What changes did the Revenue Act of 1913 make to tax rates and the administration of the federal income tax?
Executive summary
The Revenue Act of 1913 (the Underwood–Simmons or Underwood Tariff Act) simultaneously slashed tariff rates and re‑established a federal income tax, shifting the federal revenue mix away from duties toward taxation of individual and corporate incomes [1] [2]. It created a narrowly targeted, progressive income‑tax schedule with low initial rates and exemptions and introduced administrative mechanisms — including collection‑at‑source ideas and the first Form 1040 — that laid the groundwork for modern federal tax administration [3] [4].
1. A constitutional opening: the Sixteenth Amendment cleared the way
The Act followed the February 1913 ratification of the Sixteenth Amendment, which expressly authorized Congress to levy income taxes without apportioning them among the states, making the statute’s income provisions legally viable after earlier court setbacks [5] [6].
2. Tariff overhaul: large reductions to import duty rates
The Underwood bill sharply reduced protective tariffs that had been a dominant source of federal revenue, cutting average rates from roughly 40–41 percent down to the mid‑20s (commonly reported as about 26–27 percent) and marking the lowest tariff levels in decades [1] [7] [2].
3. Income‑tax structure: exemptions, low base rate, and a graduated surtax
The Act reintroduced a federal income tax that taxed only a small slice of Americans because of generous exemptions and low early rates; it imposed a baseline rate of 1 percent on net incomes above the exemption (commonly cited as $3,000 for individuals) and applied progressive surtaxes that raised the top marginal rate into the single digits (sources describe top rates at 6–7 percent on the very highest incomes) [2] [3] [8].
4. Who paid and how much: a narrow taxpayer base and modest initial yield
Because of the $3,000 exemption (with an extra amount for married couples) and the modest rates, the law affected only a small percentage of the population — estimates commonly put the initial taxpayer share at about 2 percent of households — and in its first year the new income tax raised a relatively small fraction of federal revenue compared with tariffs and excises [2] [3].
5. Corporate taxation and other revenue offsets
The bill also altered corporate levies, replacing or superseding earlier corporate taxes with a new corporate income charge (sources note a 1 percent corporate tax provision in the Act and discuss later revisions), and explicitly paired the tariff reductions with these new income levies to compensate for lost customs revenue [1] [9].
6. Administrative changes: collection, the Bureau of Internal Revenue, and the first 1040
The statute contained administrative provisions that were controversial for their ambition: it contemplated substantial collection‑at‑source mechanisms and strengthened the Bureau of Internal Revenue’s role, and the first Form 1040 was introduced as the operating tool for individual reporting and collection [4] [9] [3]. Sources note that withholding had historical precedent but that the 1913 law envisaged broader collection methods, a feature that stirred debate over enforcement and practicality [4].
7. Immediate aftermath and longer‑term trajectory
Although the 1913 tax was deliberately light and narrow, World War I and subsequent revenue needs drove rapid escalation of rates and broader tax bases in later acts (notably 1916–1918), demonstrating that the Revenue Act of 1913 established institutional capacity for federal income taxation even as its initial rates and scope were modest [10] [4].