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A History of Revolution in U.S. Taxation

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As Benjamin Franklin once said, “Nothing is certain except death and taxes.”

While this quote was penned in 1789, his words still ring true today. U.S. taxation has changed over time, but it has always existed in some shape or form for over 250 years.

U.S. Taxation: 1765 to Today

In today’s infographic from New York Life Investments, we explore the history of U.S. taxation – from its colonial roots to its recent reform.

A History of Revolution in U.S. Taxation

The modern American tax code has little resemblance to its early iterations.

Over the last few centuries, Americans have battled against British taxation, faced sky-high tax rates to fund war efforts, and enjoyed tax cuts designed to boost economic growth.

A Timeline of U.S. Taxation

Today, total U.S. tax revenue exceeds $3.4 trillion. Below are some notable events that have shaped modern American taxation.

Colonial Roots: 1765 to 1783

1765 – Stamp Act
In its first direct tax on the colonists, Britain places a tax on all paper – including ship’s papers, court documents, advertisements, and even playing cards.

1767 – Townshend Revenue Act
Importation duties are placed on British products such as glass, paint, and tea. The taxes are expected to raise £40,000 annually, (£6,500,000 in 2018 GBP). As hostilities continue to bubble up, colonists argue for “No taxation without representation”. Although taxes are imposed on the colonists, they aren’t able to elect representatives to British parliament.

1770 – The Boston Massacre
British troops occupy Boston to end the boycott on British goods. The March 5th Boston Massacre sees five colonists killed. By April, all Townshend duties are repealed except for the one on tea.

1773 – The Tea Act (May 10)
Britain grants the struggling British East India Company a monopoly on tea in America. While no new taxes are imposed, this angers colonists as it is seen as a thinly veiled plan to gain colonial support for the Townshend tax while threatening local business.

1773 – The Boston Tea Party (December 16)
Three ships arrive in Boston carrying British East India Company tea. Colonists refuse to allow the unloading of the tea, throwing all 342 chests of tea into Boston Harbour.

1775-1783 – The American Revolutionary War
Growing tensions between Britain and the colonists erupt in a full-scale war. After eight long years, Britain officially recognizes the independence of the United States.

A Free Nation: 1787 to 1943

1787 – The U.S. Constitution
Congress gains the “power to lay and collect taxes, duties, imposts, and excises.” The government primarily earns revenue from excise taxes and tariffs, including an “importation tax” on slaves.

1791-1794 – Whiskey Rebellion
Alexander Hamilton, the nation’s first Secretary of Treasury, leads the implementation of a whiskey excise tax. In 1794, whiskey rebels destroy a tax inspector’s home. President Washington sends in troops and quells the rebellion.

1862 – The Nation’s First Income Tax
To help pay for the Civil War, President Lincoln legislates the nation’s first income tax.

Income level (1862 dollars)Income level (2019 dollars)Tax Rate
$600-$10,000$15,000-$250,0003%
$10,000+$250,000+5%
Over the coming years, income tax is repealed and reinstated twice.

1913 – 16th Amendment
As World War I looms the 16th amendment is ratified, allowing for taxation without allocation according to state populations. An income tax is permanently introduced for both individuals and corporations, and the first Form 1040 is created.

Income Level (1913 dollars)Income level (2019 dollars)Tax Rate
$3,000+$77,000+1%
$500,000+$12,800,000+7%
At this time, less than 1% of the population is paying income tax.

1918 – The Revenue Act
Tax rates skyrocket to pay for World War I efforts. The top tax rate is 77%.

1935 – Social Security Act
In light of the Great Depression, the Social Security Act introduces:

  • An old-age pension program
  • Unemployment insurance
  • Funding for health and welfare programs

To fund the programs, a 2% tax is shared equally by an employee and their employer.

