Income Tax

The income tax had little effect on most Americans until it became an issue advocated by the Populist party in 1892. Because of the support, Congress later passed the Income Tax Act of 1894, which was a tax of 2% on individual incomes in excess of $4,000. This essentially only effected the wealthy in America. In Supreme Court case Pollock vs. Farmers' Loan & Trust Company, the Supreme court opposed this tax on the basis that it violated the constitutional requirement that direct taxes are apportioned by population. The tax had not been apportioned, and was therefore invalid. The ruling could arguably be attributed to the "Red Scare" or manifestation of Communist/ Bolshevik fear across Europe and America. 

However, this decision was later superseded in the Sixteenth amendment of the constitution, ratified in 1913, which stated that Congress had the power to lay and collect taxes on income without apportionment among the states. It is important to note that these tax laws often reflected the time period in which they were written. The 1913 tax was simply a flat tax aiming to distribute the tax burden and raise revenue. However, in 1917, this flat tax was replaced with a gradual tax in the War Revenue Act of 1917. It imposed a maximum tax rate at 67%. The Revenue Act of 1924 reduced this maximum individual tax rate to 43% and in 1926 it had decreased to 25%. Mellon, the Secretary of the Treasury, argued that lowering taxes on a "reasonable basis" will motivate individuals to innovate and promote economic growth. 

During the Great Depression, the maximum again increased from 25 to 63 percent per individual. Personal exemptions also largely decreased. Tax hikes remained a reality during the Roosevelt administration as well. The maximum rose to 79%. State governments did the same at the time, and the social security act of 1935 increased taxation as well, in order to establish social programs such as a federal retirement fund in the Old Age Pension act. And ultimately Mellon was correct. Tax increases decreased incentive to work but also decreased investment and entrepreneurship of the previous couple of decades. While income taxes did even out the taxation distribution and increase government revenue for social programs, it was also greatly detrimental to the economy during and after the Great Depression.