Revenue Acts of 1924, 1926, and 1928
The Revenue Acts of 1924, 1926, and 1928 were pivotal pieces of legislation in the United States that aimed to adjust tax policies following the economic adjustments after World War I. These acts primarily focused on reducing personal and corporate income tax rates, as well as modifying estate and gift taxes. The 1924 Act notably lowered the maximum income tax rate from 58% to 46% for high earners, while the 1926 Act took it further down to 25% for incomes over $100,000. Additionally, the 1926 Act increased personal exemptions, allowing individuals and families to retain more of their income.
The acts also included provisions about the taxation of unearned income, with the 1924 Act increasing the maximum estate tax rate, although this was adjusted downwards in subsequent legislation. Notably, the 1924 Act briefly allowed public access to private tax returns, which was later retracted by the 1926 Act to restore taxpayer confidentiality. Collectively, these acts contributed to significant economic growth during the 1920s by promoting investment and consumption through lower tax burdens, although this era of prosperity was ultimately interrupted by the stock market crash of 1929, leading to increased tax rates in the following decade.
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Revenue Acts of 1924, 1926, and 1928
The Law: A series of federal acts altering tax rates
Date: Enacted on June 2, 1924; February 25, 1926; and May 29, 1928
The Revenue Acts of 1924, 1926, and 1928 made a number of modifications to personal and corporate income taxes, gift and inheritance taxes, and excises, steadily reducing taxes from high wartime levels.
While the United States’ involvement in World War I had necessitated an increase in revenue, the federal government sought to lower tax rates from wartime levels during the 1920s. To that end, Andrew Mellon, secretary of the Treasury during the presidencies of Warren G. Harding, Calvin Coolidge, and Herbert Hoover, wanted to reduce the maximum income tax rate and eliminate various minor taxes, but in return, he was willing to accept a small increase in the corporate tax rate and increased personal exemptions.
The Revenue Act of 1924 lowered the maximum income tax rate, which combined the base rate and the surtax, from 58 percent on incomes greater than $200,000 to 46 percent on incomes over $500,000. The Revenue Act of 1926 further reduced the maximum tax rate to 25 percent on incomes over $100,000. The 1926 act also increased personal exemptions from $1,000 to $1,500 for individuals and from $2,500 to $3,500 for married couples, thus reducing the amount of taxable income.
As Mellon supported higher tax rates for unearned income, or money accumulated through investments or inheritance rather than wages, the Revenue Act of 1924 increased the maximum estate tax rate from 25 percent to 40 percent of the amount in excess of $10 million, although the 1926 act lowered the rate to 20 percent. The corporate income tax rate increased from 12.5 percent to 13.5 percent with the Revenue Act of 1926 before decreasing to 12 percent in 1928. The 1926 act also eliminated a number of excise taxes and a gift tax that had been added in 1924.
In addition to altering tax rates, the 1924 act permitted the Treasury to reveal private tax returns to the public. The Senate had asked for the tax returns of several corrupt Harding administration officials while investigating the Teapot Dome scandal and other financial wrongdoing, but Coolidge had refused because revealing private tax returns was then illegal. After a brief period of public access, the 1926 act removed this provision, restoring the privacy of tax returns.
Impact
Maximum tax rates were drastically reduced, and exemptions increased during the 1920s, thus encouraging the period’s overall economic growth. The passage of the Revenue Acts of 1924, 1926, and 1928, combined with limited spending, significantly reduced the national debt during the decade. However, the stock market crash of 1929 put an end to this prosperity, and tax rates increased throughout the 1930s.
Bibliography
Brownlee, W. Elliot. Federal Taxation in America: A Short History. 2d. ed. New York: Cambridge University Press, 2004.
Cannadine, David. Mellon: An American Life. New York: Vintage Books, 2008.