Revenue Acts
Revenue Acts refer to a series of tax legislation enacted in the United States primarily during the 1930s, in response to the financial crises following the Great Depression. The first major act, the Revenue Act of 1932, marked a significant increase in income tax rates, raising the top marginal rate from 24% to 63%, alongside increases in estate and corporate taxes. Subsequent acts, notably the Revenue Act of 1935 and 1936, were characterized by a more progressive tax structure aimed at wealthier individuals and corporations, with the 1935 act colloquially dubbed the "Soak the Rich" Act due to its substantial tax hikes on high incomes, reaching a top rate of 79%.
Despite these increases, the overall impact of the Revenue Acts on wealth redistribution was limited, and a large majority of American families remained exempt from federal income taxes. The acts were controversial, sparking debate about their effectiveness and implications for economic recovery, with some historians suggesting they contributed to a recession in 1937-1938. Additionally, the political landscape shifted as opposition grew among wealthier citizens, leading to subsequent revisions and reductions in tax rates. Overall, the Revenue Acts of the 1930s played a crucial role in shaping U.S. tax policy and the relationship between government and the economy during a turbulent historical period.
Revenue Acts
The Laws Series of federal laws establishing income tax rates
Dates Enacted in 1932, 1934, 1935, 1936, 1937, 1938, and 1939
Of the seven Revenue Acts of the 1930’s, the first five increased taxes on the wealthy, making the tax code somewhat more progressive. The more conservative Revenue Acts of 1938 and 1939, however, reversed much of the progressiveness of the five earlier laws.
After World War I, the numerous tax cuts during the 1920’s reduced the top marginal income-tax rate from 73 percent to 24 percent, and the federal government consistently maintained a budget surplus. With the outbreak of the Great Depression, however, the federal tax base shrank dramatically, resulting in large budget deficits. In reaction, President Herbert Hoover, who wrote in his memoirs that “stability required that we balance the budget,” asked Congress to increase taxes and reduce spending. The result was the Revenue Act of 1932, which was the largest peacetime increase of tax rates in U.S. history. Under the act, the highest brackets increased to 63 percent of net income. The act also doubled the estate taxes to a maximum rate of 45 percent, and it increased the corporate tax from 12 percent to 13.75 percent.
Although taxation was not a major issue in the election of 1932, the Revenue Act of 1932 probably contributed to Hoover’s defeat, because many voters were upset with the large tax increases. During the election campaign, Franklin D. Roosevelt pledged to balance the budget. Once elected, he was extremely reluctant to recommend tax increases, even as he pushed Congress to enact costly New Deal programs. A Revenue Act of early 1934 slightly increased the tax rates on persons with high incomes. Roosevelt criticized the idea of raising consumer or excise taxes, but the end of Prohibition did result in significant revenues from taxes on the sale of alcoholic beverages.
“Soak the Rich” Act of 1935
By the summer of 1934, the growing deficit, combined with the “thunder on the left,” exemplified by Louisiana governor Huey Long’s Share Our Wealth movement, convinced Roosevelt that increased taxes were necessary. Secretary of the Treasury Henry T. Morgenthau, Jr., and a group of tax experts designed a program for a progressive tax reform, and Roosevelt presented the program to Congress in June. The chair of the House Ways and Means Committee, Representative Robert Doughton, was a progressive who believed that wealthy Americans were not paying their fair share of taxes, and he used his position to support Roosevelt’s proposal.
The Revenue Act of 1935, called the “Soak the Rich” tax at the time, gave Roosevelt much of what he wanted, significantly increasing taxes on wealthy individuals and corporations as well raising taxes on gifts and estates. The act increased the marginal top bracket to 79 percent on annual incomes of over $5 million. Under the act, the richest one percent of taxpayers paid an average of 16.4 percent of their incomes, the highest rate until World War II. The act also pushed up the maximum estate tax to 70 percent. The act, however, only affected persons with massive incomes, and 95 percent of American families continued to pay no federal income taxes.
