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August 28, 2003
The Republican Roots of New Deal Tax Policy
Joseph J. Thorndike

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Joseph J. Thorndike is director of the Tax History Project at Tax Analysts. This is the second in a series of articles on tax policy during the Great Depression and World War II. For more information, visit the Tax History Project Web site at

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The New Deal tax regime was not a product of the New Deal. It was, rather, the ironic capstone to a decade of Republican fiscal stewardship. The Revenue Act of 1932, enacted five months before Franklin Roosevelt won his bid for the White House, established the enduring framework for 1930s tax policy. For the next eight years, every tax debate would unfold against the backdrop of this landmark revenue law, including its broad, regressive consumption taxes and its narrow but progressive income tax. While often beleaguered on its rhetorical fringes, the system proved remarkably durable in its statutory core.

Throughout the 1920s, Republicans had led a popular campaign to slash federal taxes. Under the guiding hand of Treasury Secretary Andrew Mellon, Congress abolished the excess profits tax, gutted the estate levy, and cut income tax rates for the nation's richest citizens. Shorn of its most progressive elements, the tax system was no longer a tool for broad-scale economic reform. Neither, however, was the income tax ever again in serious political trouble; by taming the income tax, Mellon ensured its survival.

Democrats spent much of the decade trying to fend off conservative tax reforms. With vital support from Mellon, they managed to defeat plans for a national sales tax. They were less successful in protecting the estate and gift taxes, both of which were on their way to oblivion by the end of the decade. As for the income tax, Democrats lost their battle to retain steep marginal rates on the nation's wealthiest citizens. But they did manage to target some relief at the lower echelon of income taxpayers, removing many from the tax rolls entirely. In general, Democrats supported a narrower, steeper income tax, while Mellon and his GOP colleagues sought a broader, flatter levy. The parties compromised on a narrower, flatter tax -- a politically successful compromise, but one that left the income tax vulnerable in the face of economic recession.

The Great Depression brought an end to GOP tax cuts. Faced with a ballooning deficit, President Herbert Hoover proposed a major tax increase, including new excise taxes and a broader, somewhat steeper income tax. In a striking display of bipartisanship, Democratic leaders embraced the plan. They even went Hoover one better, trying to replace the regressive excise taxes with an even more regressive national sales tax. It was a major reversal for the party, which had long opposed any sort of sales tax. It was also a huge blunder, prompting a revolt among rank-and-file Democrats. When the dust finally settled, lawmakers agreed to a host of new excises, as well as steeper, somewhat broader income taxes. Widely considered both prudent and distasteful, these changes constituted the largest peacetime tax increase in the nation's history. For Republicans, the law brought an unhappy end to Mellon's long campaign for tax reduction. For Democrats, it established the regressive starting point for New Deal tax reform.

I. Taxation for Prosperity

Tax cuts were the order of the day -- and the decade -- throughout the 1920s. Taken together, the Revenue Acts of 1921, 1924, 1926, and 1928 lightened the burden for almost everyone. Wealthy taxpayers did particularly well, enjoying a steep decline in marginal rates; between 1918 and 1929, the top rate fell from 77 percent to just 24 percent. Meanwhile, many middle-class Americans disappeared from the tax rolls altogether, as Congress narrowed the income tax to focus on the well-to-do. Perhaps most important, the business community managed to orchestrate repeal of the excess profits tax -- the most progressive, and burdensome, tax to emerge from World War I.1

On the eve of the Great Depression, the revenue system featured a narrower, flatter individual income tax, as well as a modest corporate income levy. Despite the best efforts of Treasury Secretary Andrew Mellon, it also included an estate tax; Democrats and progressive Republicans had managed to stave off his call for repeal, although they agreed to substantial rate cuts. Mellon could console himself with broad success in almost every other facet of his tax cut program. Dominating fiscal policy for more than 11 years, he reshaped the tax system along new, distinctly less progressive lines.

For die-hard opponents of the federal income tax, the Mellon reforms were a mixed blessing. While they reduced the redistributive qualities of the federal tax system, they also ensured that the income tax would remain a fixture of national finance. First enacted in 1913, it had grown dramatically during World War I, emerging with a highly progressive rate structure and a controversial cousin in the excess profits tax. Mellon tamed this system, reducing rates, narrowing the tax base, and abolishing the profits levy. In doing so, he stole the thunder of his more conservative colleagues who hoped to shelve the tax entirely. He even battled fellow Republicans when they tried to replace the individual income tax with a general sales levy. When all was said and done, Woodrow Wilson may have made the world safe for democracy, but Andrew Mellon made it safe for income taxation.

Even before Warren Harding's victory in the 1920 presidential election, leaders of both political parties agreed that taxes should be reduced. During World War I, the federal tax system had grown dramatically, with revenues climbing from $512.7 million in fiscal 1916 to $5.4 billion in fiscal 1920. Rates followed a similar trajectory, with the top marginal rate climbing from 15 percent in 1916 to 77 percent in 1918.2

A broad consensus held that such rates were unsustainable. Two of Woodrow Wilson's Treasury secretaries, Carter Glass and David Houston, suggested cuts. Even Wilson himself -- the architect of the progressive wartime tax system -- seemed to agree: "The Congress might well consider," he suggested, "whether the higher rates of income and profits taxes can in peace times be effectively productive of revenue and whether they may not, on the contrary, be destructive of business activity and productive of waste and inefficiency."3

Still, many Democrats and progressive Republicans were unwilling to roll back wartime tax reforms. Pleased with the newly progressive cast of federal revenue policy, they sought to retain some of its more progressive elements, including the excess profits tax. Supporters believed that the profits tax -- which imposed a graduated levy on business profits above a pre-determined "normal" rate of return on capital -- to be a blow for egalitarian ideals. Rep. Claude Kitchin, D-N.C., an able debater and prominent tax specialist, led the campaign to retain the tax. As chairman of the House Ways and Means Committee in the years leading up to World War I, he had helped craft the highly progressive wartime tax system. Now in the minority, he insisted that the tax should be made permanent, arguing that it would shift the fiscal burden to the individuals and corporations whose wealth posed a threat to American society.4

Kitchin and his allies were not destined to succeed. Republican lawmakers joined a series of GOP presidents to engineer tax cuts in 1921, 1924, 1926, and 1928. Andrew Mellon -- who moved into his Treasury office in 1921 and stayed there until 1932 -- was the principal architect of these reforms. As one wag remarked, "three presidents served under Mellon," and when it came to taxes, he was certainly correct.5 Mellon's ideology of tax reduction, outlined in his 1924 book, Taxation: the People's Business, dominated the decade.

Generally speaking, Mellon argued that tax burdens were too high. Steep rates, he insisted, served only to stifle incentive and foster tax evasion. "Any man of energy and initiative in this country can get what he wants out of life," he wrote. "But when initiative is crippled by legislation or by a tax system which denies him the right to receive a reasonable share of his earnings, then he will no longer exert himself and the country will be deprived of the energy on which its continued greatness depends."6

Worse yet, Mellon argued, high rates didn't even raise money. By encouraging both legal tax avoidance and illegal tax evasion, they eroded the tax base and reduced overall revenue. Lower rates, he said, would actually raise money by spurring economic growth and reducing the incentive for tax avoidance. "It seems difficult for some to understand," he complained, "that high rates of taxation do not necessarily mean large revenue to the government, and that more revenue may actually be obtained by lower rates."7 In particular, Mellon insisted that high rates distorted investment decisions, boosting the popularity of tax-free state and local government bonds. Indeed, Mellon made these tax-free bonds a regular target of his reform attempts, but Congress resisted his plans to eliminate them.8

In general, Mellon offered a consistent and politically compelling case for tax reduction, impressing even his opponents with his passion for sweeping cuts. "There was a mystical righteousness about tax reduction," observed Randolph Paul, a leading tax expert who would figure prominently in Roosevelt-era tax policymaking.9 That sense of righteousness even extended to specialized tax breaks for specific industries. Mellon and his supporters believed that tax reductions -- almost any tax reduction - - would spur growth. A convenient side effect of such narrow tax incentives was the power they conferred on policymakers, who used them to reward friends and political allies.10

But for all his tax-cutting zeal, Mellon was not quite singleminded in his pursuit of lower taxes. He split with some of his GOP colleagues to support the retention of both corporate and individual income taxes. When some Republicans tried in 1921 to advance a plan for a national sales tax, Mellon resisted the idea. And even while promoting repeal of the excess profits tax, he supported an increase in corporate income tax rates to compensate for the lost revenue. Perhaps most important, he advocated rate cuts for individuals but endorsed retention of the income tax. "The income tax," he assured lawmakers, "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." The comment reflected Mellon's assessment of political and economic realities. The income tax, he had concluded, was here to stay.11

Mellon had a few distinctly progressive ideas. Of particular note, he suggested taxing "earned" income from wages and salaries more lightly that "unearned" income from investments. As he argued:

    The fairness of taxing more lightly income from wages, salaries or from investments is beyond question. In the first case, the income is uncertain and limited in duration; sickness or death destroys it and old age diminishes it; in the other, the source of income continues; the income may be disposed of during a man's life and it descends to his heirs.

