Wilson believed that this action would encourage American manufacturers to increase efficiency and become more competitive with their prices. The Underwood Tariff also famously re-imposed the federal Income Tax.
Wilson's New Freedom Reforms for kids: Underwood Tariff aka the Revenue Act of 1913
President Woodrow Wilson, like his predecessors Theodore Roosevelt and William Taft, was a firm supporter of the Progressive Movement and Progressive reforms. His New Freedom polices included the passing of the federal law known as the Underwood Tariff aka the Revenue Act of 1913.
Underwood Tariff: What was the Purpose of the Underwood Tariff aka the Revenue Act of 1913?
The purpose of the Underwood Tariff was two-fold:
To reduce the average tariff on imported goods
To compensate for lost revenue on tariffs, a rider to the act created a small, graduated income tax. The Underwood Tariff aka the Revenue Act of 1913 therefore re-imposed the federal Income Tax
Who sponsored the Underwood Tariff aka the Revenue Act of 1913?
The Underwood Tariff was sponsored and named for the progressive Alabama Representative, Oscar Underwood.
Underwood Tariff aka the Revenue Act of 1913: The Tariff Reduction
What is a tariff? A Tariff is a tax placed on goods that are imported from foreign countries. The Underwood Tariff, aka the Revenue Act of 1913, lowered basic tariff rates from 40% to 26%, well below the 1909 Payne-Aldrich Tariff Act which had been President Taft's derisive compromise on tariffs. Many items were added to the free list, including iron, steel, woolens, farm machinery and many raw materials, groceries and removed the duties from more than a hundred other items. The purpose of the tariff reductions was to make manufacturers more efficient and provide consumers with competitive pricing.
Effect of the Tariff Reduction
The effect of the reduced tariffs encouraged the import of foreign materials and manufactured goods, and prices of goods came down. It was a genuine attempt to lower the cost of living. However the effect of reduced tariffs on prices and foreign trade was short-lived due to the outbreak of World War I (1914 -1918) which curtailed imports.
Underwood Tariff aka the Revenue Act of 1913: The 16th Amendment and Income Tax
In 1894 the United States Congress had enacted a flat rate Federal income tax but this had been ruled unconstitutional by the U.S. Supreme Court because it was a direct tax not apportioned according to the population of each state. The 16th Amendment, which authorized Congress to collect income taxes, was ratified just a few weeks before the inauguration of Woodrow Wilson. This amendment to the Constitution enabled Wilson to enact a new tax on individual income. He took the opportunity to do so with the Underwood Tariff. The Revenue Act of 1913 re-imposed the federal Income Tax without regard to the population of each State. (A Corporation Tax had already been included in the Payne-Aldrich Tariff law).
Effect of the federal Income Tax
The effect of the Underwood Tariff, aka the Revenue Act of 1913, on federal Income Tax was as follows:
Incomes less than $4000 per year were exempt by the act (this ensured that nearly all factory workers and farmers were not required to pay the taxes)
Those earning more than $4000, but less than $20,000, paid just 1% income tax
There was then a gradual increase in rates. The highest tax was just 6% on earnings exceeding $500,000.