Office of Tax Analysis 

U.S. Treasury Department 

Washington, D. C. 20220 

Issued: November 1976 

INCOMES UNDER LOW AND HIGH 

TAX RATE SYSTEMS: 1929 vs. 1973 

Gabriel G. Rudney 

U. S. Treasury Department 

OTA Paper 17 September 1976 
TABLE OF CONTENTS 

page 

I. Introduction. . . . . . . . . . . . 1 

11. Features of 1929 Data . a . . . . . , . . . . 2 

111. Adjusting 1929 Data for Comparability with 1973 . . . 7 

IV. Adjusting 1973 Data for Comparability with Adjusted 

1929Data. * .. . . . . . *. . . . . 10 

V. Comparison of Income Distributions in 1929 and 1973 . . 12 
I. INTRODUCTION 

A major argument for basic personal income tax reform 

is that a broad base with low rates would be more preferable 

in terms of efficiency and equity than the present narrow 

base with high rates. Some contend that the substitution 

of low rates for high rates would, by itself, broaden the 

tax base over time. Taxpayers would voluntarily give up 

tax shelters and tax concessions because their advantages 

under the present high-rate system would be lost under a 

low-rate system. 

Little empirical evidence is available on the effect 

of low rates on the size and distribution of the income 

tax base as compared to high rates. This paper provides 

some empirical insights. It presents comparative data on 

incomes in 1929, a year when a low tax-rate system was in 

effect, and 1973, a year when high tax rates and many tax 

preferences of current law were in effect. The data are 

derived from tax returns for those years. 
-2-

11. FEATURES OF 1929 DATA 

Tabulated data from individual income tax returns for 

1929 (filed in 1930) are available in the Internal Revenue 

Bureau's report, Statistics of Income, for 1929 (SOI) . The 

SO1 data 'were obtained from all returns with "net income" 

(defined below) of $5,000 or more; estimates were made from 

a sample of returns with "net income" of under $5,000. 

A return had to be filed for 1929 if "gross income" of 

the filer amounted to $5,000, or if "net income" amounted to 

$1,500 if the filer was single, or a married person living 

separately, or if "net income" amounted to $3,500 if the 

filer was married, Income of dependents was included. 

"Gross income" included all income subject to tax. 

The term "net income" was used in more than one sense. 

For purposes of determining the obligation to file a return, "net income" was defined to be the excess of gross 

income over nonbusiness deductions. 

Individuals were subject to a normal tax and a surtax. 

The normal tax was applied to a "net income" base which was 

the excess of gross income over the sum of nonbusiness 

deductions, personal exemptions,-dependents' credits, dividends, interest and capital gains on assets held more than 

two years. 
-3-

The surtax was applied to a "net income" base which 

was the excess of gross income over the sum of nonbusiness 

deductions and capital gains on assets held more than two 

years. The surtax rate schedule was designed so that net 

income less than $10,000 was exempt from the surtax. 

Capital gains on assets held more than two years 

were taxed separately at the lower of a flat 12.5 percent 

rate or the normal tax and surtax if applied to capital 

gains. Therefore, both the normal tax and surtax definitions of net income excluded capital gains which were taxed 

at the 12.5 percent rate.-11 

Personal exemptions were $1,500 for a single person 

or a married person living separately, and $3,500 for a 

married couple. An additional exemption of $400 was granted 

for each dependent. 

The definition of "net income" used for the tables in 

the 1929 SO1 represented a further variant, presumably for 

simple statistical presentation. The 1929 SO1 defined "net 

income" to be total income less nonbusiness deductions, a 

definition which amounted to the surtax base plus long-term 

capital gains. 