    Surely we can afford to make a distinction between the people whose only capital is their mental and physical energy and the people whose income is derived from investments. Such a distinction would mean much to millions of American workers and would be an added inspiration to the man who must provide a competence during his few productive years to care for himself and his family when his earnings capacity is at an end.12

It was a striking argument, especially coming from a friend of wealth and capital. But it was not out of character. Mellon believed that some degree of progressivity was necessary to forestall more radical attacks on capital. Such an argument did not sit well with many of his Republican colleagues, who longed to eliminate income taxes. Mellon remained committed, however, to taming the income tax, saving it from the excesses of its more ardent supporters, as well as its most bitter critics.13

A. Revenue Act of 1921

The series of Mellon tax cuts began in 1921, as legislators from both parties set about revising the wartime tax system. On April 30, Mellon asked Congress for a variety of changes, including elimination of the excess profits tax, a modest increase in the corporate income tax, a reduction in personal income tax rates, and the retention of most wartime excise levies.14

Repeal of the excess profits tax was almost a foregone conclusion, enjoying broad, bipartisan support. In 1919, President Wilson had told Congress that the levy "should be made the basis of a permanent tax system which will reach undue profits without discouraging the enterprise and activity of our business men."15 But fiscal experts had since begun to question the tax.16

Thomas S. Adams was arguably the most important tax policy expert of his day, a trusted adviser to both Democratic and Republican administrations. He was also one of the original champions of excess profits taxation. In 1920, however, he dealt the levy a heavy blow, calling for its repeal. Having once defended the tax as a means to "allay hostility to big business," Adams now derided it as burdensome, complicated, and inequitable. Business leaders, he warned, understandably resented its "intricacy and capricious inequalities." Government officials, moreover, had found the levy hard to administer.17

Columbia University economist Edwin Seligman was another vocal critic. More conservative than Adams, Seligman was a leading light of the economics profession and a pioneer in the study of taxation. With strong support from the business community, he argued that the excess profits tax posed a threat to corporate autonomy and economic efficiency. While supporting progressive taxation generally, Seligman argued that the excess profits tax was unwise. Instead, he favored broader use of the federal income tax.18

Not every economist, however, was a critic of the excess profits tax. Robert M. Haig, a Seligman protege and colleague at Columbia, offered a compelling case for retention. The excess profits tax, he insisted, was both just and practical -- or at least it might be, if Congress would enact several key reforms to simplify its administration. Compared with its alternatives, including higher income taxes or a national sales tax, the profits tax was far superior. Policymakers should "continue the policy of skimming the richer crocks of milk," he counseled, rather than opting for less progressive alternatives.19

Expert debate notwithstanding, the forces arrayed against the excess profits tax proved irresistible. Even Democrats joined the campaign for repeal. Wilson's Treasury Secretary Carter Glass insisted that the tax "encourages wasteful expenditure, puts a premium on overcapitalization and a penalty on brains, energy, and enterprise, discourages new ventures, and confirms old ventures and their monopolies."20 Business leaders, meanwhile, agitated aggressively against the levy. The Business Men's National Tax Committee organized in support of a national sales tax, hoping to offer it as a replacement for the profits tax. Similar groups joined the campaign, including the U.S. Chamber of Commerce, the Association of Credit Men, the Tax League of America, the New York Board of Trade, and the National Association of Retail Grocers. While some of these groups refused to endorse a sales tax, all agreed that the profits tax must go.21

When Congress began consideration of the 1921 revenue bill, the sales tax proved to be a sticking point. Mellon's proposals, including excess profits repeal, sailed through the House of Representatives, arriving in the Senate almost intact. In the upper house, however, the bill ran into trouble. Sen. Reed Smoot, R-Utah, proposed a national retail sales tax, and he had considerable support among Senate leaders. Sen. George Higgins Moses, R-N.H., offered a colorful, if intemperate, appeal, insisting that a sales tax would "strike down the vicious principle of graduated taxation which appears in the pending [House] tax bill, and which is but a modern legislative adaptation of the Communistic doctrine of Karl Marx."22

Moses failed to persuade his colleagues, especially after Mellon sided with opponents of the sales tax. Meanwhile, a strong coalition of Democrats and progressive Republicans challenged the bill on the Senate floor, opposing the sales tax and insisting on higher income tax rates. This "agricultural block" -- derided as the "wild asses of the desert" by their enemies -- also pushed for steeper estate tax rates, as well as higher corporate income taxes.23

Outside the Capital, farm and labor groups continued to agitate against the Mellon reforms; the American Farm Bureau, the National Grange, and the American Federation of Labor, were particularly vocal. And they reserved special animus for Smoot's sales tax. In fact, opposition to the sales tax emerged in the business community as well, with the National Industrial Conference Board, the National Association of Credit Men, the U.S. Chamber of Commerce, and other groups joining the opposition. And in a particularly damaging blow, Mellon refused to endorse the sales tax proposal.24

Ultimately, opponents of the sales tax triumphed. Nearing the end of the session, harried lawmakers agreed to a relatively moderate package of reforms. They eliminated the excess profits tax, but replaced some of the lost revenue with a hike in corporate income tax rates.25 They also lowered the top marginal income tax rate on individuals to 50 percent -- a dramatic reduction from wartime highs but far less than Mellon had requested. Legislators increased the exemption for heads of families and for dependents, making the tax base somewhat narrower and lightening the burden for many middle- income taxpayers.26 And they introduced preferential treatment for capital gains income.27

As passed, the 1921 revenue act pleased almost no one. Critics complained that it was a pastiche of unrelated, politically driven compromises. Republicans were disappointed in its modest rate reductions; as Sen. Smoot observed, "When the bill becomes law it will be the present revenue baby merely dressed in pink instead of red."28 But at least one contemporary observer thought the country had dodged a bullet. "The leaders of each of the contesting parties," observed economist Roy Blakey, "as well as the nation at large had cause to be thankful that the law was no worse than it was."29

B. Revenue Act of 1924

Mellon took another run at tax reduction in 1924. He urged lawmakers to further cut income tax rates, arguing -- as he had in 1921 -- that lower rates would raise revenue. Existing taxes were simply too high, he told the chairman of the House Ways and Means Committee. "Ways will always be found to avoid taxes so destructive in their nature, and the only way to save the situation is to put the taxes on a reasonable basis that will permit business to go on and industry to develop," he wrote. "The alternative is a gradual breakdown in the system and a perversion of industry that stifles our progress as a nation."30

The secretary proposed a top rate of 25 percent, insisting that lower rates would stem tax avoidance.31 He also proposed his special tax break for earned income, amounting to a 25 percent reduction for wage and salary income. Finally, he supported reductions in estate taxes, which Mellon considered a "levy upon capital," since it allowed lawmakers to extract capital from accumulated fortunes and use it for current operating expenses.32

Mellon met stiff resistance on Capitol Hill. With a smaller congressional majority than they had enjoyed in 1921, Republicans had less room to maneuver. Rep. John Nance Garner, D-Texas, seized the opportunity to launch a Democratic attack, contending that the Mellon plan cut rates too much. "This is the time to determine the policy of who is going to pay the taxes," he told one observer. "The crux of the fight is the surtax. The Mellon 25 percent maximum is at least 10 or 15 per cent too low."33

Republican stalwarts attacked Garner's substitute bill as a mishmash of bad economics. "You have heard of great musicians sitting down at a piano and improvising a tune," declared Rep. Ogden Mills, R-N.Y. "Mr. Garner sits down at a table in this chamber and improvises a tax bill."34 But Garner was gaining ground, securing the votes of virtually all Democrats and even some progressive Republicans. Within three weeks, Republican leaders were ready to capitulate. Speaker Nicholas Longworth, R-Ohio, agreed to accept higher income tax rates, and even swallowed a hike in estate tax rates. By the time the bill left the House, it featured a top rate of 37.5 percent, as well as a top estate tax rate of 40 percent. The latter was particularly galling for Mellon, representing a 15 percent hike in a tax he wanted to eliminate.35

Garner's bill also included a plan to raise income tax exemptions, thereby narrowing the tax base and providing some relief for middle income Americans. House members did not, however, adopt this proposal, which would have focused the income tax even more directly on the rich. Garner accepted this setback, but he would soon return to the idea.

