Income and Wealth Taxes (1934-1941)

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New Deal efforts to address the economic catastrophe of the Great Depression required much more revenue than was coming in at the beginning of the 1930s; and later in the decade the Roosevelt Administration would face the need to raise more revenues for mobilization as the world girded for war.  To meet these exigencies, New Deal leaders created several new taxes along the way, such as a liquor tax, coal tax, and Social Security tax [1].  Furthermore, President Roosevelt and his advisors were committed to the idea of progressive income and wealth taxation; as one tax historian puts it, “When it came to taxes, Roosevelt simply believed that rich people should pay more than poor people. And in emergencies, they should pay a lot more” [2].

The 1920s had been a period of continuous tax-cutting by Republican administrations, but after the stock market crash of 1929 federal revenue plummeted so dramatically that the government could not fulfill its basic functions.  Even President Hoover had to relent, and the Revenue Act of 1932 was enacted.  This law “spread its burden widely across the population with steep new rates for income taxpayers, as well as numerous new levies on consumption” [3].  Tax increases continued under FDR, but with greater emphasis on progressive taxes on income and wealth, rather than regressive consumption (sales) taxes [4].  The only major exception was the Social Security tax on wages, starting in 1937.

The Revenue Act of 1934 raised income taxes on the wealthy and reduced them for lower income groups; it also raised estate taxes on the wealthy and closed corporate tax loopholes [5].  The Revenue Act of 1935, sometimes called the “Wealth Tax Act,” raised taxes on the wealthy again: “The top rate jumped from 59 percent on incomes over $1 million to 75 percent on incomes over $500,000”; it “placed graduated net income taxes on corporations and a tax on incorporated dividends”; and it once again raised estate taxes [6].  The Revenue Act of 1936 taxed undistributed corporate profits and the Revenue Act of 1937 aimed to clamp down on corporate tax avoidance [7].  The Revenue Act of 1940 – by which time national defense spending was ramping up – raised taxes on corporations by 1%; increased taxes on incomes between $6,000 and $100,000; and lowered personal exemptions by 20%, thereby broadening the tax base [8].

Some commentators have argued that increased taxation on high incomes and wealth during the New Deal era were not overly successful in raising additional revenue [9].  Nevertheless, in its report on fiscal year (FY) 1936, the U.S. Treasury reported an additional $321 million in income tax receipts (a 29% increase from FY 1935) and an additional $78 million in estate tax receipts (a 56% increase).  The Treasury noted that these increases were not only the result of the economic recovery, but also “the full effect of the Revenue Act of 1934” [10].

Revenue rose again in FY 1937, and the Treasury noted “[it was] the largest increase recorded since receipts began to rise in the fiscal year 1933… [G]ains were widespread among the numerous sources of revenue, [and] the rise in income tax receipts, including back taxes and excess-profit taxes, was especially marked… [T]he large augmentation of receipts from these sources is ascribable both to the higher levels of income in 1935 and 1936 and to the sundry features of the Revenue Act of 1936, such as increases in rate scales, imposition of surtaxes on undistributed profits, and subjection of dividends to the normal tax” [11].

Overall, from FY 1933 through FY 1941, annual federal receipts (excluding Social Security contributions) rose 262%, from $2.1 billion to $7.6 billion [12].  Although this increase was largely due to a rapidly growing economy and higher total national income, higher taxes on the rich and corporations were significant contributors to the revenue mix.

Federal taxes were the most progressive in U.S. history after the New Deal (for example, top marginal income tax rates were 91% from 1954 through 1963) and remained so through the postwar golden age of U.S. economic dominance [13].  Rates have been whittled down in the modern era, especially under presidents Kennedy, Reagan, George W. Bush, and Donald Trump.  Not surprisingly, the national debt has soared alongside these persistently low tax rates [14].


(1) Annual reports of the Secretary of the Treasury, fiscal years1934, p. 16, and1935, pp. 38-40.  (2) Joseph J. Thorndike, Their Fair Share: Taxing the Rich in the Age of FDR, Washington, DC: The Urban Institute Press, 2013, p. 45.  (3) Ibid., p. 159.  (4) Ibid., pp. 275-276.  (5) Ibid., pp. 94-104, and the Annual Report to the Secretary of the Treasury, for fiscal year 1935, pp. 3-4, 37-40.  (6) See note 2, pp. 173-175, and the Annual Report to the Secretary of the Treasury, for fiscal year 1936, pp. 29.  (7) James S. Olson (ed.), Historical Dictionary of the New Deal, Westport, CT: Greenwood Press, pp. 420-421.  (8) Annual Report of the Secretary of the Treasury, for fiscal year 1940, p. 21.  (9) See, e.g., note 2, p. 174; note 7, pp. 531-532; and Michael Hiltzik, The New Deal: A Modern History, New York: Free Press, 2011, pp. 339-340.  (10) Annual Report of the Secretary of the Treasury, FY 1936, pp. 1-4.  (11) Annual Report of the Secretary of the Treasury, for fiscal year 1937, p. 3.  (12) Yearly receipts during the core New Deal years (minus Social Security contributions) were as follows: 1933 – $2.1 billion; 1934 – $3.1 billion; 1935 – $3.8 billion; 1936 – $4.1 billion; 1937 – $5 billion; 1938 – $5.9 billion; 1939 – $5.2 billion; 1940 – $5.4 billion; 1941 – $7.6 billion (see annual reports of the Secretary of the Treasury, fiscal years 1940, p. 1, and 1941, p. 1).  (13) See, e.g., “Historical Highest Marginal Income Tax Rates,” “Exemption Level, 1916-2017” (showing exemptions and rates for federal estate taxes), and “Corporate Income Tax as a Share of GDP, 1946-2009,” Tax Policy Center, Urban Institute and Brookings Institution, accessed April 7, 2017.  (14) See, e.g., “Historical Debt Outstanding – Annual,” TreasuryDirect, U.S. Department of the Treasury Bureau of the Fiscal Service, accessed May 7, 2018.

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