Question

In January 1914, Henry Ford startled the world by announcing that Ford Motor Company would pay $5 a day to its workers. At the time, $5 was about double what the average auto worker made. A recent article stated that at General Motors, the total cost for wages (not including benefits) is about $35 an hour. 1) What was the income tax rate in 1914 for someone making $5 a day? 2) What was the income tax rate in 2018 for someone making $35 an hour? 3) What has the average annual inflation been since 1914? 4) What would $5 per day be in 2018 dollars? 5) If you consider take home pay, who received the most take home pay in inflation adjusted 2018 dollars, the $5 per day worker in 1914 or the $35 per hour worker today? 6) Which worker would have a better chance of creating personal wealth?

Answer 1

1)

Income tax rates in 1914 (Single individuals)

Income	Rate
0+	1%
20,000+	2%
50,000+	3%
75,000+	4%
100,000+	5%
250,000+	6%
500,000+	7%

Annual income = 5 per day x 5 days a week x 52 weeks = 1300

1% income tax rate, so income tax amount is $13

2)

Income tax rates in 2018 (Single individuals)

Income	Rate
0 - 9,524	10%
9,525 - 38,699	12%
38,700 - 82,499	22%
82,500 - 157,499	24%
157,500 - 199,999	32%
200,000 - 499,999	35%
500,000 +	37%

Income = 35 per hour x 8 hrs a day x 5 days a week x 52 weeks

= $72,800

This income is taxed using slab rates of 10%, 12%, 22%

3)

Average annual inflation in 1914 = 1%

Average annual inflation in 2018 = 2.4%

Average CPI in 1914 = 10

Average CPI in 2018 = 251.1

4)

A $5 per day in 1914 in 2018 terms will be $5 x (251.1/10)

= $125.55 per day

5)

Take home pay will be higher in 2018 $35 per hour worker as he is earning $280 a day ($35x8) and even after the marginal income tax rate 22% applicable for his income (from part 2), his income is higher than $125.55

6)

Worker in 2018 having better chance of creating Personal wealth