Visualizing History

U.S. Individual Income Tax Rates: Highest / Lowest Brackets (1913 – 2018)

From the Archives

The Stock Exchange from Within (1913)

Investor Amnesia Course

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Sunday Reads

“Print shows a scene at the “Income Tax Office” with a crowd clamoring at the door where a notice states “One at a Time”; inside, a wealthy man is standing by a desk, on the floor at his feet, in his hat, are papers labeled “Personal Property Tax Sworn Off”, “Tax on Capital Sworn Off”, and “Tax on Investments”, he kisses the Bible while a government official sits at the desk with his right hand raised.”

In November 1789, Benjamin Franklin penned a letter to French Scientist Jean-Baptiste Le Roy that declared:

“Our new Constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes.

Much has changed in the 200+ since Franklin wrote this famous quip, but the certainty of death and taxes have not. However, there is definitely uncertainty around the rate of taxes that one will be expected to pay their government, and sudden changes to this rate can be a source of great pain or satisfaction depending on the direction of change.

Capital Gains Tax Hike

The response to President Biden’s announcement on Capital Gains Tax hikes was swift and negative. This chart from Bloomberg exhibits how investors reacted to the news in real time:

News of a planned Capital Gains Tax hike prompted an afternoon swoon

“What are the direct effects of a CGT hike? If you were thinking of selling shares anyway, it makes far more sense to sell them before the end of the year. There is also an incentive for “bed-and-breakfasting” — selling a position to crystalize a gain for tax purposes and then buying it back. That should help ensure an exciting end to the year. But it’s not clear that higher CGT does anything more than bring sales forward.

The way the market handled the last major CGT increase, at the end of 2012, is instructive. As it grew clear that higher capital gains taxes were coming, the S&P 500 languished and went sideways for the last few months of the year, closing roughly where it had been in March. Then 2013 turned out to be a great year; stocks started their rally at the beginning of January and never really stopped.”

This 2011 Opinion piece from the Wall Street Journal offers a brief history of the Income Tax in America:

Presidents Wilson (left) and Taft, fathers of the modern income tax

After the Civil War, nearly all the wartime taxes—including the nation’s first income tax—were repealed and the federal government relied mostly on the tariff for revenues. It provided the government with more than ample peacetime income. In 1882, the government had revenues of $403 million, but expenses were only $257 million, a staggering budget surplus of nearly 36%. The reason the tariff was so high was, ostensibly, to protect America’s burgeoning industries from foreign competition.

Of course, the owners of those burgeoning industries—i.e., the rich—were greatly helped by the protection, which enabled them to charge higher prices and make greater profits than if they had had to face unbridled foreign competition.

But the tariff is a consumption tax, which is simply added to the price of the goods sold. And consumption taxes are inherently regressive. The poor, by definition, must spend all of their income on necessities and thus pay consumption taxes on all of their income. The rich, while living in luxury, bank most of their income and largely escape these types of taxes.

As the vast surpluses piled up in the Treasury, the political pressure to institute an income tax on the rich grew steadily. In 1894, with Democrat Grover Cleveland in the White House and Democratic majorities in both houses of Congress, a federal income tax became law. The new tax, however, was very different from the Civil War income tax, which had exempted only the poor. The new one hit only the rich, imposing a 2% tax on incomes above $4,000. Less than 1% of American households in 1894 met that income threshold.

Needless to say, the tax was attacked in court, in a 1895 test case called Pollack v. Farmers’ Loan & Trust. The case turned on the definition of a “direct tax,” which the Constitution requires to be apportioned equally among the states according to population, something obviously impossible with an income tax.

The court split 4-4 as to whether the new income tax was constitutional. One member of the court, Justice Howell Jackson of Tennessee, was absent because of illness (and died less than three months later). But with the case drawing enormous public attention, the court agreed to reargue it and Justice Jackson rose from his deathbed to hear it.

Jackson was known to favor the income tax and it was assumed that it would now be upheld 5-4. But one of the other justices switched his vote (the opinion is unsigned and we don’t know by whom or why) and it was voted down 5-4.