In the Senate, Republican leaders knew they had a weak hand, and they offered only limited resistance to the Democratic onslaught. Resistance to the Mellon proposals came again from a coalition of Democrats and progressive Republicans, including Sens. James Couzens, R-Mich., F.M. Simmons, D-N.C., David Walsh, D-Mass., and Andrieus Jones, D-N.M.36

Senate Republicans accepted a House provision to make income tax returns available for public inspection. In conference, however, party leaders managed to limit inspection to congressional committees and state officials, with full public disclosure only upon order of the president. The provision still rankled most Republicans, as well as their wealthy supporters. While full disclosure was rejected, a publicity provision directed the Bureau of Internal Revenue to publish annual lists of taxes paid by all income tax filers. Such lists became a popular feature in newspapers across the country.37

President Calvin Coolidge reluctantly signed the 1924 act, complaining that Congress had ignored his recommendations. The law granted an immediate 25 percent rebate on taxes paid for 1923 income. It also reduced the top marginal income tax rate to 40 percent -- a substantial cut but, again, much less than Mellon had sought. The secretary got his 25 percent earned income credit, but he also had to swallow a hike in estate tax rates from 25 percent to 40 percent. Finally, Congress enacted a gift tax to forestall evasion of the estate levy.38

C. Revenue Acts of 1926 and 1928

All in all, the 1924 tax act amounted to half a loaf -- or less -- for Mellon. By 1926, he was ready for another try. Energized by GOP victories in the presidential and congressional elections, he offered a new plan, including immediate elimination of the gift tax, gradual elimination of the estate tax, and a broad reduction in individual income tax rates, bringing the top marginal rate to just 20 percent.39 Mellon again proffered his familiar argument that lower rates would produce additional revenue: "A reform in taxation such as a reduction of the high surtaxes increases the taxable income through stimulation of business and productive investment so that what apparently would be a loss is later made up."40

A major lobbying effort sprung up in support of Mellon's proposals, featuring Capitol Hill appearances by a number of "tax clubs." The clubs claimed to be grassroots organizations, giving prominent voice to popular opinion.41 Critics, however, considered them ill-informed, partisan mouthpieces for the rich. As one progressive Republican complained:

    Men of wealth are naturally interested in tax reduction that will benefit themselves, and no one gainsays the right or the desire to relieve them from tax burdens; but the blackjack method of intimidating Congress to relieve a handful of wealthy men, to the exclusion of the rest of the country, is perilous to any system of representative government.42

As it happened, Congress needed little convincing; lawmakers of both parties rushed to sweeten the Mellon proposals. With the progressive wing of the Republican party in disarray, and many Democrats throwing in their lot with GOP tax cutters, the success of the Mellon proposals was never in much doubt.43

Democrats managed to stave off elimination of the estate tax, but only after agreeing to a 50 percent rate cut, as well as a credit for state inheritance taxes. The gift tax didn't fare as well, with lawmakers voting to repeal it. And in a blow to progressive forces, Congress gutted the income tax publicity provisions enacted in 1924. These had proven hugely unpopular, and not just among the rich. Middle-income taxpayers, including small business leaders, resented the intrusion.44

The principal battle of the 1926 revenue law centered on the estate tax. Mellon's effort to repeal it struck dangerously close to the heart of the progressive tax agenda. But another provision of the 1926 law would prove equally important in the years to come. Rep. John Nance Garner successfully resurrected his plan to raise income tax exemptions. This time, his colleagues agreed. The law raised exemptions across the board, eliminating roughly a third of the nation's 7.3 million income taxpayers; higher exemptions moved many taxpayers off the rolls entirely.45

The exemption hikes were not part of Mellon's plan. Indeed, he opposed the idea, insisting that the tax base was already too small. "To narrow it further," he told one Republican senator, "would make the whole tax structure unstable and its continued usefulness as a source of revenue uncertain." In Mellon's view, the higher exemptions also created a political hazard. "As a matter of policy," he said, "it is advisable to have every citizen with a stake in his country. Nothing brings home to a man the feeling that he personally has an interest in seeing that government revenues are not squandered, but intelligently expended, as the fact that he contributes individually a direct tax, no matter how small, to his government."46

Progressives in both parties bridled at Mellon's suggestion that poor Americans had no fiscal stake in their government. "Surely the Secretary of the Treasury can not intend, with a stroke of his mighty pen, to expatriate 96 per cent of us," noted the Omaha World-Herald:

    We pay taxes on our coats, on our shoes and socks, on our hats, on our shorts and underwear, on the food on the breakfast-table, on the materials of which are homes are constructed, on the furniture in them, on the vehicles we ride in, on the amusements wherein we seek surcease -- on practically everything, indeed, that we have and do. Do not these payments entitle us to feel equally with Mr. Mellon, that we have a stake in our country?

Poor Americans did, indeed, pay a host of taxes, most of them on consumption. Many excise taxes enacted during World War I remained on the books, imposing their regressive burden on consumer goods and services. But as a few lonely liberals pointed out, the consumption tax burden was really an argument against higher exemptions, not for them.

Rep. Cordell Hull, D-Tenn., was an original champion of the modern income tax, playing a key role in the debate over the 16th Amendment and helping shape the wartime tax system. He was certainly an advocate for progressive revenue policy. And for that very reason, he opposed any move to narrow the scope of the income tax. "A tax system vitally important as is the income tax should apply to a respectable number of persons," he warned his colleagues.47 Narrowing it too much would endanger the very existence of the income tax. Moreover, he argued, leaving exemptions unchanged would leave more room in the budget to eliminate consumption taxes. Taxes on shoes, socks, hats, and underwear were remnants of the wartime tax system. By keeping the income tax reasonably broad, lawmakers would have enough money to repeal these levies. Eliminating them "would afford not only a greater measure of tax relief to the small-income taxpayers, whose exemption is proposed, but to some two or three million other persons with small incomes who pay automobile taxes but no income taxes," he said.48

It was a powerful argument, and it had some limited support among Democrats. Rep. Henry Rainey, D-Ill., offered an impassioned case against the higher exemptions, insisting that they were designed to benefit rich taxpayers. "This bill expresses a tender solicitude for the very rich in which I do not share," he declared.49 Higher exemptions would apply to everyone, lowering the taxes of all income-tax payers, not just those removed from the rolls. "In order to exempt these 3,000,000 taxpayers, we have, of course, exempted every income-tax payer," he complained. "It is a horizontal exemption clipped off of the taxes paid by the entire bloc of income-tax payers."50

As an alternative, Rainey suggested repeal of the federal automobile excise tax. The Ways and Means Committee had rejected the idea as too expensive. The tax was "immensely productive," the committee explained, making it impossible to eliminate. While agreeing to cut taxes on auto parts -- the so-called "tax on misfortune" -- the committee refused to abolish the larger tax. Rainey was unsatisfied. "We are not rendering much of a favor to men of small incomes," he complained, "when we relieve them of the income tax they now pay of about $7.50 and impose a tax of from $15 to $30 on the cheap automobiles they buy."51 Echoing Hull, he suggested that Congress leave income tax exemptions intact, thereby making room to abolish the car tax.

The Hull-Rainey argument cut across political lines, uniting a small contingent of Democrats with a much larger group of conservative Republicans. But the argument never really caught on. Traditional divisions on the income tax persisted, with Democrats supporting a narrow, steep levy and Republicans endorsing a broader, flatter tax. Hearings on the 1926 revenue bill revealed this traditional arrangement of fiscal opinion.

Representatives of farm groups endorsed Garner's call for higher exemptions. E.B. Reid of the American Farm Bureau applauded the removal of many citizens from the tax rolls. "In many sections of the country," he observed, "the income tax law is an unfathomable mystery to the man of small income."52

Business spokesmen, meanwhile, were generally opposed to the move. Some echoed Mellon's argument that the income tax gave people a stake in their government. L.R. Gottlieb of the National Industrial Conference Board suggested that exemptions were already generous. "Any movement toward freeing larger numbers of our population from the obligation of supporting to some extent the Federal Government in a tangible, conscious manner would be inconsistent with the sound development of representative government," he said.53

Similarly, Edward P. Doyle of the Real Estate Board of New York insisted that poor people were already getting a good deal. "I think every man should pay his share of conducting the Government. The poor man gets more benefits from the Government than I do, who belong to the lower middle class," he complained. "The poor man gets everything and he spends $3,500,000,000 for prize fights and baseball games and chewing gum and beauty parlors, and yet he objects to paying any tax at all." Not surprisingly, Doyle endorsed excise taxes, like those on entertainment, gum, and cosmetics.54

Academics tended to agree with conservative leaders, resisting higher exemptions. Economist E.R.A. Seligman told the Ways and Means Committee that taxes must remain reasonably broad. "It will not do," he said, "to have all the rights on one side and all the obligations on the other side. If you are developing a community where only one class pays the taxes, and the other class, because of its immense numbers, votes the expenditures, you are opening the door for all sorts of political abuses."55

Like Hull, Seligman believed deeply in the income tax, even endorsing a progressive rate structure. In his view, high exemptions were a threat to the tax, inviting political trouble. If the tax was to survive, then it should be getting broader, not narrower. And survival was vital, for tax economists generally regarded the income tax as the fairest of all federal taxes.

