From 2% to Nearly Everyone: Musk’s X Post on Income Tax Raises Big Questions

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Elon Musk has been vocal about the tax code’s flaws. He believes there shouldn’t be any tax incentives and also raised questions about how income taxes became the model. The questions and scrutiny come as the Department of Government Efficiency (DOGE) discovers questionable uses of taxpayers’ money.

An X post from Musk indicates that DOGE has saved $51.8 billion in taxpayer dollars. The initiative is just getting started, but it wasn’t that long ago when only 2% of households paid income tax, according to data compiled by VisualizingEconomics.com. Here’s how we went from 2% of households paying income taxes to most middle-class families.

Also here are top tax breaks middle-class families should take advantage of.

The Origin of the Income Tax

The first income tax was introduced during the Civil War but was quickly scrapped once the war concluded. This tax was enforced from 1861 to 1872. The income tax we know today was introduced in 1913 to help finance World War I, according to the Ronald Reagan Presidential Library & Museum. That year, the legislative branch ratified the 16th amendment, which allowed Congress to levy income taxes. The amendment overturned the Supreme Court’s previous decision that required a nationwide income tax to be proportional to a state’s population.

Income taxes came as a part of The Revenue Act of 1913, which also reduced tariffs. Initially, only 2% of households filed income taxes. The highest tax rate was 7% on incomes above $500,000 (approximately $16 million in today’s money), while anyone who made less than $3,000 per year didn’t have to pay income taxes (roughly $96,000 in today’s money). The starting tax rate was 1% on income above $3,000 in 1913 money.

How the Tax Code Changed During World War I

During World War I, the U.S. adjusted its tax brackets to ensure that more people filed taxes and paid higher rates. According to the Budget Counsel Reference, the extra tax revenue helped to fund the war and the top rate in 1918 was 77% on all income above $1 million (roughly $21.4 million in today’s money).

The higher tax rates were during wartime and even then, no more than 40% of households paid income taxes. After the war, the United States adjusted tax rates in 1925 to ensure that fewer people paid taxes. 

How the Tax Code Changed During World War II

The United States was lenient with income taxes throughout the 1930s. In most of the 30s, fewer than 20% of households paid income taxes. However, that changed in World War II when the United States once again needed money to fight in an expensive war.

The stakes were high and America was focused on taking down the Axis powers. That included the tax exemption dropping to only $500 in 1942 ($9,860 in today’s money). This was the beginning of an oppressive tax system. While wartime efforts warranted additional tax revenue, the United States did not return its tax rates to prewar times. 

The United States continued to get tangled in global wars and there was no urgency to get taxes back to where they were in the 1920s and 30s. The original income tax was more generous. Lower and middle-income families were mostly unscathed, while the upper class only had to pay up to 7% on their top dollar. 

Can We Get Back to Lower Income Tax Rates?

It’s easy to look at current tax rates and think it’s always been normal to pay a large percentage of your income to the government. However, the history of the United States paints a different picture. The Department of Government Efficiency’s ability to cut down on waste will reduce how much money the government needs to collect from taxpayers to remain solvent.

An emphasis on tariffs instead of an income tax can also bring the country back to lower income tax rates. A consumption tax hits everyone equally instead of a few people having to pay more than others.

While the current tax code looks like it taxes the rich the hardest, that’s hardly the case. Musk has remarked that you need an AI to understand the tax code and that the ultra-rich know how to work the system to pay zero taxes.

For instance, billionaire George Soros did not pay any federal income taxes between 2016 and 2018, per the ProPublica.org. Furthermore, Jeff Bezos claimed a $4,000 child tax credit on top of avoiding federal income taxes in 2011, according to Fortune. He was worth $18 billion at the time. 

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