1942 – The Revenue Act
Described by President Roosevelt as “the greatest tax bill in American history”, the Act increases taxes and the numbers of citizens subject to income tax. Total personal and corporate income tax revenue more than doubles:

YearRevenue2019 dollar equivalent
1941$3.4 billion$59.2 billion
1942$8.0 billion$123.8 billion

1943 – Current Tax Payment Act
It becomes mandatory for employers to withhold taxes from employees’ wages and remit them four times per year.

Modern Times: 1961 to 2018

1961 – Beginning of The Computer Age
The National Computer Center at Martinsburg, West Virginia is formally dedicated to assisting the IRS in its shift to computer data processing.

1986 – Tax Reform Act
The Tax Reform Act:

  • Lowers the top individual tax rate from 50% to 28%
  • Increases taxes on capital gains from 20% to 28%
  • Reduces corporate tax breaks

The revisions are designed to make the tax code simpler and fairer.

1992 – Electronic Filing
Taxpayers who owe money are given the option to file electronically.

2001 – Economic Growth and Tax Relief Reconciliation Act
President George W. Bush implements large tax cuts:

  • Creates a new lowest individual tax rate of 10%
  • Reduces the top individual tax rate from 39.6% to 35%
  • Doubles child tax credit from $500 to $1,000* (*From $700 to $1,400 in 2019 dollars)

2017 – Tax Cuts and Jobs Act
President Trump signs off on reductions in tax rates, while some deductions are made more restrictive.

For example, State and Local Taxes (SALT) deductions are capped at $10,000. Residents in high-tax states such as New York, New Jersey, California and Connecticut could see substantially higher tax bills.

The Future

U.S. taxation policy remains a contentious issue and shifts depending on who is in the White House.

Investors need to stay informed on current legislation, so they can engage in proactive financial planning and minimize their tax obligations.

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Infographics

Retirement Savings: How to Calculate If You’re on Track

This graphic shows how to plan for sufficient retirement savings, and how the U.S. population measures up at each step.

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Retirement savings by age group, to help people gauge their own retirement planning. Retirement balances get bigger until age 65-74 and go down for those over age 75.

This infographic is available as a poster.

Retirement Savings: How to Calculate If You’re on Track

Setting a retirement savings goal can be overwhelming. In fact, one in three Americans have no idea what they need to save to retire at their target age.

Luckily, we can use a retirement calculator to help outline what you need to consider. This graphic from New York Life Investments walks you through setting your retirement savings goal, and shows how the U.S. population measures up at each step.

Step 1: Your Age

A calculator will typically start by asking for your current age and your target retirement age. This is to determine how long you have left to build up your investments. In the U.S., the average age of retirement has remained relatively stable and is currently 62.

Keep in mind that your retirement age can depend on many factors:

  • Your cost of living
  • Your job satisfaction
  • Your debts
  • Your spouse’s retirement plan
  • Your health

After you have your projected retirement age figured out, you’ll also need to estimate the length of your retirement.

The life expectancy for Americans at birth is 77 years. Once you’ve lived to age 65, that number is higher. This is because you’ve survived many untimely causes of death, including the higher mortality associated with childhood. The below table shows how the expected age of death changes as you age.

 At BirthAt Age 65
Male7482
Female8085
Both Sexes7784

To estimate your particular lifespan, you’ll also need to consider things like your genetics and your lifestyle. Having an idea of how long you might live may help you better manage longevity risk, or the risk you’ll outlive your savings.

Step 2: Your Savings

The next step in setting your retirement savings goal is to take stock of how much you’ve already saved. For context, here is how much Americans have saved for retirement by age group.

 Median BalanceAverage Balance
< 35$13,000$30,170
35-44$60,000$131,950
45-54$100,000$254,720
55-64$134,000$408,420
65-74$164,000$426,070
> 75$83,000$357,920

You’ll also need to decide how much you’ll be putting toward your retirement each year. Experts typically recommend saving about 15% of your pre-tax income. This can include your employer’s contributions, if any. Of course, this amount will vary based on how early you start saving and when you plan to retire.