Nonetheless, 1926 was a year for tax cuts, and Garner's exemption hike became part of the package. Lawmakers ignored Hull's complaints, convincing even reluctant Republicans to endorse the higher exemptions. Mellon accepted the higher exemptions as the price of his marginal rate cuts. In a few years, he would have cause to regret that decision, but for the time being, it seemed a reasonable expedient.

The tax cut parade was not quite over. In 1928, Mellon took another run at reduction, again suggesting estate tax repeal, as well as cuts in the corporate income tax. Lawmakers agreed with the latter, but not the former.56 It was the last time for a long while that legislators would have a free hand in cutting taxes.

As Mellon surveyed his seven years in office, he must have been pleased. The income tax had grown more central to the federal revenue system; Prohibition had dried up alcohol excise revenue, making the income tax even more important than it had been at the end of World War I.57 But rates had declined dramatically since 1921. And while Mellon never succeeded in his quest to eliminate the estate tax, he did manage to keep its rates relatively modest. All in all, taxes were less burdensome for many Americans, particularly those in the upper strata of society. These were happy years for tax policymakers of both parties. They had the pleasant task of choosing among various tax cuts, their deliberations buoyed by a fat and happy Treasury. As Franklin Roosevelt later pointed out, "it was all very merry while it lasted." But in 1929, the party came to a crashing end.

II. Taxation for Depression

The Great Depression wreaked havoc on the federal budget; as one observer recalled, "The sun was sinking in a cloudy western sky."58 By 1930, Andrew Mellon was warning Congress that declining revenues would produce a deficit of $200 million. His projection proved optimistic, and lawmakers watched the fiscal gap soar to more than $900 million that year. Despite the prospect of even larger deficits, Mellon and President Herbert Hoover continued to resist tax increases. But with national income falling from $87.8 billion to $42.5 billion between 1929 and 1932 -- and tax revenues falling at an even faster rate, thanks to the progressive rate structure of the individual income tax -- such intransigence could not last.59

Early in 1932, Mellon appeared before the House Ways and Means Committee to ask for a tax hike. It was a painful request for this inveterate tax cutter, but one dictated by fiscal orthodoxy. In a sign of things to come, Mellon asked Undersecretary of the Treasury Ogden Mills to read his statement; within a month, Mellon would be eased out of the Treasury building, dispatched to London as an ambassador. This towering figure of the 1920s was being put out to pasture.

Ogden Mills took the reins at Treasury, offering the Hoover administration both his financial expertise and his political acumen. An upper-class New York Republican of generally orthodox fiscal inclinations, he had served on the Ways and Means Committee during the early 1920s. "Little Oggie," as he was known in the liberal press, enjoyed a reputation as a tax expert.60 Amid the sales tax furor of 1921, he had proffered a novel, if short- lived, proposal for a "spendings" tax. Like a traditional sales tax, the spendings tax was to be levied on the money that taxpayers spent on various goods. Unlike a sales tax, its rates would increase along with the amount spent. The point, Mills explained, was to promote thrift and saving, while avoiding the regressive pitfalls associated with a traditional sales tax. "It can fairly claim the virtues of the sales tax, being in effect a tax on money spent for consumption, without being regressive in character or laying a disproportionate burden on those least able to bear it," he explained.61

It was a provocative idea, but not a new one. John Stuart Mill had proposed something similar in 1848. As Mills pointed out, that proposal had been criticized as a sop to the rich, but the utilitarian philosopher had insisted that it benefited only those who saved, rather than spent their money. And since saved money was generally invested in productive enterprise, society as a whole benefited from a preferential treatment of saved income.62

In the 1920s, the idea had important intellectual support, especially from economist Thomas S. Adams. But it was still an idea ahead of its time. Mills's proposal went nowhere. Some 20 years later, a Democratic administration would propose a similar tax -- with similar, disappointing results.63

But in 1932, Mills was not proposing his spendings tax. In fact, he avoided recommending any sort of broad sales tax. Before addressing the Ways and Means Committee, Mills had already done much of the hard work, convincing President Hoover that balancing the federal budget amidst economic depression was, in fact, a reasonable -- if improbable -- goal. With support from several other fiscal conservatives in the administration, he convinced the president to endorse a large package of tax increases. In his 1931 annual message to Congress, Hoover warned lawmakers that they must cut expenses and raise taxes. He stressed, however, that tax increases should be of limited size and duration. Excessive tax hikes, he declared, would "destroy confidence, denude commerce and industry of its resources, jeopardize the financial system, and actually extend unemployment and demoralize agriculture rather than relieve it."64

In presenting the administration's proposals, Mills warned that the deficit was soaring above $2 billion. Excessive expenditures, coupled with falling tax revenues, had opened a huge hole in the budget. The decline in revenue was particularly dramatic. Corporate income taxes, which had yielded $1.1 billion in fiscal 1930, were likely to raise only $550 million in 1932. Individual income tax revenues were plummeting even more dramatically, from just over $1 billion in 1930 to $370 million in 1932. The only relatively bright spot was excise revenue, which Mills expected to decline from $628 million to $544 million over the same period; the moderate decline, he pointed out, was due largely to the stable revenues of the federal tobacco tax.65

Altogether, the revenue shortfalls were nothing short of cataclysmic. The problem, Mills declared, was inherent in the revenue structure. "The truth of the matter is that our revenue system rests on a comparatively narrow base," he explained, "and that our tax receipts are susceptible to the widest variations in accordance with variations in business conditions. This is particularly true of current individual income-tax collections." The progressive nature of the income tax made the problem worse. Large incomes were the first to rise in good times and the first to fall in bad times. The graduated rate structure ensured that revenues would rise faster than overall income when the economy was doing well. But it also guaranteed that when depression struck, revenues would fall faster than incomes.66

Given this reality, Mills counseled against steep increases in the rate structure, predicting that they would not raise adequate revenue. While acknowledging that rates must necessarily rise, especially on the richest Americans, he emphasized the need for an increase in the number of people paying income taxes in the first place. Congress must recognize, he said, that "the weakness in our revenue system is, as I have already stated, the narrowness of the base on which it rests." Broadening that base was crucial to securing adequate, and dependable, revenue. It was also, he said, manifestly fair. "Many not now taxed are very definitely in a position to make some contribution to the support of Government," he declared. "They should be asked to do so, taking into consideration ability to pay."67

Mills made a point of not suggesting a general sales tax. Republicans had lost this battle in the '20s, and he was not about to saddle the Hoover administration with this contentious issue.68 He did, however, lay out in some detail the success of Canada's broad-based sales tax, implicitly inviting lawmakers to consider the levy. While warning that such a tax could be difficult to administer in the United States, he had many favorable things to say about it. Nonetheless, he counseled lawmakers to opt for more familiar taxes. "Instead of embarking on new and untried ventures in taxation," he suggested, "it is wiser to utilize a known general plan with such changes as may be appropriate in the light of altered conditions."69 While most observers took him at his word, others questioned his sincerity; many suspected that the Treasury would embrace a sales tax proposal were it to come from Congress.70

To close the budget gap, Mills suggested a package of tax hikes that would together raise about $920 million. First and foremost, he asked legislators to restore income tax rates to their 1924 levels. Surtax rates, he said, should increase across the board, topping out at 40 percent -- twice their existing level.71 Even more important, Congress should reduce exemptions to $1,000 for individuals and $2,500 for married couples. These reductions would broaden the tax base, bringing 1.7 million new taxpayers into the system. The tax, Mills emphasized, would still be confined to a narrow slice of American society. "There would be only some 3,600,000 Federal taxpayers in a Nation of 120,000,000 people, and of this number less than 300,000 would contribute 90 percent of the tax." Indeed, Mills's plan would still have left the tax much narrower than it had been before the 1926 exemption hike. Together, the higher rates and broader base would raise $83 million in the remainder of fiscal 1932, Mills predicted, and $185 million in fiscal 1933.72

Corporation income taxes should also rise, Mills said, climbing from 12 percent to 12.5 percent. Exemptions for the tax should be eliminated entirely. These changes would raise $60 million annually, he said. And finally, Mills asked Congress to return estate tax rates to their 1921 level. While restating his general dislike for the levy, he asked for a tax ranging from 1 percent on the first $50,000 up to 25 percent on amounts over $10 million. Estate tax hikes would bring in $22 million.73

These were dramatic recommendations, but they ultimately proved less momentous than a host of smaller changes to what the Treasury always called "miscellaneous taxes." Noting that the depression had savaged individual and corporate income tax receipts, which were highly sensitive to economic fluctuations, Mills recommended a variety of new or increased excise levies; including taxes on tobacco, stock transfers, admissions, radio and phonograph equipment, bank checks, telephone calls, and telegrams. He also suggested additional taxes on the sale of automobiles and trucks. Altogether, Treasury predicted these increases would raise $514 million in fiscal 1933.74

A. A Broader, Steeper Income Tax

Hearings on the Treasury's revenue proposals featured a running debate on the Treasury plan for a broader income tax. Several business groups, including the U.S. Chamber of Commerce and the National Association of Manufacturers, endorsed the idea, arguing that it would raise revenue and promote tax consciousness. The latter effect, they maintained, would promote governmental thrift. As NAM representative James A. Emery put it, broadening the tax base would "arouse the tax consciousness of the individual citizen and excite his interest through his contribution so that he may realize the purposes for and the manner in which public funds are expended, and examine anew the function, objectives, and capacity of government to render service with the expenditures made."