The income tax was dead. But the pressure to tax the incomes of the largely untaxed rich only increased, especially as the Progressive wing of the Republican Party grew in strength under Theodore Roosevelt. By the time of the administration of President William Howard Taft (1909-13) the pressure was becoming overwhelming. One representative suggested simply repassing the 1894 tax bill and daring the Supreme Court to overturn it a second time.

That idea horrified Taft, who revered the court. He feared that it would weaken its position as the final arbiter of the Constitution. He came up with a brilliant, very lawyerly, alternative: He proposed a constitutional amendment to legalize a personal income tax, while meanwhile imposing a tax on corporate profits. In the early 20th century such a tax was, in effect, a tax on the rich. As the corporate income tax is technically an excise tax, there was no constitutional problem. Taft’s solution was implemented and in 1913 the 16th Amendment was declared ratified, just as Taft was leaving office.

The new president, Woodrow Wilson, and the strongly Democratic Congress promptly passed a personal income tax. It kicked in at 1% on incomes above $3,000 (a comfortable upper middle-class income at the time) and reached 7% on incomes over $500,000. But there were many deductions, bringing the effective tax rates down sharply from the marginal ones—a feature of the tax system ever since.

Unfortunately the corporate income tax, originally intended as only a stopgap measure, was left in place unchanged. As a result, for the last 98 years we have had two completely separate and uncoordinated income taxes. It’s a bit as if corporations were owned by Martians, otherwise untaxed, instead of by their very earthly—and taxed—stockholders…

There has since been a sort of evolutionary arms race, as tax lawyers and accountants came up with ever new ways to game the system, and Congress endlessly added to the tax code to forbid or regulate the new strategies. The income tax act of 1913 had been 14 pages long. The Revenue Act of 1942 was 208 pages long, 78% of them devoted to closing or defining loopholes. It has only gotten worse.

Financial / Security Transaction Taxes

Not to be outdone by the Biden administration’s tax announcement this week, Senator Bernie Sanders and Representative Pramila Jayapala put forward the plan for a tax that has been teased for several months: A Transaction Tax.

“The legislation proposed by Sanders and Jayapal is a big investment in education and comes with a high price tag. The bill says the federal government will shoulder 75% of the cost of free college at public schools, with states paying the remainder. In the event of an economic downturn, the federal government’s share would increase to 90%.

In addition, the bill proposes the government pay for free college by imposing a financial transaction tax on Wall Street, as in previous plans put forth by Sanders and others.

The Tax on Wall Street Speculation Act would levy a 0.5% tax on stock trades, a 0.1% fee on bond trades and a 0.005% fee on derivative transactions. That would raise up to $2.4 trillion over the next decade, according to a summary of the bill.

Now, this would obviously have very important ramifications for financial markets, and would not be well received should it pass. However, like most things, this idea is nothing new and actually stretches as far back at 1694 when the British government implemented a Stamp Duty on stock shares. In the United States there have been transaction taxes enacted during the Civil War, and again throughout the 20th century. Fellow historian Jason Zweig wrote this short history of transaction taxes in 2011 for the Wall Street Journal:

“History provides at least one striking example of that. In 1905, the state of New York slapped brokers with a 0.02% charge to discourage speculative trading in the outdoor “curb market” and in manipulative “bucket shops” that took advantage of naive investors. (The federal government had imposed its own “stamp tax” in 1898.)

Fifty thousand furious brokers presented a petition of protest to the governor. The Wall Street Journal called the tax “radically objectionable.” A stock exchange was proposed in New Jersey to capture the activity that was sure to flee New York.

The first day the law was in effect, a broker named Albert Hatch flouted it, eventually taking his defiance all the way to the U.S. Supreme Court—which ruled the law constitutional. Instead of discouraging traders, however, the new tax seems to have lit a fire under them.

With their dollar gains per trade reduced by roughly one-fourth, speculators had to sprint faster just to stay in place.

