The Great Depression is usually remembered for introducing extremely high progressive federal income taxes. This shift began as a misguided revenue measure by Herbert Hoover, who raised the top marginal rate to 63 percent in 1932, from 25 percent, in a failed attempt to combat growing budget deficits.
But Franklin Delano Roosevelt made the progressive tax structure into a permanent feature of New Deal policy, premised on the redistribution of wealth from the rich to the poor. Roosevelt signed legislation boosting the top marginal rate to 77 percent in 1936, and successive increases raised it to an astounding 94 percent by 1944, although wealthy earners seldom actually paid these statutory rates, leading to a much lower effective tax rate, particularly after 1940.
Among progressives, Roosevelt’s package of taxing the wealthy to finance a redistributive welfare state remains his most celebrated legacy. Historians have been comparatively reluctant to acknowledge another tax legacy of the New Deal though, as FDR was also responsible for a radical expansion of the federal income-tax base, on the backs of the lowest income earners.
Breaking the Limits
From its inception in 1913 until the late 1930s, the federal income tax was intended to apply only to the wealthiest earners in society. This intentional policy sought to exempt lower-income earners from the burdens of paying for the government’s operations. Single filers could exempt the first $1,000 of their earnings (roughly $15,000 to $18,000 today) from taxation, with an extra $500 exemption between 1925 and 1931. Married filers enjoyed roughly double that amount in most years. The eligible taxpaying public hovered around roughly 10 to 15 percent of all income earners (measured as “tax units”) prior 1939.
This all changed beginning in 1940, as FDR marshaled through a rapid succession of tax measures that simultaneously (1) raised rates across the board, (2) lowered the exemption level, and (3) ramped up tax enforcement by the IRS. While these measures slightly increased the already-high rates upon the wealthy, the bulk of their burdens actually fell upon the poor—mainly working class people who previously paid no income taxes due to falling below the exemption threshold.
Between 1939 and 1942, Roosevelt cut the personal exemption in half. Single filers now had to pay taxes on income earnings above $500 (roughly $8,000 today). Married filers saw their exemption drop from $2,500 to $1,200 by 1942, and again to only $1,000 in 1944. The revenue strains of World War II provided an important impetus for these policies, but Roosevelt’s actions both preceded the United States’ entry into war and persisted as a permanent feature of the tax code after the return of peace in 1945.