The act was popular with the general public, but many wealthy persons were upset and denounced Roosevelt as a “traitor to his class.” The tax’s moderate progressiveness was offset by the regressive nature of numerous exemptions and the Social Security tax. Most historians agree that the Revenue Act of 1935 did not result in any massive redistribution of income, and some historians, such as Mark Leff, have even referred to it as a “symbolic reform.”
Later New Deal Tax Laws
The Revenue Act of 1936 was primarily an undistributed profits tax, which was a tax on profits that corporations did not distribute in dividends to stockholders. The tax had the goal of forcing businesses to increase dividends instead of reinvesting them. The proponents of the act expected that wealthy stockholders would then pay significant taxes on dividends. Proponents also argued that the tax on undistributed dividends ended an unfair advantage of large corporations in raising capital. Under the law, undistributed profits were taxed on a sliding scale, with a top rate of 73.9 percent.
Following the Democratic Party’s landslide victory in the 1936 election, President Roosevelt took special aim at wealthy individuals and corporations that used clever loopholes to evade taxes. Congress quickly passed the 1937 Revenue Act, which either eliminated or limited many deductions, including corporate purchases of country estates and artificial losses on sales of property. The Revenue Act of 1937 constituted the high point of New Deal tax reform.
In 1938, Roosevelt was prepared to push Congress to increase the progressivity of the tax code even further. By then, however, business leaders, upset about the New Deal’s tax policies, were prepared for a strong counterattack. Joseph P. Kennedy and Bernard Baruch claimed that tax increases, especially the undistributed profits tax, had contributed to the recession of 1937-1938. Roosevelt’s court-packing fight also had the effect of weakening his influence in Congress.
To Roosevelt’s dismay, a coalition of conservative Democrats and Republicans passed the Revenue Act of 1938, which gutted the tax on undistributed taxes and ended the graduated income tax on corporations. As a realist, Roosevelt chose not to use his veto and allowed the bill to become law without his signature. In the Revenue Act of 1939, Congress completely eliminated the undistributed profits tax.
Impact
The revenue acts of 1932, 1935, 1936, and 1937, taken together, substantially increased the tax rates paid by wealthy Americans, and the acts made the tax system somewhat more progressive. Although these acts did not radically redistribute the wealth, as left-of-center Democrats wanted, many Americans incorrectly believed that New Deal tax laws were revolutionary, and conservative Republicans denounced the acts as socialistic in nature. Some historians believe that the tax increases contributed to the recession of 1937-1938, but this is a minority viewpoint. Even with the legislation, no more than five percent of the population ever paid taxes during the decade. This can be compared with the tax increases of World War II, when the percentage of citizens paying income taxes swelled from about 5 percent to 74 percent.
Bibliography
Beito, David. Tax Payers in Revolt: Tax Resistance During the Great Depression. Chapel Hill: University of North Carolina Press, 1989. Emphasizes the importance of the tax-resistance culture and argues that the New Deal helped to change it.
Brownlee, W. Elliot. Federal Taxation in America: A Short History. 2d ed. New York: Cambridge University Press, 2004. Clearly written and balanced summary, with chapter 2 describing taxation policies during the 1930’s.
Higgs, Robert. Crisis and Leviathan: Critical Episodes in the Growth of American Government. New York: Oxford University Press, 1987. A neoconservative analysis that criticizes the income tax as a wedge to redistribute incomes.
Hoover, Herbert. The Memoirs of Herbert Hoover: The Great Depression, 1929-41. New York: Macmillan, 1952. The former president succinctly summarized his fiscal policies in chapter 12.
Leff, Mark. The Limits of Symbolic Reform: The New Deal and Taxation. New York: Cambridge University Press, 1984. Scholarly work from a left-of-center perspective, arguing that Roosevelt pursued symbols more than substance, never seriously attempting to redistribute wealth.
Ratner, Sidney. Taxation and Democracy in America. New York: W. W. Norton, 1967. Considered to be the best single volume on the history of U.S. taxation through the 1940’s; written from a “progressive” perspective.
Stein, Herbert. The Fiscal Revolution in America. Chicago: University of Chicago Press, 1969. Emphasizes the extent and significance of business hostility to Roosevelt’s tax policies.