Anticipating the costs of American participation in World War I, Treasury Secretary William McAdoo predicted that the U. S. government would need billions of dollars for the war effort. Progressive and conservatives sharply disagreed on how to pay for the war. Specifically, they, like McAdoo, addressed the problem of the ratio of war taxes to war loans. Progressives believed that the war offered an opportunity to solidify a system of progressive taxation based on ability to pay. The Revenue Act of 1916 and the passage of the Sixteenth Amendment for a federal income tax had opened the door to taxation as a means to redistribute income. Further, progressives envisioned that paying for the war effort through current taxes was more rational and efficient than long-term war debts. These taxes were to be imposed on incomes, estates, luxury goods, and excess profits. Among conservatives, especially in the business community, loans, not taxes, were the better option. Business interests offered their own variations on what taxes would be imposed. Some suggested a war profits tax, which would have been borne disproportionately by agriculture and manufacturing sectors, which had experienced recessions before the war. Other conservatives preferred to fund the war on consumption taxes alone, though taxing consumption was regressive and punitive.
For the most part, the principles of progressive taxation won out in the War Revenue Act of 1917. While the Liberty Loan and the War Revenue bills were introduced into Congress at the same time, it took six months for the War Revenue Act to make it into law. The act put into force an excess profits tax, raised both individual and corporate income taxes to 4 percent and 6 percent, respectively, and raised excise and estate taxes. New taxes on services, facilities, and on luxury goods such as automobiles were part of the broad-based revenue act. It also increased the maximum surtax on incomes to 63 percent. The 1918 Revenue Act further increased the tax on the highest incomes to 77 percent.
One of the major casualties of the new excise taxes was independent journalism. At a time when inflation had already boosted the costs of publishing newspapers, the introduction of new excise taxes in the form of higher postal rates costs skyrocketed. Already before the war, newspapers had folded under the pressures of escalating costs of new printing machines and linotype metal. Now, along with the soaring price of newsprint, newspapers saw declining profits. The consolidation of newspapers before the war continued due to these new pressures, and hundreds of journals and newspapers either merged with other companies or closed their doors.
The War Revenue Act changed the shape of American taxation and government finance. It shifted the tax burden from customs and excise taxes to taxes on income, profits, and estates, which were at least marginally progressive. During the war, federal tax receipts escalated more than five times, and they never returned to the lower levels of the prewar years. The federal debt also became a permanent part of American political discourse, as government indebtedness increased during the war years from $1 billion in 1915 to over $20 billion in 1920. The cry for tax relief, however, was never far behind, and tax cuts formed a major part of the Republican Party platform in the elections of the 1920s.
See also Andrew W. Mellon.
Further reading: David M. Kennedy, Over Here: The First World War and American Society (New York: Oxford University Press, 1980).
World History
