income was taxed. In fact, there’s a good story related to this. You remember Ronald Reagan, right?
The politician? What you might not remember about Ronald Reagan is the actor! Ronald Reagan was an actor when federal income tax topped out at 94% for income over $200,000 and he would earn $100,000 per film he made.
If you go onto IMDB or Rotten Tomatoes or whatever it is and look up Ronald Reagan you’ll see that he didn’t really ever make more than two movies a year. That’s because if he earned more than $200,000 in a he would make $0.00 once he combined the federal and California income tax rates.
94% Federal and 6% California, I believe, were the rates. So you can see why he was so energetic about lowering income tax rates when he would later ascend to the presidency.
In fact, when the 80s came around you saw income taxes from the post-Vietnam Era plunged to really historical lows, although they did spike up a little bit at the end of the Reagan era. If we keep going you would see rates hold steady until the George W Bush years and then they went down. They went up a little bit over Obama’s era and then the Tax Cuts and Jobs Act of 2017 lowered them again. So we’re really living in a pretty historically low, other than the early Reagan years, income tax environment.
In Illinois, but the way, the income tax rate is not where the state of Illinois gets you.
Income tax rates in Illinois as compared to income tax rates of other states are not too much worse than the states that don’t charge any income tax.
In fact, Illinois doesn’t yet tax retirement income so those are two good things, if you’re an optimist you might say “Illinois is doing all right by us!” but if you’re a pessimist and cynic like some people hosting this podcast you might exclaim, “They have plenty of room for growth! If the state of Illinois wants to raise the revenue they got an unmilked cow sitting right there!”
But I digress – I bring all this up to illustrate where I base my opinion, and it is just an opinion, that income tax rates are low and that I will not be paying lower income tax rates through the rest of my life and that my 10-month-old son when he inherits whatever money I have that has income tax due, will not be paying lower tax rates than I am paying right now.
So when you’re making decisions on when you’re going to pay tax, the question isn’t if taxes will have to be paid but rather when should you pay tax. The obvious answer is, “When they’re lower!” and what you need an attorney to do for you right now is to run your numbers based on your situation and the situations of your kids to see when the time might be to pay the lowest amount of tax in your IRAs, 401(k)s, 403(b)s, and any other tax-deferred retirement account.