The Revenue Acts of 1924 and 1926: Provisions & Impact

The United States emerged from World War I with a national debt of over $24 billion. To finance the war, federal income tax rates had been raised to historic highs, with the top marginal rate reaching 77% by the war’s end. This level of taxation was considered unsustainable in peacetime, and the political climate of the early 1920s, under President Calvin Coolidge, favored a return to normalcy, which included a significant reduction in the tax burden.

The primary architect of this tax reform was Secretary of the Treasury Andrew Mellon. Appointed by President Warren G. Harding and continuing his service under Coolidge, Mellon entered office with a clear agenda to lower tax rates, believing that the wartime structure was hampering economic investment and growth. This sentiment that a new approach to federal revenue was needed to foster prosperity set the stage for a series of legislative battles over the nation’s tax code.

Key Provisions of the Revenue Act of 1924

The Revenue Act of 1924, while not fully encompassing Andrew Mellon’s vision, was a first step in reshaping post-war tax policy. The act reduced income tax rates across the board, lowering the top marginal income tax rate from 58% to 46%. The law also adjusted the rates for lower-income brackets to provide relief to all taxpayers and stimulate economic activity.

In a move that ran counter to Mellon’s broader goals, the 1924 Act increased the maximum estate tax rate. This was a concession to progressive members of Congress who were concerned about the concentration of wealth. To support the estate tax, the act introduced a new federal gift tax. The purpose of the gift tax was to prevent individuals from circumventing the estate tax by transferring large portions of their wealth to heirs before death.

A controversial provision required the public disclosure of federal income tax payments made by individuals and corporations. This measure was championed by progressives in Congress who argued for greater transparency from wealthy taxpayers and large businesses. The policy was met with strong opposition from the business community and wealthy individuals who valued their financial privacy. The act also established the U.S. Board of Tax Appeals to adjudicate disputes between taxpayers and the government.

Key Provisions of the Revenue Act of 1926

The Revenue Act of 1926 is seen as the successful implementation of Andrew Mellon’s complete tax reform plan. It went much further than its 1924 predecessor, enacting the deep cuts Mellon had long advocated for. The most significant change was the drastic reduction of the top marginal income tax rate, which was lowered from 46% to 25% on incomes over $100,000.

The 1926 Act also made substantial changes to wealth transfer taxes, directly reversing some elements of the 1924 law. The estate tax, which had been increased just two years earlier, was significantly reduced. In a more decisive move, the federal gift tax that was established in the 1924 Act was completely repealed. This repeal eliminated the mechanism designed to prevent the avoidance of the estate tax through lifetime wealth transfers.

Furthermore, the 1926 legislation addressed the contentious issue of financial privacy by repealing the provision that made tax payments public information. This was a direct response to the outcry from the business community. The act also provided greater relief to lower and middle-income families by increasing personal exemption amounts, which took about a third of taxpayers off the rolls entirely. The corporate income tax rate, however, was slightly increased from 12.5% to 13.5%.

Andrew Mellon’s Tax Philosophy

The tax policies of the 1920s were driven by Andrew Mellon’s philosophy, which he termed “scientific taxation.” This approach was not about eliminating taxes, but about setting rates at a level that would maximize government revenue while minimizing the negative impact on the economy. Mellon believed that the excessively high tax rates inherited from World War I were counter-productive. He argued that when rates on the wealthy and corporations became too high, it created a powerful incentive to seek out tax shelters and avoid productive investment, ultimately reducing the total amount of tax revenue collected.

High tax rates on capital stifled the very economic activity that generated tax revenue. Mellon contended that by lowering the tax burden on the highest earners, the government would encourage them to invest their capital in new businesses and industries. This increased investment would lead to job creation, higher wages, and overall economic growth. The resulting prosperity would expand the total pool of national income, meaning the government could collect more revenue even with lower tax rates.

This theory is an early articulation of what would later be known as supply-side economics. The idea is that the economic benefits of tax cuts for the wealthy and corporations would “trickle down” to the rest of society. Mellon’s public relations efforts were instrumental in promoting this philosophy. He argued that the interests of the wealthy and the working class were aligned, as the investment of the former was necessary for the employment and prosperity of the latter.

Economic and Political Consequences

The implementation of Mellon’s tax policies coincided with a period of significant economic growth in the latter half of the 1920s, often referred to as the “Coolidge Prosperity.” Following the tax cuts, the economy expanded, and the federal budget experienced surpluses. This outcome appeared to validate Mellon’s prediction that lower tax rates could lead to increased government revenue by fostering a more robust economy.

The tax cuts, however, were a subject of intense political debate. While proponents pointed to the booming economy as proof of their success, opponents raised concerns about their effect on wealth distribution. Progressives in Congress argued that the policies disproportionately benefited the wealthiest Americans at the expense of the working class, thereby exacerbating the already wide gap between the rich and the poor. The Democratic Party platform, for example, denounced the Mellon plan as a “device to relieve multi-millionaires.”

This clash of ideologies defined the political landscape of the era. The debate centered on fundamental questions about the role of government and the fairness of the tax system. The period demonstrated the ongoing conflict between the goals of economic growth and equitable wealth distribution in American fiscal policy.