Revenue Act of 1913
The Revenue Act of 1913, also known as the Underwood Tariff or the Underwood-Simmons Act (ch. 16, 38 Stat. 114), re-established a federal income tax in the United States and substantially lowered tariff rates. The act was sponsored by Representative Oscar Underwood, passed by the 63rd United States Congress, and signed into law by President Woodrow Wilson.[1]
Wilson and other members of the Democratic Party had long seen high tariffs as equivalent to unfair taxes on consumers, and tariff reduction was President Wilson's first priority upon taking office. Following the ratification of the Sixteenth Amendment in 1913, Democratic leaders agreed to seek passage of a major bill that would dramatically lower tariffs and implement an income tax. Underwood quickly shepherded the revenue bill through the House of Representatives, but the bill won approval in the United States Senate only after extensive lobbying by the Wilson administration. Wilson signed the bill into law on October 3, 1913.
The Revenue Act of 1913 lowered average tariff rates from 40 percent to 26 percent. It also established a one percent tax on income above $3,000 per year; the tax affected approximately three percent of the population. A separate provision established a corporate tax of one percent, superseding a previous tax that had only applied to corporations with net incomes greater than $5,000 per year. Though a Republican-controlled Congress would later raise tariff rates, the Revenue Act of 1913 marked an important shift in federal revenue policy, as government revenue would increasingly rely on income taxes rather than tariff duties.
Passage[edit]
Democrats had long seen high tariff rates as equivalent to unfair taxes on consumers, and tariff reduction was President Wilson's first priority upon taking office.[2] He argued that the system of high tariffs "cuts us off from our proper part in the commerce of the world, violates the just principles of taxation, and makes the government a facile instrument in the hands of private interests."[3] While most Democrats were united behind a decrease in tariff rates, most Republicans held that high tariff rates were useful for protecting domestic manufacturing and factory workers against foreign competition.[2] Shortly before Wilson took office, the Sixteenth Amendment, which had been proposed by Congress in 1909 during a debate over tariff legislation, was ratified by the requisite number of states.[4] Following the ratification of the Sixteenth Amendment, Democratic leaders agreed to attach an income tax provision to their tariff reduction bill, partly to make up for lost revenue, and partly to shift the burden of funding the government towards the high earners that would be subject to the income tax.[5]
By late May 1913, House Majority Leader Oscar Underwood had passed a bill in the House that cut the average tariff rate by 10 percent.[6] Underwood's bill, which represented the largest downward revision of the tariff since the Civil War, aggressively cut rates for raw materials, goods deemed to be "necessities," and products produced domestically by trusts, but it retained higher tariff rates for luxury goods.[7] The bill also instituted a tax on personal income above $4,000.[6] Passage of Underwood's tariff bill in the Senate would prove more difficult than in the House, partially because some Southern and Western Democrats favored the continued protection of the wool and sugar industries, and partially because Democrats had a narrower majority in that chamber.[8] Seeking to marshal support for the tariff bill, Wilson met extensively with Democratic senators and appealed directly to the people through the press. After weeks of hearings and debate, Wilson and Secretary of State William Jennings Bryan managed to unite Senate Democrats behind the bill.[6] The Senate voted 44 to 37 in favor of the bill, with only one Democrat voting against it and only one Republican, progressive leader Robert M. La Follette, voting for it. Wilson signed the Revenue Act of 1913 into law on October 3, 1913.[6]
Impact and aftermath[edit]
Working with progressive Republicans, Congressional Democrats won passage of the Revenue Act of 1916, which reinstated the federal estate tax, established a tax on the production of munitions, raised the top income tax rate to fifteen percent, and raised the corporate income tax from one percent to two percent.[15] That same year, Wilson signed a law that established the Tariff Commission, which was charged with providing expert advice on tariff rates.[16]
There was an impact for the Cuban tobacco industry concerning their import to the States. Theodore Garbade, President of the Union of Manufacturers of Cigars of Cuba laid this out to Cuban President Mario G. Menocal.[17]
The Act also created a new group of tax-exempt organizations dedicated to social welfare. The provision was a precursor to what is now Internal Revenue Code Section 501(c)(4).[18]
In the 1920s, Republicans raised tariffs and lowered the income tax. Nonetheless, the policies of the Wilson administration had a durable impact on the composition of government revenue, which after the 1920s would primarily come from taxation rather than tariffs.[19]