We’re a Back To The Future household. My son is obsessed with the first movie of the series, thanks largely to the time machine. If you haven’t seen the film (which boggles the mind, quite frankly), Doc (played by Christopher Lloyd) sends Marty McFly (played by Michael J. Fox) back to the 1950s using a creative mode of transportation:
Marty McFly: Wait a minute, Doc. Are you telling me that you built a time machine out of a DeLorean?
Doc: The way I see it, if you’re gonna build a time machine into a car, why not do it with some style?
In the second movie, creatively titled, Back To The Future Part II, Marty McFly travels into the future to save his children. That future, which seemed eons away in 1985, is today, October 21, 2015.
A lot has changed over those thirty years. I thought it would be fun to take a look back and see what was happening when Marty hopped into the DeLorean. This being a tax blog, of course, I’m focusing on tax.
In 1985, the President was Ronald Reagan. With a term beginning on January 20, 1981, our 40th President would serve for two terms, leaving office in 1989. His Vice President, George H. W. Bush, served both terms as Second in Command but would serve just one term as President, from 1989 to 1993.
President Reagan is, of course, known for a series of tax reforms. The longest lasting – and most familiar – was the Tax Reform Act of 1986, signed into law on October 22, 1986. That, of course, postdates Marty’s travel date by a year and a few days (he left the present for the future on October 26, 1985).
Before the tax act, Reagan had faced criticism for what was considered an out of control Tax Code (sound familiar)?
As in 2015, taxpayers used one of four tax rate schedules for 1985, depending on filing status. Those schedules were single, married filing joint returns; married filing separate returns; and heads of households. The tax brackets – not counting capital gains or other additions – ranged from 0% to 50% with more than 15 different rates. In contrast, the top tax rates for 2015 – again, not counting capital gains or other additions – ranges from 0% to 39.6% with just a handful of rates (0%, 10%, 15%, 25%, 28%, 33%, 35% and 39.6%).
The average total income tax on returns that showed a tax for 1985 was $3,931; 100,625,000 individual taxpayers filed returns. We don’t have the final dollars for 2015 just yet but for the first three quarters of the 2015 fiscal year, individuals paid a total of $1.276 trillion in individual income taxes. With 145,088,000 individual taxpayers, that works out to $8,795 per taxpayer in 2015 (keep in mind, of course, with nearly half of taxpayers paying no tax, the “real” average income tax is much different).
According to IRS (downloads as a pdf), 1985 was a good year for revenues: an increase in adjusted gross income (AGI) of $162 billion and an increase in taxable income of $119 billion boosted tax revenues by 8%, from $302 billion for 1984 to $326 billion for 1985. That compares to more than $1.276 trillion (again with a few months left in the fiscal year) received in fiscal year 2015.
Taxpayers were treated to a subtle but important change in tax rates in 1985: indexing of the tax rate schedules. This was done to avoid an increase in taxes as a percentage of adjusted gross income (AGI) caused by inflation. Of course, today, this happens automatically – that’s why you’ll see the new tax rates come out after interest rates are announced (if you’re looking for those 2016 rates, you’ll see those on Forbes shortly).
Alternative minimum tax (AMT) began in 1969 which means that taxpayers were paying the tax in 1985: 427,000 returns were filed with taxpayers paying AMT tax totaling $3.8 billion. In contrast, in 2013 (the latest year for which complete data is available), 9,705,282 taxpayers were subject to the AMT paying more than $27.4 billion.
And while we like to scream about corporate tax rates these days, they’ve gone down. The top corporate tax rate in 1985 was a whopping 51% (according to Tax Foundation, though President Reagan cited 46% in his speech below). In 2015, the top corporate tax rate was 39%.
The complexities and tax rates in 1985 prompted President Reagan to deliver a speech in May 1985 where he suggested a number of changes to the then existing Tax Code, saying:
For the sake of fairness, simplicity, and growth, we must radically change the structure of a tax system that still treats our earnings as the personal property of the Internal Revenue Service; radically change a system that still treats people’s earnings, similar incomes, much differently regarding the tax that they pay; and, yes, radically change a system that still causes some to invest their money, not to make a better mousetrap but simply to avoid a tax trap.
He went on to promote lower tax rates and a more simple system:
We’re reducing tax rates by simplifying the complex system of special provisions that favor some at the expense of others. Restoring confidence in our tax system means restoring and respecting the principle of fairness for all. This means curtailing some business deductions now being written off; it means ending several personal deductions, including the State and local tax deduction, which actually provides a special subsidy for high-income individuals, especially in a few high-tax States.
(Sound familiar?)
Finally, President Reagan called on Congress to work together, saying:
A great national debate now begins. It should not be a partisan debate for the authors of tax reform come from both parties, and all of us want greater fairness, incentives, and simplicity in taxation.
Simplify the Tax Code? Lower tax rates? A call for bipartisan cooperation? Great Scott! Some things – even with the passage of 30 years – never change.
You can read more about 2015 rates here. You can see the 2016 rates here.