Your expected investment earnings will play a big role, too. Here is what average annual returns have been for different types of portfolios based on historical data from 1928-2021.

 Conservative
(80% bonds, 20% stocks)
Balanced
(40% bonds, 60% stocks)
Growth
(20% bonds, 80% stocks)
Nominal Return8%10%11%
Real Return5%7%8%

Inflation has averaged about 3% each year. Remember to include inflation in your calculations so you can maintain purchasing power in retirement.

Step 3: Your Income

In the final step of setting your retirement savings goal, you’ll need to decide how much of your current household income you will use in retirement. Financial experts typically estimate you could need 70-80% of your pre-retirement income.

At this stage, it can be helpful to plan out a detailed budget. Here’s a spending overview for the average American over age 65.

CategoryAnnual Spending
Housing$17,435
Healthcare$6,668
Transportation$6,221
Food$5,698
Donations, Child and Spousal Support$3,119
Personal Insurance and Pensions$2,721
Entertainment$2,293
Clothing$821
Alcohol and Tobacco$635
Other$2,033

Other includes personal care products and services ($505), education ($450), reading ($157), and miscellaneous expenses ($921).

Now that you have an estimate of your expenses, you can factor in all sources of income you expect to receive in retirement. This helps narrow down what you need to have set aside in your retirement savings. For instance, most people collect Social Security in addition to their own pension. The below table shows what percentage of retirees have each income source.

SourceRetirees Age 65 and OlderAll Retirees
Social Security92%78%
Defined Contribution or Defined Benefit Pension66%57%
Interest, Dividends, or Rental Income49%43%
Wages, Salaries, or Self-employment25%32%
Cash Transfers Other Than Social Security7%11%

Respondents could select multiple answers. Sources include the income of a spouse or partner.

Based on all this information, a retirement calculator will estimate whether you are on track to sufficiently fund your retirement years.

Turning a Retirement Savings Strategy Into Action

It’s important to note that retirement calculators are a starting point. To come up with a customized strategy, you’ll likely want to consider:

  • Your current and expected tax rate
  • Increases in your income and savings rate
  • A contingency plan for unexpected events

However, retirement calculators can make the concept of retirement savings more concrete—and help you take action toward your goals.

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Infographics

Demystifying Three Bond Myths During Rising Rates

Contrary to popular belief, it’s not all doom and gloom for bonds during rising interest rates. Below, we dispel three myths to explain why.

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Bonds During Rising Interest Rates

This infographic is available as a poster.

Demystifying Three Bond Myths During Rising Rates

Today U.S. Treasury yields, a key return measure for bonds, are over 1% higher than pre-pandemic levels.

  • January 2020: 1.8%
  • May 2022: 2.9*

*As of May 17, 2022

While rising interest rates are often seen to have a negative impact on bonds, the current environment may be beneficial.

In this infographic from New York Life Investments, we debunk three common myths about bonds during rising rate environments to explain why.

Bonds During Rising Interest Rates

To start, here’s a brief introduction on how bond yields are affected by interest rates.

Bond yields are the return investors will earn from a bond over a period of time. Bond investors receive interest for purchasing debt issued by the government or a corporation. For instance, a $1,000 bond with a 3% yield would earn $30 annually.

Rising interest rates directly affect bonds.

When interest rates rise, bond yields typically rise. As investors seek out new bonds that provide higher yields (income), the demand for existing lower-yielding bonds declines. Consequently, the price of these existing bonds typically falls.

Given this backdrop, let’s explore how bonds have historically performed during rising rates, the potential buying opportunities they present, and their long-term performance in a rising rate climate.

