Taxes Through World War I
And The Great Depression

Taxes Through World War I and The Great Depression

Taxes During World War I

In response to U.S. participation in World War I and the need to significantly increase revenues to fund the war, in 1916, Congress passed the Revenue Act.

This resulted in increases to the lowest and highest tax rates, with the lowest tax rate going from 1 to 2% and the highest tax rate increased to a whopping 15% for individuals with incomes more than one and a half million dollars.

In addition, there would now also be taxes imposed on excessive business profits, as well as estates.

By 1917, the Federal budget for that one year was almost the same as all of the budgets for the previous 25 years combined! The war and all the newly collected tax revenues were the driving factors in the absurdly expanded Federal budget! It was about this time that income taxes began to get out of control.

As the government wanted even more tax revenues, Congress passed the 1917 War Revenue Act, which raised tax rates even higher, while reducing exemptions at the same time. Before this latest Act, a 15% tax rate only kicked in on incomes over $1.5 million, but now that was 67% and those making just $40,000 were hit with a 16% rate.

Old Carriage They did it again in 1918 with another Act, raising the bottom and top tax rates to 6% and 77% respectively!

These back-to-back annual increases brought 1918 tax revenues to $3.6 billion - up from the 1916 revenues of just $761 million. For those of you keeping score at home, that’s an increase of 475% in just two years.

At this point, the tax burden was equal to 25% of GDP and while a full third of the war’s cost was being funded by the income tax, still only about 5% paid income taxes at all.

The 1920s brought a booming economy, which resulted in even further increased tax revenues.

Vintage Steam Engine Pulling Passenger Train

During this period, Congress was able to reduce the top and bottom tax rates back to 25% and 1% respectively by cutting taxes on five different occasions and tax revenues were back down again to about 13% of GDP.

Interestingly, the economy became even stronger with these reductions in tax rates and tax revenues.

In 1929 in October, the stock market crashed, marking the start of the Great Depression. Government revenues started dropping as the economy started to contract. While 1920 revenues were as high as $6.6 billion, by 1932, tax revenues collected were only $1.9 billion.

Great Depression - Bread Line - Sculpture By George Segal

In 1936, to increase revenues even more, they hiked taxes yet again; this time raising the lowest and highest tax rates back up to 4% and 79% respectively and weakening the economy further.

Congress methodically codified all of the tax statutes in 1939 into what was called the “Internal Revenue Code” such that all succeeding tax changes made by Congress up until 1954 would amend this fundamental code. The downed economy of this period combined with recurring tax increases continued to raise the Federal government's tax burden as a share of GDP.

Back To "History Of The 16th Amendment"
When the Civil War ended, much of the tax revenues were no longer needed so most taxes were rescinded. By 1868, liquor and tobacco taxes were the Government’s primary source of revenue. In 1872, they even did away with the personal income tax...

NEXT -- "The Social Security Tax And Taxes During World War II"
On August 14, 1935, the Social Security Act was signed into law by President Franklin D. Roosevelt. The Social Security Act was passed basically as the result of difficult economic times during the Great Depression. Under the new law, workers who lost their jobs received payments called “unemployment compensation.”...

Source: U.S. Department of Treasury

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