The History of Federal Income Tax Changes


The new Tax Cuts and Jobs Act became a reality for Americans when President Donald Trump signed it into law on Dec. 22. This country has only had a federal income tax for just over a century since the 16th Amendment was passed in 1913 instituting the tax. Since then, the IRS form (including instructions) to file a personal annual tax return has gone from four pages in 1914 to 181 pages in 2016.

It's unclear whether next year's form will be shorter or longer since the latest iteration of the tax code was meant to simplify taxes. What we do know is that this country's tax laws are now markedly different than they were just 30 days ago. Here is a history of the federal income Tax changes that we've seen since this country's latest financial crisis.

Taxes Leading Up to the Financial Crisis

When Bill Clinton was elected President in the 1990's, the country was already experiencing a downward trend in income tax rates that had led many Americans to become millionaires, but that also created a troublesome budget deficit. Clinton slightly increased the top marginal tax rate to 39.6% and the economy produced somewhat above average growth in the following five years. By 1997, the country experienced its first negative income tax, where low-income Americans could pay no income tax at all and receive funds in the form of tax credits.

We had additional tax cuts in the early 2000's under President George W. Bush, who cut taxes in two packages during 2001 and 2003. On the whole, the top tax rate was cut to 35%. Shortly after these rates went into effect, the economy began to slowly decline before crashing in 2008.

Income Tax Rates Post-2008 Stock Market Crash

When the stock market crashed in September 2008, it eventually lost over 40% of its value by the following summer. One of the primary concerns of the 15 million Americans that found themselves out of work was the fact that their taxes were also about to go up. President Bush's earlier tax cuts were set to expire. In 2010, President Barack Obama and a Democratic Congress elected to extend those income tax cuts for another two years. When there was a GOP Congress in place in 2012, the decision was made to extend those tax cuts once again with the exception of the top marginal tax rate, which reverted to 39.6%. The result was not the same as it was in the Clinton era since we were already in the midst of the Great Recession. The economy continued to post growth that was below-average.


Largest Tax Cut in a Quarter Century

What is being touted as the largest tax cut in history is really just the largest tax cut in about 25 years. According to the Tax Policy Center, the Tax Cuts and Jobs Act is going to lower taxes for 80.4% of taxpayers in 2018, but raise the payout for a majority of Americans by 2027. Unfortunately, most of the personal provisions in the tax reform expire in 2025, so it will be up to future legislatures to extend or amend those.

Corporate tax cuts in the law are permanent, taking the tax rate on corporations down to 21% from 35%. Individuals still have seven tax brackets, but the tax rates are slightly lowered across the board. Some of the biggest changes come in what is deductible and other tax credits. For example, the standard deductions are now $12,000 for individual filers and $24,000 for married filers, which nearly doubles the prior deductions. The personal exemptions are eliminated beginning in 2018.

Most education credits and deductions remain the same, but taxpayers now have the ability to use 529 funds to pay for private school expenses. There are also some changes to housing-related expenses, such as the cap on state and local taxes deductions, referred to as "SALT," at $10,000 and a cap on mortgage interest deductions to $750,000 loans.

How the Tax Law Changes Might Impact the Economy

We don't know for certain how these new tax changes are going to impact consumers, businesses, and the economy as a whole. If consumers have more disposable income, this could be good news for economic growth. Likewise, the cuts in business tax rates could spur wage growth and further stock market gains. One concern among experts is the potential impact on housing affordability now that some tax loopholes have been closed.

There will be changes, and it is likely that lenders are going to find that some asset classes will bring higher profits than others over the next several years. Now that we know what the new tax laws entail, it's a good time to clean up loan portfolios. Lenders and non-lenders can engage in buying loans or selling loans depending on their needs and goals. An experienced asset management company can help evaluate loan portfolio sales for the best possible mix of risk and return.