The tax rates applicable to the normal tax base in 

1929 were as follows:-21 
4 -

Tax and Rate 

- -Base 

1/2% applicable to $ 0 to $4,000 $60 plus 2% applicable to 4,000 to 8,000

180 plus 4% applicable to 8,000 or more 

The tax rates applicable to the surtax base in 1929 

were as follows:

Tax and Rate 

$40 plus

80 plus

140 plus

220 plus

320 plus

440 plus

720 plus

1040 plus

1400 plus

1800 plus

2240 plus 

2720 plus

3240 plus

3800 plus

4400 plus

5040 plus

6060 plus

7860 plus

11660 plus 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

0% applicable to 

1 applicable to 

-

Bas e

$ 0 to $lO,OOO 

$10,000 to 14,000 

14,000 to 16,000 

16,000 to 18,000 

18,300 to 20,000 

20,000 to 22,000 

22,000 to 24,000 

24,000 to 28,000 

28,000 to 32,000 

32,000 to 36,000 

36,000 to 40,000 

40,000 to 44,000 

44,000 to 48,000 

48,000 to 52,000 

52,000 to 56,000 

56,000 to 60,000 

60,000 to 64,000 

64,000 to 70,000

70,000 to 80,000 

80,000 to 100,000 

100,000 and over 

applicable to 

applicable to 

applicable to 

applicable to 

applicable to 

applicable to 

applicable to 

applicable to 

applicable to 

applicable to 

applicable to 

applicable to 

applicable to 

applicable to 

applicable to 

applicable to 

applicable to 

applicable to 

applicable to 

The combination of normal tax and surtax rates produced 

a maximum marginal rate of i4 percent. 
-5-

Table 1 presents the 1929 data on number of returns, 

total income and net income by net income classes for all 

returns filed and for taxable returns. The 1929 SO1 reported four million returns filed for 1929 with total income of $29.9 billion and net income of $24.8 billion. 

However, only about 2.5 million returns were taxable and 

these reported total income of $24.3 billion and net income of $20.5 billion. 
-6-

Table 1 

Number of Returns, Total Income, Net Income, Taxable Income, 

All Returns and Taxable Returns, 1929 Levels 

Net Number 

Income of 

Class Returns 

(000) (000) 

Under 1 126.2 

1 - 2 903.1 

2 - 3 810.3 

3 - 5 1172.7 

5 - 10 658.0 

10 - 25 271.5 

25 - 50 63.7 

50 - 100 24.1 

100 - 150 0.4 

150 - 300 5.3 

300 - 500 1.6 

500 -1000 1.0 

1000 and over 0.5 

Total 4044.3 

Under 1 8.5 

1 - 2 479.1 

2 - 3 439. a 

3 - 5 549.9 

5 - 10 606.6 

10 - 25 271.5 

25 - 50 63.7 

50 - 100 24.1 

100 - 150 6.4 

150 - 300 5.3 

300 - 500 1.6 

500 -1000 1.0 

1000 and over 0.5 

Total 2458. o 

Office of the Secretary of 

Office of Tax Analysis 

Total Net : Estimated 

: Income : Income Taxable 

: ($billion) : ($billion) : Income 

All Returns 

$ 0.1 est. 

1.8 est. 

2.4 est. 

5.7 est. 

5.2 

4.8 

2.6 

2.0 

0.9 

1.3 

0.7 

0.8 

1.4 

$29.9 

Taxable Returns 

$ * est. 

1.0 est. 

1.2 est. 

2.9 est. 

4.7 est. 

4.8 

2.6 

2.0 

0.9 

1.3 

0.7 

0.8 

0.4 

$24.3 

the Treasury 

($billion) 

$ 0.1 $* 

1.5 0.1 

2.0 0.4 

4.6 0.7 

4.5 3.5 

4.0 3.1 

2.2 2.0 

1.6 1.6 

0.8 0.8 

1.1 1.1 

0.6 0.6 

0.7 0.7 

1.2 1.2 

$24.8 $14.2 

* * 

0.8 0.1 

1.0 0.4 

2.3 0.7 

4.1 3.5 

4.0 3.1 

2.2 2.0 

1.6 1.6 

0.8 0.8 

1.1 1.1 

0.6 0.6 

0.7 0.7 

1.2 1.2 

$20.5 $14.2 

July 30, 1976 
-7-

111. ADJUSTING 1929 DATA FOR COMPARABILITY WITH 1973 

To make the 1929 data comparable to the 1973 tax base, 

an estimate of the 1929 "taxable income'' was calculated by 

subtracting personal exemptions from 1929 net income. The 

taxable income for 1929 was estimated to be $14.2 billion 

(see Table 1). 

