Revenue Act of 1913 facts for kids
The Revenue Act of 1913 was an important law in United States history. It is also known as the Underwood Tariff or the Underwood-Simmons Act. This law brought back a federal income tax and significantly lowered tariffs. Tariffs are taxes on goods imported from other countries.
Representative Oscar Underwood was the main person who proposed this law. The 63rd United States Congress passed it, and President Woodrow Wilson signed it into law. This happened on October 3, 1913.
President Wilson and his Democratic Party believed that high tariffs were unfair taxes on regular people. Lowering these tariffs was President Wilson's top goal when he became president. In 1913, the Sixteenth Amendment was approved. This amendment made it legal for the government to collect income taxes. After this, Democratic leaders decided to lower tariffs and also create an income tax.
Underwood quickly guided the bill through the House of Representatives. It was harder to get the bill approved in the United States Senate. But with a lot of effort from President Wilson's team, it finally passed.
The Revenue Act of 1913 lowered average tariff rates from 40 percent to 26 percent. It also created a one percent tax on income above $3,000 per year. This tax affected only about three percent of the population. There was also a one percent tax on the profits of companies. This law was a big change because the government would now get more money from income taxes instead of mostly from tariffs.
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Why the Law Was Passed
Democrats had long believed that high tariffs were unfair to consumers. President Wilson made lowering tariffs his main goal when he took office. He said that high tariffs stopped the U.S. from being a big part of world trade. He also felt they were not fair taxes and helped special interest groups.
Most Democrats agreed on lowering tariffs. However, many Republicans thought high tariffs were good. They believed tariffs protected American factories and workers from foreign competition.
Just before Wilson became president, the Sixteenth Amendment was approved. This amendment allowed the government to collect income taxes. After this, Democratic leaders decided to add an income tax to their tariff reduction bill. They did this for two reasons. First, it would help make up for the money lost by lowering tariffs. Second, it would shift the tax burden more towards people with higher incomes.
By May 1913, Oscar Underwood had passed a bill in the House. This bill cut the average tariff rate by 10 percent. It was the biggest tariff cut since the Civil War. The bill greatly reduced taxes on raw materials and necessary goods. It also lowered taxes on products made by large companies (trusts). However, it kept higher tariff rates on luxury items. The bill also added a tax on personal income above $4,000.
Passing Underwood's bill in the Senate was more challenging. Some Democrats from the South and West wanted to keep tariffs high for industries like wool and sugar. Also, Democrats had a smaller majority in the Senate. President Wilson worked hard to get support for the bill. He met with many Democratic senators and spoke directly to the public through the news. After many discussions, Wilson and Secretary of State William Jennings Bryan got Senate Democrats to agree. The Senate voted 44 to 37 for the bill. Only one Democrat voted against it, and only one Republican, Robert M. La Follette, voted for it. President Wilson signed the law on October 3, 1913.
What the Law Included
Tariffs
The Revenue Act of 1913 reduced the average import tariff rates. They went from about 40 percent down to about 25 percent. This was the lowest tariff rate since the Walker Tariff of 1857. Most of these taxes were ad valorem, meaning they were a percentage of the item's value.
For example, the tax on wool products dropped from 56% to 18.5%. Items like steel rails, raw wool, iron ore, and farm tools now had no tariffs at all. The law also added many items to a "free list," meaning they could be imported without any tax. This included woolens, iron, steel, farm machinery, and many raw materials and foods.
Interestingly, stained glass windows for churches were made tax-free. This was because of a special law passed earlier for one church in South Boston.
Income Tax
The Revenue Act of 1913 brought back a federal income tax. The government had tried to have an income tax before, but the Supreme Court had stopped it. This new law put a one percent tax on incomes above $3,000. The highest tax rate was six percent for people earning more than $500,000 per year. Only about three percent of the population had to pay this income tax.
The law also included a one percent tax on the net income (profit) of all companies. Before this, only companies with profits over $5,000 had to pay a federal tax. The Supreme Court later confirmed that this new income tax was legal.
How the Income Tax Worked
The law had a normal income tax and an extra tax for individuals. For example, if you earned $20,000, you paid a 1% normal rate and an additional 1%, making it a 2% combined tax. The more you earned, the higher the additional tax rate became.
There was an exemption for how much income was taxed. Single people did not pay tax on the first $3,000 they earned. Married couples did not pay tax on the first $4,000 they earned. This meant that the lowest 1% tax rate only applied to income above these amounts.
What Happened After the Law
Working with some progressive Republicans, Democrats in Congress passed the Revenue Act of 1916. This law brought back the federal estate tax (a tax on money or property left by someone who died). It also created a tax on making weapons. This law raised the highest income tax rate to fifteen percent and the company income tax to two percent. In the same year, President Wilson signed a law that created the Tariff Commission. This group was created to give expert advice on tariff rates.
The Act also created a new type of organization that did not have to pay taxes. These organizations were focused on social welfare. This was an early version of what is now called Internal Revenue Code Section 501(c)(4).
In the 1920s, Republicans raised tariffs again and lowered the income tax. However, the changes made by President Wilson's government had a lasting effect. After the 1920s, the U.S. government would mostly get its money from taxes on income, not from tariffs.