It was a familiar argument. But it found at least a few unfamiliar champions. In particular, the American Farm Bureau Federation embraced the idea, though without much fervor.75 Still, the most vocal supporters were found among business groups. Organized labor, meanwhile, joined liberal members of Congress to oppose the idea.

Some committee members worried that lower exemptions would cost more to administer than they could ever raise in new revenue. Ways and Means Chair James Collier, D-Miss., asked Mills whether a broader tax was worth collecting:

    I recall that several years ago, there was a disputed tax item of less than $6, and on two different occasions the return was sent back by the Washington office to the taxpayer, and the revenue collector came 50 or 60 miles to a town where the taxpayer lived. His railroad fare, I suppose, was $3 or $4, and I do not know what his hotel bill was, but they finally got the $6."

Mills took the bait. "It seems to me," he responded dryly, "that that is a tribute to the efficiency of the department."76 Mills assured the committee that broadening the income tax base was both practical and necessary.

Critics of the broader income tax included liberal members of Congress, as well as labor leaders. Rep. Fiorello LaGuardia, R-N.Y., argued that low- and middle-income taxpayers already paid their fair share of state and local taxes, as well as federal excise levies.77 Rep. Charles Crisp, D-Ga., asked LaGuardia whether a broad income tax could be defended as a means to promote governmental economy:

    Now, as a public policy, is it or is it not advisable to have as many citizens as can economically do so contribute to the maintenance of the Government? Will they not have more interest in the expenditures and affairs of the Government if they are directly contributing something, no matter how small, toward its maintenance?"78

This was a classic restatement of the tax visibility argument that conservatives advanced to defend a broader income levy. But LaGuardia would have none of it. "I think Mr. Average Citizen knows he is paying his share of the maintenance of government," LaGuardia said.79 Like most progressives, LaGuardia preferred his income taxes narrow and steep.

Other witnesses agreed. Carlos B. Clark of the National Retail Dry Goods Association, for instance, argued that trying to balance the budget on the backs of taxpayers would damage the economy. He criticized a host of Mills's proposed increases, including the lower income tax exemptions. "I cannot bring myself to the belief that the lowering of the exemptions would be a good thing," he said, questioning whether the new revenue would be worth the administrative cost of collecting it. In addition, he agreed with committee members who argued that people with smaller incomes were already stretched thin. "It is only another burden on the man of small income, who is doing his best to help the other fellow."80

Spokesmen for organized labor also opposed lower exemptions, with the American Federation of Labor offering a strident critique. "The plan of the Treasury Department," the AFL spokesmen declared, "proposes that those who have suffered the most during this depression must pay the taxes of those who have neither hungered nor wanted for any of the necessaries of life."81

B. Fairness and Excise Taxation

Ways and Means members heard endless testimony from business groups seeking to avoid excise levies on their goods and services. Affected industries were quick to organize, claiming undue hardship. In fact, the issue arose during Mills's testimony, when Rep. Allen T. Treadway, R-Mass., spoke up for the paper manufacturers.

Treadway first challenged the fairness of the administration's proposed tax on bank checks, suggesting that its flat rate made it unfair; the stamp would cost two cents whether a check was written for $1 or $1,000. Mills was unmoved: "Mr. Treadway, you have wrestled with these tax problems long enough to know that there is no tax devised by man that works with exact justice." Nonetheless, Mills said, the check tax came close. It would be levied at a low rate on a very broad base. In addition, the use of checks implied an ability to pay. Taken together, these qualities were the essence of a fair, practical, and economically efficient tax.82 It was an instructive response, encapsulating the Hoover administration's stance on excise levies. Taxing items of "wide use but not of first necessity" was a popular notion among Republicans and even many Democrats.83

Treadway then took a different tack, complaining that the check tax would hurt the paper industry. The argument also held no water with Mills. "Mr. Treadway, that is just the beginning of the stories you are going to hear over the next 10 days," he predicted. "I have seen the legion gathering and I could almost recite the story that each industry is going to tell. But the only way to raise money is to increase taxes, and some one has got to pay them."84

Several members pressed Mills on the absence of "luxury" taxes from his package of revenue proposals. Mills offered the Treasury Department's stock answer: Taxes on furs, cosmetics, or other "luxuries" would raise little revenue but cause many problems. "All these luxury taxes are difficult and costly to collect, and the dealer or manufacturer who is honest pays them, and the dishonest one does not," Mills said.85 He pointed to his proposed automobile tax as an alternative, again outlining his definition of a good excise tax. The car tax, he said, "is easy to administer, can be imposed at a very low rate, that rests on a very broad base, and therefore imposes no particular hardship on anyone." Moreover, he added, anyone able to buy a car clearly had some ability to pay, making the tax fair.86

In general, affected industries were vocal in their efforts to deflect new taxes on their products. Often, they justified their position as a blow for progressivity, insisting the excise would be passed on to consumers, including those least able to pay. At other times, however, they simply complained that the tax was too much for the industry to bear, particularly in hard economic times. Without offering specifics, they urged lawmakers to find other sources of new revenue.87 Forty years later, another lawmaker would aptly describe this political dynamic: "Don't tax you, don't tax me, tax that man behind the tree."88

C. Sales Tax

In fact, many business leaders did have another revenue source in mind: a general sales tax. NAM representatives approached the subject archly, urging that excise taxes be levied as broadly as possible. In case the committee missed the hint, they added, that "We suggest, in this connection, exploration for new sources of income capable of yielding additional revenue, without being either burdensome to the taxpayer or expensive to collect."89

Other industry groups were less coy. The American Petroleum Institute spoke out against a new federal gas tax and in favor of a general sales levy.90 The American Hotel Association agreed, adding by way of justification that "the singling out of one commodity for tax exaction to the exclusion of another is not fair to business."91

But businesses did not all line up on the side of a sales tax. Indeed, even closely allied industries differed on the subject. Spokesmen for the American Manufacturers of Toilet Articles predictably opposed new excise levies on cosmetics, and when asked about a sales tax, demurely noted that "we ourselves are not particularly opposed to it."92 By contrast, however, the National Association of Retail Druggists opposed the sales tax, predicting that politically driven exemptions would quickly turn it into a less-than-comprehensive collection of excises.93

Outside the business community, sales tax support was harder to find. The American Farm Bureau Federation strenuously rejected the idea, noting that "A general sales tax is constantly opposed by the Farm Bureau for the broad reason that it is based on the necessity to consume rather than on the ability to pay."94 And the AFL attacked the levy as a cruel addition to the burden of working Americans. The proposal would shift the tax burden down the income ladder, spokesmen insisted. They compared its effect to a cold-hearted biblical injunction: "For unto everyone that hath shall be given, and he shall have abundance, but from him that hath not shall be taken away even that which he hath."95

Despite such objections, the committee showed considerable interest in a sales tax, especially along the lines of one then used in Canada. The panel heard from noted economist Thomas S. Adams on the details of the Canadian system. While not precisely endorsing the tax, Adams gave it a warm review. Similarly, members entered into the record a report on the Canadian tax, produced after publisher William Randolph Hearst arranged an all-expense-paid trip for U.S. policymakers to meet with their Canadian counterparts and discuss the sales tax.96

Indeed, Hearst carried on a vigorous campaign against the income tax, promoting the sales tax as a workable alternative. He implored readers in a March 1932 editorial to "please carry on a sustained crusade Morning, Evening, and Sunday against the present Bolshevist system of income taxation." Meanwhile, other influential Democrats -- most from the party's conservative wing -- also lined up behind the sales tax bill, including Bernard Baruch, John Raskob, and Jouett Shouse, chairman of the Democratic National Executive Committee.97

When the Ways and Means Committee finally issued its report on the revenue bill, the influence of business arguments was clear to see.98 The panel recommended a manufacturer's excise tax of 2.25 percent on all items except food. Arguing that a broad levy was fairer than one on selected items, the panel also insisted that it would not be regressive. The tax would be so small as to be almost negligible. Moreover, a substantial portion of it would almost certainly be absorbed by manufacturers, rather than passed on to consumers in the form of higher prices. Not surprisingly, the committee noted with approval the Canadian sales tax of similar design.99

The Democratic majority offered a traditionally Republican argument for the tax, insisting that it would be progressive, not regressive in its operation. "It should also be pointed out," the panel contended, "that the more one spends the greater his tax under this manufacturers' excise tax. The poor man with small living expenses will pay much less than the wealthy man who lives in great luxury."100 This argument hinged on the notion of free will; taxpayers could simply choose to consume less, thereby limiting their tax burden. It was a powerful argument, at least among Democratic leaders and their Republican bedfellows in the tax debate.