The most recent data available for comparability were 

for tax year 1973 in the Treasury Tax Model, which is a 

sample drawn from the 1973 SO1 designed to represent the 

entire tax filing population. To answer questions about 

how the relative income distribution in 1929 compared with 

that in 1973, either the number of returns and levels of 

income in 1973 had to be reduced to 1929 levels, or the 1929 

data had to be "blown up" to 1973 levels. The latter approach 

was chosen. 

To adjust for the change in the number of potential 

tax returns between 1929 and 1973, the number of returns in 

each category was multiplied by 1.7, the ratio of the U.S. 

population in 1973 to that in 1929. A further adjustment 

was needed to make income figures comparable between these 

years. The number of taxpayers in a given bracket would 

naturally be expected to change between the two subject 

years because of the general increase in the level of income in both nominal and real terms. To account for this 
-8-

general growth in income, per-return income items from the 

1929 data were blown up by a factor of 7.2, the ratio of 

per capita money income in 1973 to that in 1929. Thus, the 

1929 income items -- total income, net income, and taxable 

income -- were projected to 1973 by applying an overall "blowup factor" of 12.4 to reflect both population growth and 

income growth. 

The idea underlying these projections'is that, if the 

1973 distribution of economic activity, wealth, and so forth 

represented a simple magnification of the 1929 picture, the 

projected 1929 numbers would represent the number of returns 

in 1973. Of course, many changes took place in the interval, 

including changes in demographic structure and in the income 

characteristics of the population. 

Table 2 indicates that if 1929 incomes are projected to 

1973, the 1929 tax system (expressed in terms of 1973 

income levels) would produce 6.9 million filers, 4.2 million 

of whom would be taxable. Total income reported on taxable 

returns would be $301.2 billion and taxable income would be 

$194.7 billion. 
-9-

Table 2 

Number of Returns, Total Income, Net Income, 

Taxable Income, All Returns and Taxable Returns., 

1973 Levels Projected from 1929 Data 

Net : 

Income : 

Class : 

(000) : 

Under 7.2 

7.2 - 14.4 

14.4 - 21.6 

21.6 - 35.9 

35.9 - 71.9 

71.9 - 179.7 

179.7 - 359.5 

359.5 - 718.9 

718.9 -1100. 

1100. -2200. 

2200. -3600. 

3600. -7200. 

7200. and over 

Total 

Under 7.2 

7.2 - 14.4 

14.4 - 21.6 

21.6 - 35.9 

35.9 - 71.9 

71.9 - 179.7 

179.7 - 359.5 

359.5 - 718.9 

718.9 -1100. 

1100. -2200. 

2200. -3600. 

3600. -7200. 

7200. and over 

Total 

Number : : Estimated 

of : Total : Net Taxable 

Returns : Income : Income :Income 

(000) : ($billion) : ($billion):($billion) 

All Returns 

* 214.5 $ 1.3 est. $ 1.2 

1535.3 22.8 est. 18.6 1.2 

1377.5 30.4 est. 24.8 5.0 

1993.6 70.8 est. 57.0 8.7 

1118.6 64.5 55.8 43.4 

461.6 59.5 49.6 38.4 

108.3 32.2 27.3 24.8 

41.0 24.8 19.8 19.8 

10.9 11.2 9.9 9.9 

9.0 16.1 13.6 13.6 

2.7 8.7 7.4 7.4 

1.7 9.9 8.7 8.7 

0.9 -

17.4 14.9 14.9

6875.3 $370 .IO $307.5 $194.7 

Taxable Returns 

* * * 14.5 

814.5 $ 12.1 e.st. 9.9 1.2 

747.7 15.2 est. 12.4 5.0 

934.8 35.4 est. 28.5 8.7 

1031.2 58.7 est. 50.8 43.4 

461.6 59.5 50.8 38.4 

108.3 32.2 27.3 24.8 

41.0 24.8 19.8 19.8 

10.9 11.2 9.9 9.9 

9.0 16.1 13.6 13.6 

2.7 8.7 7.4 7.4 

1.7 9.9 8.7 8.7 

0.9 -

17.4 -

14.9 -

14.9

4178.6 $301.2 $254.0 $194.7 

Office of the Secretary of the Treasury July 30, 1976 

Office of Tax Analysis 
- 10 -

IV. ADJUSTING 1973 DATA FOR 

COMPARABILITY WITH ADJUSTED 1929 DATA 

The 1973 tax return data in the Treasury Tax Model 

required adjustment in order to make income comparisons 

meaningful. The 1973 filing requirements and personal 

exemptions differed substantially from those of 1929. 