Myth #1: “Never Hold Bonds During a Rising Rate Environment”

Answer: False

Even during multiple rising rate periods, bonds have shown positive performance in the last 38 out of 42 years. Let’s take a look at the two most recent rising rate periods:

Bond TypeJun 2004 - Jul 2006Dec 2015 - Jan 2019Average
Bank Loans5.90%5.20%5.50%
Short-Term Bonds2.90%1.10%2.00%
Long-Term Bonds5.60%2.70%4.10%
High-Yield Bonds8.40%7.50%7.90%
Municipal Bonds8.40%2.70%3.80%

Time periods measured from the first Federal Reserve rate hike until one month after the last rate hike, which, on average, is when the effective federal funds rate tends to stabilize.
Source: Morningstar (Feb 2022)

As shown above, every type of bond showed positive performance.

High-yield bonds returned the highest over the last two rising rate periods, averaging 7.9%. Not only that, when equities decline, bonds have often cushioned losses, as seen in the Great Financial Crisis and the COVID-19 market crash.

Myth #2: “This Is the Worst Time to Invest In Bonds”

Answer: False

Rather than doom and gloom, the current environment could present a buying opportunity. Consider how municipal (muni) bonds have performed after historically low periods:

Time PeriodPeak DateTrough DateDrawdown (%)Return (%) 12 Months
Following Trough
Fed Rate Rise (‘04 - ‘06)Mar 17, 2004May 13, 2004-5.298.65
Subprime Mortgage Collapse/
Global Financial Crisis
Jan 23, 2008Oct 16, 2008-11.2219.85
Meredith Whitney
60 Minutes Interview
Oct 12, 2010Jan 17, 2011-6.4615.2
Taper TantrumMay 2, 2013Sep 5, 2013-6.7710.22
Trump Election VictoryJul 6, 2016Dec 1, 2016-5.715.95
COVID-19Mar 9, 2020Mar 23, 2020-10.9413.18
Fed Rate Rise (‘22)Aug 4, 2021Mar 16, 2022-5.59?

Municipal bonds represented by Bloomberg Municipal Bond Index. Data is for the time period 1/1/1994 to 4/30/2022. Meredith Whitney is known as “The Oracle of Wall Street”. In 2010, when Whitney stated that many municipal bonds would default in 2010, it shocked the market.
Source: Morningstar (Apr 2022)

In the 12 months following each trough date, muni bonds rebounded notably.

For example, after falling over 11% during the Global Financial Crisis, munis returned nearly 20% in the 12 months after. Munis also could potentially benefit from other key factors including solid credit fundamentals and the $350 billion federal stimulus to state and local budgets.

Not only that as bond prices dip, a “buy low” opportunity may be present not only in munis, but other areas of the bond market.

Myth #3: “The Long-Term View Looks Dismal”

Answer: False

When taking a long-term perspective, investors could potentially generate more income from their bond holdings in a rising rate environment than they would have otherwise.

Here’s how investors can capitalize on rising rates as bonds mature, given the following assumptions:

  1. Every year, a maturing bond is replaced with a new 5-year bond.
  2. The yield is 20 basis points (bps) higher on each new bond.
ScenarioDescriptionAnnualized Return of Bond Portfolio
After 10 Years
Scenario 1Yields remain unchanged1.80%
Scenario 2Yields fall 100bps across the curve
during Year 1
1.10%
Scenario 3Yields rise 100bps across the curve
during Year 1
2.50%

Hypothetical example, for illustrative purposes only. One basis point is equal to 1/100th of 1%, or 0.01%, or 0.0001, and is used to denote the percentage change in a financial instrument.
Source: RBC Global Asset Management (2020)

Over the long term, a rising rate environment more than doubled the bond portfolio’s return compared to the falling rate scenario.

With this in mind, active management and a long-term strategy can potentially benefit investors during today’s rising interest rate environment.

Research shows that active approaches to fixed income have generally outperformed passive strategies by diversifying across the maturity spectrum while proactively balancing risk and return. Active strategies can seek out new opportunities as interest rates shift, addressing a broader scope of the bond market.

The Case for Bonds

With inflation and bond yields on the rise, purchasing newly-issued bonds at higher rates can help offset this impact. While bonds may not seem like the obvious choice for investors amid rising rates, history shows us that they may be worth a closer look.

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