But these were also strange arguments for a Democratic committee; the party had a long history of opposing general sales taxes in any form. The fiscal crisis had apparently convinced party leaders that they had no alternative. "In these times of doubt and uncertainty, even more than in normal times, the unimpaired credit of the Federal Government is of paramount importance," the committee declared. "In the opinion of your committee the preservation, unimpaired, of the national credit is the most important single issue facing this country to-day, and it is confidently stated that this is only possible by taking those steps necessary to balance the Budget for 1933."101 Such comments represented a striking success for the Hoover administration, which had managed to make fiscal soundness a new touchstone of Democratic politics.

The most vigorous champions of the bill were Ways and Means senior Democrat Charles Crisp of Georgia and Majority Leader Henry Rainey of Illinois. Speaker of the House John Garner provided critical, if lukewarm, support for the Ways and Means bill, including its sales tax. His willingness to embrace the idea no doubt pleased William Randolph Hearst, who earlier in the year had launched a Garner for President campaign.102

President Hoover was no doubt pleased as well. Although he insisted that the sales tax was a Democratic idea, he left many skeptics unconvinced.103 Treasury Secretary Mills had already signaled his approval to House Democrats, and he applauded the House bill after its release.104

D. Rebellion and Compromise

Not every Democrat was so eager to cooperate with Hoover. Many progressive legislators of both parties were appalled. In the Senate, Tom Walsh, D-Mont., and Elmer Thomas, D-Okla., were quick to oppose the move.105 And in the House, Rep. Robert L. "Muley" Doughton of North Carolina was stiffening his stance against the levy. He dissented from the Ways and Means committee report, and soon began planning a major rebellion among rank-and-file Democrats. An outpouring of constituent complaints prompted his stance, and many other lawmakers reported similar constituent opinion.106 Despite leadership assurances that the bill was highly progressive -- Crisp insisted that "Wealth will say this bill is confiscatory" -- outspoken Democrats began to denounce it.107 One member of the House was moved to offer his critique in verse:

    He was taxed on boots, was taxed on shoes, was taxed on suits
    and taxed on booze,
    Was taxed on socks, was taxed on hose, was taxed on everything
    that grows.
    A tax attacked him when he was born, attacked him till he felt
    If they increase, as in this bill, it won't be long until they
    Impose a tax on growing corn and on the toots of Gabriel's
Meanwhile, press reaction was mixed. The New York Times endorsed the bill generally and the sales tax in particular, arguing that the latter would help sensitize voters to the cost of government. Other papers, including the New York Herald Tribune, the Baltimore Sun, and the Chicago Tribune were also inclined to support the legislation.109 Other publications disagreed, including the Washington News and the Nation magazine.110

Working closely with insurgent Republicans like Rep. Fiorello LaGuardia, Doughton helped orchestrate a series of votes that eventually killed the sales tax idea. It was a major setback for Democratic leaders, especially Garner, who found his presidential ambitions considerably less bright in the wake of the sales tax fight.111

Garner eventually appealed to the House to pass some sort of tax bill raising new revenue. Failure to raise adequate revenue would imperil the nation, he declared. The speaker challenged every House member who agreed with the principle of a balanced budget to rise in their seats; no one remained seated.112 Lawmakers soon agreed on a compromise measure, featuring an array of new excise levies. Indeed, the sales tax rebellion prompted the House to embrace a collection of "miscellaneous" taxes not unlike the Treasury Department's original proposal. As passed by the House, the bill included taxes on luxuries like furs, jewelry, and yachts, as well as stock transfers and safety deposit boxes.113

The House bill also included higher income and estate tax rates, and it reimposed the federal gift tax. Significantly, it also reduced personal exemptions in line with administration proposals. The exemption cut was generally uncontroversial; in the midst of a revenue crisis, the idea seemed reasonable, especially since it left the income tax very narrow in an overall sense. The tax emerging from the 1932 debate was certainly not broad-based. Indeed, with its higher rates on upper-income Americans, it was very much the narrow, steep tax that Democrats had long championed.

As it left the chamber, however, the House bill was broadly viewed as inadequate. To the Senate was left the task of writing something better.114 Majority Leader Joe Robinson, D-Ark., took a far more pragmatic approach to the legislation than his House counterparts. In no hurry to throw in his lot with the Hoover administration, he paid heed to party colleagues who warned that they would fight a sales tax revival in the Senate. Several progressive Republicans -- including George Norris of Nebraska, William Borah of Idaho, Arthur Capper of Kansas, and John Blaine of Wisconsin -- also signaled their opposition.115

In hearings before the Senate Finance Committee, Treasury Secretary Mills attacked the numerous excises that emerged from the House debacle. Without endorsing a sales tax, he gave the committee reason to believe that the administration would support the idea.116 Meanwhile, Senate conservatives began to marshal support for their effort to revive the levy. Sen. Reed Smoot, R-Utah, reprised his longstanding role as the principal congressional champion of sales taxation. He found key support from David Reed, R- Penn., and David Walsh, R-Mass. When the Finance Committee -- under the conservative but pragmatic chairmanship of Pat Harrison, D-Miss. -- declined to reinstate the sales levy, its champions took the fight to the Senate floor. But despite substantial support from the White House, the idea never got off the ground. House Democrats had demonstrated that the party rank-and-file would never support the idea, and the Senate eventually acquiesced in a package of excise taxes much like the one coming from the House.117

The sales tax debate in both Houses revealed some persistent sectional divisions over revenue policy. Indeed, sectional interests, even more than party lines, seemed to dictate positions on the revenue bill. In the House vote of April 1, 1932, 80 percent of Southern representatives voted against the sales tax levy. Such sentiment implied a preference for steeper income tax rates, which was unsurprising, given the region's longstanding support for the levy. Meanwhile, almost all eastern representatives supported the sales tax, reflecting the disproportionate share of the income tax paid by states like New York and Massachusetts. Similarly, in the Senate vote on May 31 to kill the sales tax, no easterners voted against the levy, and no southerners voted for it.118

As ultimately passed by Congress, the Revenue Act of 1932 was predicted to raise $1.1 billion in new revenue. A substantial chunk of this revenue -- some $178 million -- was expected to come from a combination of steeper rates and lower exemptions in the personal income tax. But fully $457 million was expected from new or increased excise taxes. The list of consumption levies was long, including taxes on lubricating oil, malt syrup, brewer's wort, tires, toilet articles, furs, jewelry, automobiles, trucks, radio and phonograph equipment, refrigerators, sporting goods, cameras, firearms, matches, candy, chewing gum, soft drinks, and electricity.119

Taxed goods were disparate, their selection dependent on a variety of factors, including the political influence -- or lack thereof -- associated with an industry. Most important, however, was a preference for articles of wide consumption, with a secondary concern for their relative necessity. Lawmakers preferred to tax items that people had some choice about consuming, rather than, say, table salt or flour. Some levies, however, were selected because they clearly seemed to indicate a capacity to pay -- hence the luxury tax on jewelry, for instance. But others, like the car tax, were selected at least as much for the revenue they promised. Long the target of progressive tax reformers, the car tax survived the legislative battle because it promised to raise money.

Indeed, revenue was the name of the game in 1932. All other concerns were secondary. The pitched battle over the sales reflected not so much an argument about whether to increase taxes -- that was never in doubt -- but exactly how. The rank-and-file Democrats who shaped the debate made clear their preference for isolated excise taxes, strongly preferring them to more general sales levies. In large part, this preference reflected a conviction that people could choose whether to consume taxed goods. Under a general sales tax, no such choice was possible.

Of course, the excise taxes were highly regressive. But regressivity was only one measure of fairness, and in the face of a gaping deficit, it was not the most important one. Democrats made consumer choice a central aspect in their definition of fair taxation.

The 1932 revenue act also worked important change on the income tax. The lower exemptions so earnestly sought by the Hoover administration found their way into the final bill. Indeed, this aspect of the legislation proved relatively uncontroversial; the Senate Finance Committee report noted the expansion of the tax base only in passing.120 Lawmakers were too distracted by the sales tax debate to argue much over the exemption changes. Higher rates on the nation's richest taxpayers did receive some attention during debate. Indeed, House Majority Leader Henry Rainey, who had denounced the 1926 revenue act for its "tender solicitude" for the rich, now turned his wrath on his Democratic colleagues. When the House turned down the sales tax and replaced some of the lost revenue with higher income tax rates, he warned that "We have made a longer step in the direction of communism than any country in the world ever made except Russia."121

Just five months after the 1932 revenue act was signed into law, Franklin Roosevelt won his campaign for the presidency. When he took the oath of office in 1933, he inherited a tax system largely defined by this last revenue bill of the Hoover administration. It was, in almost every respect, consistent with the revenue policy advanced by the GOP Treasury of Andrew Mellon and later Ogden Mills. It represented a triumph for fiscal orthodoxy, even at the expense of tax fairness. The Republican era of tax policymaking would have long- lasting effects, if not quite the ones that Mellon had originally hoped to define. The low taxes of the 1920s were a distant memory, as was any hope of eliminating such progressive taxes as the estate and gift levies. But the tax system of 1933 was certainly nothing like the progressive revenue structure emerging from World War I. Republicans had managed to limit the scope of progressive taxation, keeping the income tax reasonably limited and placing much of the tax burden on consumption. While sales tax proponents had reason to be disappointed, the federal revenue system was increasingly dependent on narrow sales taxes of one sort or another. That structure, moreover, was not imposed by Republicans on their unwilling Democratic colleagues. Indeed, Roosevelt's party had crafted this system in close cooperation with the Hoover administration. Regressive taxation was a bipartisan achievement.


