Prior to World War I, the federal income tax wasn’t central to federal revenue. In 1916, it only raised 16 percent of federal revenue; at times during WWI, that percentage rose to as high as 58 percent.[fn2]
After the war ended, there was a broad consensus that the wartime rates were unsustainable. The Revenue Act of 1921 ultimately eliminated the excess profits tax, lowered the top marginal rate on individuals to 50 percent, and, to make up for lost revenue, Congress raised the corporate rate. Congress continued to make changes—some minor, and some significant—to the income tax, but it has continued to today.
Senator Reed Smoot[fn3] was not a fan of the Revenue Act of 1921; instead, he wanted to impose a national sales tax. A New York Times story asserted that Smoot had the most connections with bankers and businessmen of anybody in Congress; his national sales tax plan was remarkably popular among the business crowd.[fn4]
Ultimately, before Smoot could assemble the support he needed to pass the national sales tax, Treasury Secretary Andrew Mellon managed to quash it, telling Congress that “[i]t would not seem either wise or necessary to change from our present system of taxation to new and untried plans. The income tax is firmly embedded in our system of taxation and the objections made are not to the principle of the tax but only to the excessively high rates.”[fn5]
Had the Mormon apostle and Utah Senator had his way, though, your April 15 (and my job) would be significantly different.
That said, again, happy tax day!
[fn1] Which, by the way, it’s tax day; if you haven’t filed your taxes yet, as much as I appreciate your readership, you should probably stop reading and file your taxes. This post will still be here when you’re done.
[fn2] It’s worth noting, though, that even during WWI, the federal income tax wasn’t a broad-based levy: only 5.5 million people owed taxes in 1920.
[fn3] Quick primer (really quick) on Reed Smoot: he became an apostle in 1900, and was elected to the U.S. Senate in 1902. He represented Utah as a Republican Senator for 30 years; Mormons probably know him best because his election precipitated a four-year battle over whether he was eligible to serve. Others probably remember him best as one of the co-sponsors of the disastrous Smoot-Hawley Tariff, which, economists generally agree, made the Great Depression even worse.
[fn4] See Joseph J. Thorndike, Their Fair Share: Taxing the Rich in the Age of FDR 14 (2013). (Seriously, see this book: it’s really pretty awesome.) The one exception may have been the retail industry, which was afraid that the sales tax would reduce consumption.
[fn5] Quoted in id. at 15.