The first month under the new law, trading ran 2.5 times higher than the same month the year before, reported the Quarterly Journal of Economics late in 1905. Annual trading volume for the full year exceeded 210 million shares, up by one-third from 1904. Annual turnover hit 244%—meaning the typical share changed hands every five months, a pace that would never again be equaled in the 20th century, according to data from the New York Stock Exchange.

One trader, according to W.C. Van Antwerp’s 1913 book “The Stock Exchange from Within,” churned up to 30,000 shares a day, generating $75,000 a year—roughly $1.7 million in today’s money—in tax revenue for New York.

But there was a key difference between those days and ours. Then, brokers could afford the tax, since they still profited amply from the wide “spreads” between the prices that buyers would pay and that sellers would accept.

As markets became more competitive, the New York tax became less practical and was finally phased out in 1981.”

Given all of these announcements related to taxes, it only makes sense that today’s post studies the history of how taxes have impacted financial markets. So let’s dive in!

Tax Risk and Asset Prices (19th Century Evidence)

Why This is Relevant:

As evidenced by the immediate selloff following President Biden’s announcement, this week was a stark reminder of how “Tax Risk” can impact investor’s portfolios. Furthermore, how will the increased Capital Gains Tax impact pricing of stocks in various sectors, etc.? Using data from the late 19th century, this paper looks at that very issue and investigates the relationship between Tax Risk and asset prices.


“This paper exploits a natural experiment from the late 1800s in which many U.S. firms had inadvertently issued both taxable and tax-exempt bonds. Investors paid income tax on taxable bonds, but firms covered income tax on investors’ behalf on tax-exempt bonds. Using a unique data-set of these ‘dual-class’ corporate bonds, we derive a novel, market-based measure for tax risk, examine its time-series properties, and investigate if tax risk is priced in asset returns. We find that tax risk is pro-cyclical, is priced in the cross-section of asset returns, and commands a statistically and economically significant positive risk premium.”

Visualizing History:

Notable Quote:

Unexpected changes in tax rates affect the after-tax cash flows of investors holding taxable assets… In this paper we use a unique dataset of U.S. industrial firms that had issued both taxable and tax-exempt coupon debt. Investors in tax-exempt bonds were protected from federal taxes on the bonds’ coupon cash flows since the firms, not the investors, paid income taxes on ‘tax-exempt’ bonds. Specifically, the issuer not only paid coupon interest in full to bondholders, but also paid the requisite taxes on such interest (computed at the withholding tax rates specified annually by the U.S. Treasury) to the federal government.

We study the relative pricing of these ‘dual-class’ bonds during the period from 1910 to 1920, a period during which investors faced federal income taxes for the first time, and develop a new, market-implied measure of tax risk (TRM)We find that tax risk is pro-cyclical and that it is priced in the cross-section of asset returns with a statistically and economically significant positive risk premium.

The Impact of the Security Transaction Taxes on Stock Prices and Stock Liquidity; Evidence from the NYSE

“The Toll Takers”

Why This is Relevant:

While the prospect of a “Transaction Tax” is far less certain than a Capital Gains Tax hike, it is worth exploring how previous taxes of this type impacted markets. Looking at measures like Volume, Price and Bid-Ask Spread, this post analyzes how New York’s security transaction taxes in 1905 and 1914 affected the stock market.


“Security Transaction taxes have been in place in many countries for many years now. Yet we do not fully know how these taxes effect prices, volumes, bid-ask spreads and volatility and in turn if they are good for the economy or not. This paper is an attempt to understand how security transaction taxes decrease volume of trading, decrease prices of stocks and increase bid-ask spreads. It analyses the effect the STTs implemented by the state and federal government in New York on June 1st 1905 and December 1st 1914 respectively, had on the stocks of the New York Stock Exchange. These results will help us analyze whether future implementations of STTs will harm or benefit the market.”

Visualizing History:

Notable Quote:

“The introduction of this tax reduced the profits of traders and hence they traded more in an attempt to earn back their lost profits. As a result in the first month under this tax, the turnover rate in the New York Stock Exchange jumped from an already high 191% in 1905 to 244% in 1905 and 240% in 1906.”