1 For rates, see Internal Revenue Service, "U.S. Individual Income Tax: Personal Exemptions and Lowest and Highest Bracket Tax Rates, and Tax Base for Regular Tax, Tax Years 1913- 2003," Statistics of Income Bulletin, Appendix to Historical Tables, Winter 2002-2003; John F. Witte, The Politics and Development of the Federal Income Tax (Madison, WI: University of Wisconsin Press, 1985), p. 88.

Until 1954, the income tax included both "normal" and "surtax" rate schedules. The normal tax applied to all income over a basic exemption. The surtax applied to incomes above a given amount, with the starting point set well above the basic exemption. The surtax rate schedule provided most of the progressivity in the income tax rate structure, especially since normal tax rates tended to hover in the mid-single digits. Marginal tax rates were a sum of the applicable normal tax rate combined with the applicable surtax rate, subject to separate bracket calculations.

2 For revenue figures, see Historical Statistics of the United States, Colonial Times to 1970 (Washington, DC: U.S. Dept. of Commerce, Bureau of the Census, 1975), p. 1107. For rates, see Robert A. Wilson, "Personal Exemptions and Individual Income Tax Rates, 1913-2002," Internal Revenue Service, Statistics of Income Bulletin, Data Release, Spring 2002; Roy Blakey and Gladys Blakey, Federal Income Tax (New York: Longmans, Green and Co., 1940), p. 512.

3 Witte, Politics and Development of the Federal Income Tax, p. 88. In his own book-length case for tax reduction, Taxation: The People's Business, Andrew Mellon cited the Wilson quote to boost his argument. On the climate of opinion favoring tax reduction, see also Gene Smiley and Richard H. Keehn, "Federal Personal Income Tax Policy in the 1920s," Journal of Economic History (June 1995), p. 287.

4 W. Elliott Brownlee, Federal Taxation in America (New York: Cambridge University Press, 1996), p. 52. On World War I taxation, with a special emphasis on the role of expertise and social learning, see Brownlee, "Wilson and Financing the Modern State: The Revenue Act of 1916," Proceedings of the American Philosophical Society 129 (1985), pp. 173-210; Brownlee, "Economists and the Formation of the Modern Tax System in the United States: The World War I Crisis," in Mary O. Furner and Barry Supple, eds., The State and Economic Knowledge: The American and British Experiences (Washington, D.C.: Woodrow Wilson International Center for Scholars; Cambridge, U.K.: Cambridge University Press, 1990); Brownlee, "Social Investigation and Political Learning in the Financing of World War I," in Michael J. Lacey and Mary O. Furner, eds., The State and Social Investigation in Britain and the United States (Washington, D.C.: Woodrow Wilson International Center for Scholars; Cambridge, U.K.: Cambridge University Press, 1993).

5 The witticism is widely attributed to Sen. George Norris. See, e.g., Randolph E. Paul, Taxation in the United States (Boston: Little, Brown and Company, 1954), p. 125.

6 Andrew Mellon, Taxation: The People's Business (New York: Macmillan, 1924), p. 12. See also Witte, Politics and Development of the Federal Income Tax, p. 89.

7 Mellon, Taxation, p. 16.

8 Gene Smiley and Richard H. Keehn, "Federal Personal Income Tax Policy in the 1920s," pp. 287-303; Brownlee, Federal Taxation, pp. 59-60.

9 Paul, Taxation in the United States, p. 125.

10 Brownlee, Federal Taxation, pp. 60-62; Ronald King, "From Redistributive to Hegemonic Logic: The Transformation of American Tax Politics, 1894-1963," Politics and Society (1983), pp. 1-52.

11 U.S. Department of the Treasury, Annual Report of the Secretary of the Treasury (Washington, D.C.: Government Printing Office, 1921), p. 25.

12 Mellon, Taxation, pp. 56-57.

13 Brownlee, Federal Taxation, pp. 61-62.

14 U.S. Treasury, Annual Report of the Secretary of the Treasury, 1921, pp. 7-8; Roy Blakey, "The Revenue Act of 1921," 12(1) American Economic Review 77 (March 1922). Mellon suggested that lawmakers cut the top individual tax rate to 40 percent for 1921 and to 33 percent for subsequent years.

15 Quoted in Thomas S. Adams, "Should the Excess Profits Tax Be Repealed," Quarterly Journal of Economics (May 1921), p. 363.

16 Brownlee, "Economists and the Modern Tax System," p. 412.

17 For contemporary comments on Adams's influence, see Blakey, "The Revenue Act of 1921," pp. 90, 105. See also Brownlee, Federal Taxation, pp. 57, 64. For his initial support of the tax, see Thomas S. Adams, "Federal Taxes Upon Income and Excess Profits," 8(1) American Economic Review, Supplement, Papers and Proceedings of the Thirtieth Annual Meeting of the American Economic Association (March 1918), pp. 18-35; Adams, "Principles of Excess Profits Taxation," Annals of the American Academy of Political and Social Science (January 1918), pp. 147-158. For his later opposition, see Adams, "Should the Excess Profits Tax Be Repealed?" Quarterly Journal of Economics (May 1921), p. 369. See also Ratner, Taxation and Democracy, pp. 409-410. On Adams's concern with administrative problems in taxation, see Brownlee, "Economists and the Modern Tax System," p. 408.

18 Brownlee, "Economists and the Modern Tax System," pp. 411-414.

19 Robert Murray Haig, "British Experience With Excess Profits Taxation," American Economic Review, Supplement, Papers and Proceedings of the Thirty-Second Annual Meeting of the American Economic Association. (March 1920), pp. 1-14. Economist David Friday also offered a noted defense for the tax, arguing that it was fair and economically less disruptive than some alternatives. See David Friday, et al., "The Excess Profits Tax-Discussion," American Economic Review, Supplement, Papers and Proceedings of the Thirty-Second Annual Meeting of the American Economic Association. (March 1920), pp. 19- 22. See also Ratner, Taxation and Democracy, pp. 409- 410. On the growing popularity of excess profits taxation among economists, see Brownlee, "Economists and the Modern Tax System," p. 424.

20 Treasury Department, Annual Report of the Secretary of the Treasury (Washington, D.C.: Government Printing Office, 1919), pp. 23-24. See also Blakey and Blakey, Federal Income Tax, pp. 190-191.

21 Blakey, Federal Income Tax, pp. 190-191; Haig, "British Experience With Excess Profits Taxation," p. 1; Ratner, Taxation and Democracy, pp. 403-404.

22 Ratner, Taxation and Democracy, p. 410.

23 Ratner, Taxation and Democracy, p. 406.

24 On Mellon's opposition to a sales tax, see Brownlee, "Economists and the Modern Tax System," p. 429; Blakey, "The Revenue Act of 1921," p. 94. See also Ratner, Taxation and Democracy, p. 405.

25 The act raised the regular corporate income tax rate from 10 percent to 12.5 percent. According to one contemporary estimate, the revenue lost from repealing the excess profits tax would amount to $450 million, while the new corporate income tax hike would raise just under $134 million. See Blakey, "Revenue Act of 1921," p. 91.

26 The exemption for heads of families increased from $2,000 to $2,500, while that for dependents doubled from $200 to $400. See Ratner, Taxation and Democracy, p. 407.

27 The law provided for a top rate of 12.5 percent on capital gains from assets held more than two years. On the law's provision in general, see Witte, Politics and Development of the Federal Income Tax, pp. 90-91; Paul, Taxation in the United States, pp. 128-129; Blakey, "Revenue Act of 1921," pp. 76-77; Blakey, Federal Income Tax, pp. 198-222; Ratner, Taxation and Democracy, pp. 402-412.

28 Ratner, Taxation and Democracy, pp. 406-407; Blakey, "The Revenue Act of 1921," pp. 80, 103.

29 Blakey, "The Revenue Act of 1921," p. 77.

30 For Mellon's general argument on the futility of high marginal tax rates -- and the greater revenue productivity of lower rates -- see Mellon, Taxation: The People's Business, pp. 69-89. Quotation from Paul, Taxation in the United States, pp. 132-133. See also Roy Blakey, "The Revenue Act of 1924," American Economic Review (September 1924), p. 477.

