When the United States "first created the federal income tax, frankly, nobody below a million dollars a year paid anything."
On April 8, 2010 -- one week before tax-filing day -- former House speaker (and possible 2012 presidential candidate) Newt Gingrich made a comment about the history of U.S. taxes that caught our eye. In a question-and-answer period following a speech to the Southern Republican Leadership Conference, the Georgia Republican said that when the United States "first created the federal income tax, frankly, nobody below a million dollars a year paid anything." The first federal income tax was imposed during the Civil War, but it was scrapped in 1872 and not revived until 1913, after ratification of the 16th Amendment to the Constitution. Gingrich's camp didn't respond to an inquiry, so we weren't able to ask which tax he meant. But we'll analyze his comment based on the 1913 tax. Several experts we spoke to agreed that income and tax data from the 1860s ranges from unreliable to nonexistent, and wouldn't be comparable to current statistics. In addition, the 1913 tax is the direct predecessor of the current tax system. (The first tax form in 1913 was even called the 1040.) The 1913 federal income tax had seven tax brackets, according to the Tax Foundation. Taxpayers (either individual or joint filers) who had taxable income from zero to $20,000 were taxed at a rate of 1 percent. Those between $20,000 and $50,000 were taxed at 2 percent; between $50,000 and $75,000, 3 percent; $75,000 and $100,000, 4 percent; $100,000 to $250,000, 5 percent; $250,000 to $500,000, 6 percent; and higher than $500,000, 7 percent. Right off the bat, this would seem to make Gingrich's statement incorrect, since anyone earning even one dollar in income would, by the book, be subject to the income tax. But it's actually a bit more complicated. For one thing, that line of thinking ignores exemptions. Individuals and joint filers in 1913, just like taxpayers today, could exempt a portion of their income from the federal tax. According to the 1913 tax form, individuals could exempt their first $3,000, while joint filers could exempt their first $4,000. So that set a floor for who was on the hook for taxes in 1913. As for what constitutes a "millionaire," Gingrich didn't specify, but we think he meant millionaires in 2010 dollars. (It makes for a more favorable calculation for him.) According to an online Bureau of Labor Statistics inflation calculator, the 1913 equivalent of $1 million in today's money was $45,677. So, joint filers earning between $4,000 and $45,677 were liable for the federal income tax -- at either the 1 percent or 2 percent level -- but were less affluent than a "millionaire" in today's dollars, which was Gingrich's cutoff point. The fact that these Americans paid taxes make Gingrich's comment wrong on its face. Still, his general point might not be too misleading if an extremely small number of people fell into that income range. It's possible to estimate how many taxpayers would have fallen into that income category by looking at a well-known academic study of U.S. income distribution published in 2004 by economists Thomas Piketty and Emmanuel Saez. The authors provide tables that examine the top end of the income distribution. (For clarity's sake, we'll list the 1913 dollar figures that we reverse-engineered from the Piketty and Saez tables, which are denominated in 2000 dollars.) Looking at their tables, we see that an income of $45,677 (remember, that's enough to qualify as a 1913 "millionaire") would have placed a taxpayer in the top one-tenth of 1 percent of American incomes. Meanwhile, the tables indicate that the top 1 percent of incomes began at $10,466. Their tables don't provide a figure for the top 10 percent, but working backward from the levels they do list beginning in 1917, it seems reasonable to assume that an income of roughly $2,284 would have landed a taxpayer in the top 10 percent of income. Using a back-of-the-envelope estimate, then, a couple with $4,000 income in 1913 probably would have ranked in the best-compensated 4 to 6 percent of Americans. So that means that perhaps 5 percent of Americans weren't millionaires, and yet were subject to the federal income tax. That's equivalent to several million households among the 97 million people estimated by the Census to be living in the U.S. in 1913. That number could drop a bit once other deductions are factored in, such as interest paid on loans. But the number is probably pretty close to that. Where does this leave us? Gingrich has a point that lots of taxpayers were indeed fully exempt from federal taxation in 1913. The exemption levels were equal to nearly $66,000 and $88,000, respectively, in today's dollars -- incomes that today would place one comfortably into the middle class. But to us, it's not enough to make up for his ignoring several million Americans when he claimed that "nobody below a million dollars a year paid anything" in federal income taxes. Someone who earns $88,000 is far from a millionaire. So we rate his statement False.
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