THE WEEK ON WALL STREET
Stocks fell last week as investors sorted through conflicting inflation reports and assessed geopolitical tensions.
FACT OF THE WEEK
America Before Income Taxes
Taxes have been around for thousands of years—especially income taxes.
But that wasn't always the case in the United States. The country was income-tax-free in its infancy. That's because there was no federal government to establish one. The British government, however, imposed a variety of taxes on the colonists. These included a head tax, real estate taxes, and the infamous tea tax that led to the Boston Tea Party.
After the Revolutionary War, the Constitution gave Congress the power to impose taxes and other levies on the general public. States were responsible for collecting and passing them on to the federal government. Most of these were excise taxes—taxes imposed on specific goods or services, such as alcohol and tobacco. The government also tried direct taxation—taxing things an individual owned. That didn't last, and the feds went back to collecting excise taxes.
Income Taxes
The Civil War led to the creation of the country's first income tax and the first version of the Office of the Commissioner of Internal Revenue—the earlier version of what we now call the Internal Revenue Service (IRS). This office took over from individual states the responsibility of collecting federal taxes. Excise taxes were also added to almost every commodity possible—alcohol, tobacco, gunpowder, tea.
The federal income tax as we know it was officially enacted in 1913. Corporate income taxes were enacted slightly earlier, in 1909.
Income Tax Rates, Then and Now
Tax rates tend to change—often, but not always, rising. When the federal income tax was implemented to help finance World War I in 1913, for example, the marginal tax rate was 1% on income of $0 to $20,000, 2% on income of $20,000 to $50,000, 3% on income of $50,000 to $75,000, 4% on income of $75,000 to $100,000, 5% on income of $100,000 to $250,000, 6% on income of $250,000 to $500,000, and 7% on income of $500,000 and up.
Tax rates were the same for everyone who filed taxes, and there was no filing status. This meant all taxpayers paid the same rate whether they were single, married, or heads of households. That changed over time. Tax rates increased considerably, then dropped, with the highest marginal tax rate settling at 37% as of 2023.
MARKET MINUTE
Inflation Spooks Markets
On Wednesday, the March Consumer Price Index (CPI) report rattled markets, revealing that inflation accelerated slightly more than expected. Bond yields rose, and stocks retreated in response, as investors feared the news could influence the Fed’s rate decision. The 10-year Treasury yield had its highest intraday jump in three years.
Markets rallied Thursday as investors were encouraged by the Producer Price Index (PPI) report, which measures inflation at the producer level. Unlike CPI, PPI rose less than expected, which sparked a tech-focused rally. Markets opened lower on Friday as investors wrestled with the conflicting inflation reports. Fears of an escalating Middle East conflict also weighed on stocks during the week. Concerns about a potential weekend event led some investors to end the week in a risk-off position.
Inflated Expectations
Minutes from the March Fed meeting, published Wednesday, showed officials’ concern that inflation wasn’t slowing down quickly enough toward the Fed’s 2% target. But despite sticky inflation, they reiterated that rate cuts were still on the table for this year.
The start of Q1 earnings season reinforced inflation concerns as several leading money center banks—despite many beating expectations—forecasted lower growth for the remainder of 2024 due partly to inflation and higher-than-expected rates.
On Friday, the University of Michigan’s survey showed consumer sentiment fell last month. Some concluded that the survey confirmed what consumers have been saying for months—that inflation is still in their everyday lives.
FINANCIAL STRATEGY OF THE WEEK
You May Need to Make Estimated Tax Payments If…
You may have to make estimated tax payments if you earn income that is not subject to withholding, such as income from self-employment, interest, dividends, alimony, rent, realized investment gains, prizes, and awards.
You also may have to pay estimated taxes if your income tax withholding on salary, pension, or other income is not enough, or if you had a tax liability for the prior year. Please consult a professional with tax expertise regarding your individual situation.
How to Pay Estimated Taxes
If you are filing as a sole proprietor, a partner, an S corporation shareholder, and/or a self-employed individual and expect to owe taxes of $1,000 or more when you file a return, you should use Form 1040-ES, Estimated Tax for Individuals, to calculate and pay your estimated tax. You may pay estimated taxes either online, by phone, or through the mail.
How to Figure Estimated Tax
To calculate your estimated tax, you must include your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. Consider using your prior year's federal tax return as a guide.
When to Pay Estimated Taxes
For estimated tax purposes, the year is divided into four payment periods, each with a specific payment due date. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty, even if you are due a refund when you file your income tax return.
Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in taxes after subtracting their withholdings and credits. They may also avoid the penalty if they paid at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.