The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks

Why This is Relevant:

Regardless of whether many knew such a tax announcement was coming at some point during this administration, the market certainly took President Biden’s announcement this week as a “fiscal shock”. Diving deeper into this reaction, this paper investigates “investigates the impact of changes in the level of taxation on economic activity” and the driving forces behind every major postwar tax policy action.


“This paper investigates the impact of changes in the level of taxation on economic activity. We use the narrative record — presidential speeches, executive-branch documents, and Congressional reports — to identify the size, timing, and principal motivation for all major postwar tax policy actions. This narrative analysis allows us to separate revenue changes resulting from legislation from changes occurring for other reasons. It also allows us to further separate legislated changes into those taken for reasons related to prospective economic conditions, such as countercyclical actions and tax changes tied to changes in government spending, and those taken for more exogenous reasons, such as to reduce an inherited budget deficit or to promote long-run growth.

We then examine the behavior of output following these more exogenous legislated changes. The resulting estimates indicate that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes. The large effect stems in considerable part from a powerful negative effect of tax increases on investment. We also find that legislated tax increases designed to reduce a persistent budget deficit appear to have much smaller output costs than other tax increases.”

Visualizing History:

Notable Quote:

“We also find that the motivations for tax changes have changed substantially over time. Countercyclical changes were frequent from the mid-1960s to the mid-1970s, but were unheard of before that time and from the mid-1970s until 2001. Tax changes motivated by spending changes were commonplace in the 1950s, 1960s, and 1970s, but have virtually disappeared since then. Tax increases to address inherited deficits were common from the late 1970s to the early 1990s, but rare before and after this period. Only tax changes motivated by long-run considerations have been a constant feature of the fiscal landscape since World War II.”

U.S. Experience with Futures Transactions Taxes

Why This is Relevant:

While much of the conversation regarding Transaction Taxes have focused on equity markets, this paper dives into the impact of such taxes on futures markets, particularly Wheat and Corn. “The analysis in this paper suggests that a one basis point tax on the sale of wheat futures contracts reduced average daily trading volume by 13%.”


“The transactions tax on futures sharply reduced trading volume on wheat and corn contracts during the 1920s and 1930s but had no apparent effect on volatility or market quality. I find no evidence of a tax effect on open interest: I hypothesize this is because the relative magnitude of the tax was significantly higher for intermediaries than for other participants. Instead, the tax appears to have substantially reduced intra-day trading but not longer-term positioning. Volume related proxies of liquidity therefore exhibit a strong relation with tax rates, but other measures of market quality show no relation to tax rates. In the long-run, however, exchange members doubled the minimum tick size in order to retain a large number of market makers and offset the impact of the tax.”

Visualizing History:

Notable Quote:

“Federal stamp taxes on futures transactions during the 1920s and 1930s led to fairly immediate, contemporaneous changes in trading volume. The analysis in this paper suggests that a one basis point tax on the sale of wheat futures contracts reduced average daily trading volume by 13%.

Following up from where the earlier linked article left off, this paper further explores the impact of New York’s transaction tax on markets from 1932 to 1981. This period is particularly notable because of the modifications (increases) following the Great Depression. Interestingly, the NYSE threatened to move out of New York and into New Jersey in order to avoid the transaction tax, an idea that has also been floated in the last 12 months.


“This paper examines changes in market quality variables associated with nine modifications to the New York State Security Transaction Tax (STT) between 1932 and 1981. STTs are found to be directly related to individual stock volatility, bid-ask spreads, and the price impact of trades. Evidence of an inverse relationship is found between STTs and volume. No consistent relationship is evidenced between the level of an STT and the volatility of portfolios. We examine the propensity of traders to switch trading locations to avoid the tax and find no consistent evidence that they will change locations. Overall we conclude that an STT harms market quality.”

Visualizing History:

Notable Quote:

“Increasing a Securities Transaction Tax is accompanied by an increase in average stock volatility and transaction costs for investors, a reduction in volume, and higher price impact for trades. We find no consistent relationship that suggests that investors will switch trading to non taxing venues to avoid the tax, but do find that corporations will manage par values in the direction of minimizing taxes if they are based on par value.”