As a result, many million more lower and middle income 

persons were on the 1973 tax rolls than would have been the 

case if the 1973 equivalents of 1929 filing requirements 

and personal exemptions were in effect. These equivalents 

are shown in column (2) below. 

1929 1aw 

(1929 levels) 

(1) 

Filing Requirement:

Single person $1,500

Married couple $3,500 

E--; person $1,500

Married couple $3,500

Dependent-each $ 400 

1929 1aw 1973 law 

(1973 levels) (1973 levels) 

(2) (3) 

$10,800 $2,050 

$25,200 $2,800 

$10,800 $ 750 

$25,200 $1,500 $ 2,880 $ 750 

The equivalents were substituted in the Treasury Tax 

Model for the 1973 levels shown in column (3). This substitution removed, to a large extent, the disparities between the projected 1929 and the actual 1973 data which were 

attributable to differences in filing requirements and 

personal exemptions. Table 3 thus presents the 1973 data 

adjusted for filing requirements and personal exemptions, 
0 

0 

- 11 -

Table 3 

Number of Returns, Total Income, Net Income and Taxable Income, 

1973 Levels Adjusted far 1973 Equivalent of 1929 Filing

Requirements-andPersonal Exemptions 

Net : Number : 

Income of : Total :Net Income : Taxable 

3

Class : Returns : Income :1929 Concept Income

000 000 : ( billions) : billions) 

' Under 7.2 

7.2 - 14.4 

14.4 - 21.6 

21.6 - 35.9 

35.9 - 71.9 

71.9 - 179.7 

0 

15.7 

1460.4 

1487.6 

3406.7 

669.1 

.o 

$ 0.2 

29.2 

38.1 

183.4 

62.8 

13.3 

19.5 

84.7 

42.5 

* 

179.7 - 359.5 

359.5 - 718.9 

718.9 - 1100. 

33.1 

7.2 

1.2 

7.8 

3.4 

1.1 

6.8 

3.2 

1.0 

1100. - 2200. 0.8 1.3 1.3 

2200. - 3600. 

3600. - 7200. 

7200. and over 

0.2 

0.1* 

0.6 

0.5 

0.4 

0.5 

0.5 

0.4 

Total 7082.1 $328.7 $173.9 

Under 

7.2 - 14.4 - 21.6 - 35.9 - 71.9 - 179.7 - 359.5 - 718.9 -

7.2 

14.4 

21.6 

35.9 

71.9 

179.7 

359.5 

718.9 

1100. 

0 

10.0 

1454.0 

1479.0 

3398.3 

667.8 

33.1 

7.2 

1.2 

0 

$ 0.1 

29.1 

37.9 

183.0 

62.7 

7 .-a 

3.4 

1.1 

13.3 

19.5 

84.7 

42.5 

6.8 

3.2 

1.0 

* 

1100. - 2200. 

2200. - 3600. 

3600. -. 7200. 

7200. and over 

0.9 

0.2 

0.1* 

1.3 

0.6 

0.5 

0.4 

1.3 

0.5 

0.5 

0.4 

Total 7051.8 $327.8 $173.9 

All Returns 

$ 0 

0.4 

32.7 

42.6 

203.1 

70.5 

9.0 

3.9 

1.3 

1.5 

0.6 

0.5 

0.5 

$366.6 

Taxable Returns 

0 

$ 0.2 

32.5 

42.0 

202.5 

70.4 

9.0 

3.9 

1.3 

1.5 

0.6 

0.5 

0.5 ~~ 

$364.9 

bftice ot the Secretary ot the Treasury July 30, 1916 

Office of Tax Analysis 
- 12 -

V. COMPARISON OF INCOME DISTRIBUTIONS IN 1929 ATD 1973 

Table 4 provides a comparison of some broad characteristics of the net income distributions in 1929 and 1973, 

the 1973 levels projected from 1929 (referred to as "1929") 

and the adjusted actual 1973 levels (referred to as "1973"). 