31 On the importance Mellon and other policymakers attached to this tax avoidance argument, see Smiley and Keene, "Federal Personal Income Tax Policy in the 1920s."

32 U.S. Treasury, Annual Report of the Secretary of the Treasury (Washington, D.C.: Government Printing Office, 1923), pp. 3-15. See also Mellon, Taxation: the People's Business, pp. 111-124; Blakey, "The Revenue Act of 1924," p. 478.

33 Bascom N. Timmons, Garner of Texas: A Personal History (New York: Harper & Brothers Publishers, 1948), p. 104.

34 Id. at p. 106.

35 Blakey, "The Revenue Act of 1924," pp. 479- 480; Paul, Taxation in the United States, pp. 134-135. Ratner, Taxation and Democracy, pp. 416-418; Blakey, Federal Income Tax, pp. 246-250.

36 Blakey, "The Revenue Act of 1924," p. 489.

37 Ratner, Taxation and Democracy, pp. 418-419; Paul, Taxation in the United States, p. 136.

38 Ratner, Taxation and Democracy, p. 416; Blakey, "The Revenue Act of 1924," pp. 476-477.

39 Witte, Politics and Development of the Federal Income Tax, p. 94; Roy G. Blakey, "The Revenue Act of 1926," American Economic Review (September 1926), pp. 404- 405.

40 U.S. House of Representatives, Committee on Ways and Means, Revenue Revision, 1925, October 19 to November 3, 1925 (Washington, D.C.: Government Printing Office, 1925), p. 2.

41 "Tax Clubs -- A New Factor in Tax Revision," Literary Digest (November 21, 1925), p. 68.

42 Rep. James A. Frear, R-Wis., quoted in Blakey, "The Revenue Act of 1926," p. 406.

43 Blakey, "The Revenue Act of 1926," p. 407.

44 Ratner, Taxation and Democracy, pp. 428-430.

45 Exemptions for single taxpayers increased from $1,000 to $1,500; married couples and heads of household saw their exemptions rise from $2,500 to $3,500.

46 "The Fight Over the Little Fellows Tax," Literary Digest (October 31, 1925), pp. 10-11.

47 U.S. House of Representatives, Committee on Ways and Means, The Revenue Bill of 1926 (H. Rept. No. 1), p. 35. See also Blakey, "The Revenue Act of 1926," p. 410.

48 Committee on Ways and Means, The Revenue Bill of 1926, pp. 35-36. On the burden of automobile taxes, see James W. Follin, "Taxation of Motor Vehicles in the United States," Annals of the American Academy of Political and Social Science (November 1924), pp. 141-159.

49 Committee on Ways and Means, The Revenue Bill of 1926, p. 28.

50 Id. at 29.

51 Id. at 14, 29.

52 Committee on Ways and Means, Revenue Revision, 1925, p. 87.

53 Id. at 106.

54 Id. at 118.

55 Id. at 142.

56 The act reduced the corporate income tax rate from 13.5 percent to 12 percent. Ratner, Taxation and Democracy, p. 431; Paul, Taxation in the United States, pp. 140-141.

57 Walter Lambert, "New Deal Revenue Acts: The Politics of Taxation" (Ph.D. dissertation, University of Texas, Austin, 1970), p. 14.

58 Paul, Taxation in the United States, p. 142.

59 Jordan A. Schwarz, The Interregnum of Despair: Hoover, Congress, and the Depression (Urbana, IL: University of Chicago Press, 1970), pp. 107-108.

60 Schwarz, Interregnum of Despair, p. 111.

61 Ogden L. Mills, "The Spendings Tax," Proceedings of the Fourteenth Annual Conference on Taxation Under the Auspices of the National Tax Association, September 12-16, 1921 (New York: National Tax Association, 1922), p. 331.

62 See John Stuart Mill, Principles of Political Economy, ed. William James Ashley, London: Longmans, Green and Co. (1909). Available from; accessed August 8, 2003.

63 Schwarz, Interregnum of Despair, pp. 110-111. On Adams's support for a progressive spendings tax, see Brownlee, "Economists and the Modern Tax System," p. 431.

64 Herbert Hoover, Third Annual Message, December 8, 1931. The American Presidency Project, University of California, Santa Barbara.; Schwarz, Interregnum of Despair, pp. 112-114.

65 U.S. House of Representatives, "Revenue Revision, 1932," January 13-27 and February 2-4, 1932 (Washington, D.C.: Government Printing Office, 1932), p. 2.

66 Id. at 3.

67 Id. at 4.

68 Schwarz, Interregnum of Despair, pp. 113-114.

69 U.S. Department of the Treasury, Annual Report of the Secretary of the Treasury (Washington, D.C.: Government Printing Office, 1932), p. 28.

70 Roy Blakey and Gladys Blakey, "Revenue Act of 1932," American Economic Review (December 1932), p. 629.

71 Specifically, he suggested that "normal" rates be fixed at 2, 4, and 6 percent, while surtax rates, which increased much more dramatically as they moved up the income scale, should be set between 1 and 40 percent.

72 U.S. Treasury, Annual Report of the Secretary for 1932, p. 29.

73 Id. at 30-31. President Hoover was apparently willing to accept even higher rates for the estate tax. In fact, he was far less critical of the levy than Andrew Mellon had been throughout the 1920s, endorsing its fairness. See Lambert, "New Deal Revenue Acts," p. 19.

74 Id. at 30.

75 U.S. House of Representatives, Committee on Ways and Means, Revenue Revision, 1932, January 13-27 and February 2-4, 1932 (Washington: Government Printing Office, 1932), pp. 167, 216, 123-124.

76 Id. at 15.

77 Id. at 55-60.

78 Id. at 60.

79 Id.

80 Id. at 75-76.

81 Id. at 206.

82 Id. at 19.

83 Leff, Limits of Symbolic Reform, p. 21.

84 U.S. Treasury, Annual Report of the Secretary for 1932, p. 19.

85 Id. at 24.

86 Id. at 25.

87 Leff, Limits of Symbolic Reform, pp. 21-25; Lambert, "New Deal Revenue Acts," p. 22.

88 Attributed to Sen. Russell Long, D-La., chairman of the Senate Finance Committee.

89 Committee on Ways and Means, Revenue Revision, 1932, p. 181.

90 Id. at 891, 906.

91 Id. at 1194.

92 Id. at 664

93 Id. at 666-667.

94 Id. at 137.

95 Id. at 206-209

96 Report on Canada trip, id. at 239-252; Adams's testimony, id. at 252-262. For more on Hearst, see Schwarz, Interregnum of Despair, p. 115.

97 Hearst editorial reprinted from Mar. 13, 1932 newspapers, Public Finance Pamphlets, vol. 1. On Hearst and Garner, see Schwarz, Interregnum of Despair, p. 115.

98 Lambert, New Deal Revenue Acts, pp. 28-29.

99 U.S. House of Representatives, Committee on Ways and Means, The Revenue Bill of 1932, H. Rept. No. 708, pp. 8-10.

100 Id. at 9.

101 Id. at 5.

102 Lambert, New Deal Revenue Acts, p. 31; Schwarz, Interregnum of Despair, pp. 116-117.

103 Lambert, New Deal Revenue Acts, p. 31. Hoover insisted in his memoirs that the idea originated with the Ways and Means leadership. See Herbert Hoover, The Memoirs of Herbert Hoover: The Great Depression, 1929-1941 (New York: Macmillan, 1952), p. 137.

104 Lambert, New Deal Revenue Acts, pp. 32-33.

105 Schwarz, Interregnum of Despair, p. 116.

106 Schwarz, Interregnum of Despair, pp. 118, 134.

107 Lambert, New Deal Revenue Acts, pp. 37-38

108 Congressional Record, 72nd Cong, 1st Sess., p. 6379; quoted in Schwarz, Interregnum of Despair, p. 129.

109 Lambert, New Deal Revenue Acts, p. 43.

110 Lambert, New Deal Revenue Acts, p. 43-44

111 For a detailed analysis of the sales tax fight on the House floor, see Jordan A. Schwarz, "John Nance Garner and the Sales Tax Rebellion of 1932," 30(2) Journal of Southern History pp. 162-180 (May 1964).

112 Lambert, New Deal Revenue Acts, p. 69.

113 Lambert, New Deal Revenue Acts, p. 71.

114 Blakey and Blakey, Federal Income Tax, p. 630.

115 Schwarz, Interregnum of Despair, pp. 135- 136.

116 Id.

117 Schwarz, Interregnum of Despair, pp. 136- 137.

118 Schwarz, Interregnum of Despair, p. 140.

119 Blakey, "Revenue Act of 1932," pp. 620-621.

120 U.S. Senate, Committee on Finance, Revenue Bill of 1932, Rept. 665 (Washington, D.C.: Government Printing Office, 1932), p. 7.

121 Congressional Record, 72nd Cong., 1st Sess., p. 6512. See also Schwarz, Interregnum of Despair, p. 121.