The comparisons are based on Tables 2 and 3. There was a 

substantial difference in the aggregate number of taxable 

returns: 4.2 million in "1929" and 7.1 million in "1973", 

resulting in a difference of 2.9 million returns. This 

sizable difference was largely accounted for by taxable 

returns with less than $71,900 of net income (the 1973 

equivalent of $10,000 of net income in 1929). 

This difference in number of returns occurred in 

spite of the change in marital status of the population 

between 1929 and 1973. Census data indicate that a significantly higher proportion of the population was married 

in 1973 than in 1929. Whereas 75 percent of the male, 

population and 68 percent of the female population were 

married in 1973, only 58 percent of the males and 60 percent of the females were married in 1930. 

The large difference between the number of taxable 

returns with net incomes under $71,900 in "1929" and "1973" 

may explain most of the differences in taxable income and 

in total income in that same group. Taxable incomes and 
- 13 -

Table 4 

Nuder of Returns, Total Income and Taxble Income in "1929" 

(Using 1973 &@valent of 1929 Filing Requirements

and Personal Exeuptions)

and in "1973" 

Net Incane Distribution 

Item : Total : Mer $71,900 : Over $71,900 

Mer of taxable returns (thousands): 

"1929" (1973 projected fran 1929) 4178.6 

(100) 

3574.7 

(85) 

636.1 

(15) 

"1973" (1973 adjusted datal 6341.3 

(90) 

710.5 

(10) 

Total in- on taxable returns ($billions): 

"1929" (1973 projected fran 1929) $ 121.4 

(40) 

$ 179.8 

(60) 

"1973" (1973 adjusted data) $ 277.2 

(76) 

$ 87.7 

(24) 

Average total inco~per taxable return ($): 

"1929" (1973 projected fran 1929) $72,082 $33,961 $282,660 

"1973" (1973 adjusted data) $51,745 $43,713 $123,434 

Taxable inca ($billion) : 

"1929" (1973 projected fran 1929) $ 194.7 $ 57.2 $ 137.5 

(100) (29) (71) 

"1973" (1973 adjusted data) $ 117.3 $ 56.2 

(68) (32) 

Average taxable inccane per taxable return ($): 

"1929" (1973 projected from 1929) $46,595 $16,001 $216,161 

"1973" (1973 adjusted data) $24,604 $18,498 $79,099 

Otrice ot the Secretary ot the Weawry AWJ-st 4, 19/6

Office of Tax Analysis 

Note: Figures in parentheses are percentages of the total. 
- 14 -

total incomes on returns with net incomes under $71,900 

were more than twice as great in 1973 as in the 1929 

proj e ction. 

The number of returns filed by taxpayers with net 

income of $71,900 or more was reasonably close in "1929" 

and '1973". Differences in taxable income and total income 

for these returns in the two years arose principally from 

the average income per tax return. Table 4 shows that 

taxable income and total income for that group were each 

more than twice as great in "1929" than in '119731'. 

Table 5 shows the percentage distribution among net 

income classes of wages and salaries, dividends, and capital 

gains. The distribution of wages and salaries in "1929" and 

in "1973" were reasonably close. However, the distribution 

of dividends and capital gains differed markedly. A substantially larger proportion of dividends and capital gains 

were distributed among, higher income individuals in "1929" 

than in "1973". 

More insight into the importance of dividends and 

capital gains can be obtained from Table 6 which shows the 

relative importance of selected sources of income within 

the net income brackets of the high income individuals. 

The data shows that the combination of dividends and capital 

gains represented important sources of income for high income individuals, 
- 15 -

Table 5 

Percentage Distribution of Wages and Salaries, Dividends, and 

Capital Gains in "1929" and "1973" by Net 

Income Classes, 1973 Levels 

Net Income : : Wages 

Class Total and : Dividends Capital 

(000) : Salaries : Gains 

"1929" (1973 Projected from 1929) 

Under 71.9 52 75 

71.9-179.7 16 14 

179.7-359.5 9 5 

359.5-718.9 7 3 

718.9-1100 3 1 

1100-2200 

2200-3600 

3600-7200 

7200 and over 

4 

2 

3 

-5 

1

* * -

* 

Tot a1 100 100 

"1973" (1973 Adjusted Data) 

Under 71.9 70 82 

71.9-179.7 23 16 

179.7-359 5 4 1

* 359.5-718.9 2 

1100-2200 *

1 * * 2200-3600 

3600-7200 * * 

7200 and over - -

718.9-1100 1 * 

* * 

Total 100 100 

Office of the Secretary of the Treasury 

Office of Tax Analysis 

22 

19 - 15 1 

13 11 

6 10 

7 18 

4 13 

4 15 

-7 -

32 

100 100 

49 23 

33 35 

10 15 

5 11 

2 4 

2 5 * 3 * 2

-

* -2 

100 100 

July 30, 1976 
- 16 -

Table 6 

Relative Importance in Total Income of Selected Sources 

of Income on Returns of Net Income of $71,900 or More in 

"1929" and "1973" 

Net Income 

Class : Total : Wages and : Dividends : Capital : Other 

(000) : Income : Salaries : : Gains : 

71.9-179.7 

179.7-359.5 

359.5-718.9 

718.9-1100 

l.100-2200 

2 200- 3600 

3600-7200 

7200 and over 

Total (All 

taxable returns) 

71.9-179.7 

179.7-359.5 

359.5-718.9 

718.9-1100 

1100- 2200 

2200-3600 

3600-7200 

7200 and over 

Total (All 

taxable returns) 

-

"1929" (1973 Projected from 1929) 

100 33 19 - 48 

100 23 28 1 48 

100 15 33 13 39 

100 11 33 24 32 

100 8 30 33 29 

100 6 28 41 25 

100 4 28 46 22 

100 -2 -24 -

55 -

19 

100 37 16 

"19 7 3" (19 73 Adj ustad Data) 

100 41 9 

100 22 16 

100 13 17 

100 9 18 

100 7 14 

100 4 9 

100 1 9 * 

8 39 

14 36 

37 25 

59 11 

64 9 

73 6 

79 4 

84 6 

-

100 -2 -

79 -

19 

100 61 6 9 24 

Office of the Secretary of the Treasury July 30, 1976 

Office of Tax Analysis 
- 17 -

The exemption of dividend income under the 1929 normal 

tax (which reduced the effective overall tax rate on dividends 

from 20 percent to 16 percent for taxpayers in high-income 

brackets) may explain in part the importance of dividends 

relative to other sources of income in that year, In the 

same way, the 1929 preferential treatment of capital gains 

(which reduced the overall tax rate on gains for highincome taxpayers from 24 percent to 12.5 percent) may also 

explain the relative importance of capital gains. These 

1929 "tax preferences", as well as low tax rates, may have 

contributed to the relative importance of dividends and capital 

gains in the total income of high-income individuals in 1929. 

Capital gains alone represented an important source 

of income for the wealthy in 1973 (see Table 6), A possible 

explanation may be that the combination of 1973 high rates 

and preferential treatment discouraged dividend distributions, 

and instead encouraged taking the yield from investment in 

the form of capital gains. 
FOOTNOTES 

1/ If all of the $2.3 billion of capital gains 

reported in 1929 were subject to the 12.5 percent rate, 

the capital gains tax would have generated $293 million. 

The 1929 SO1 in fact reported $285 million. 

2/ The normal tax rates were modified by a joint

resolEtion of Congress approved by the President at the 

close of the tax year (December 16, 1929), but too late 

to change the rates printed in the 1929 tax returns. 

The normal tax rates were changed from 1-1/2, 3, and 5 

percent to 1/2, 2, and 4 percent. There is no explanation in the 1929 SO1 on how the new rates,were 

administered.