Today in 1935: The Revenue Act “soaks the rich” with higher income tax rates

August 30, 2013

Today in Legal HistoryLast week’s Today in Legal History topic was the Banking Act of 1935; this law enacted a variety of changes to the nation’s financial system – not least among them was the establishment of the Federal Deposit Insurance Corporation (FDIC), which guarantees bank deposits up to a certain amount.

As noted in the post, the presence of the FDIC during and following the 2008 financial crisis helped limit the number of bank failures, since the organization deters “bank runs” – in which bank customers, out of fear of the bank’s potential failure, would withdraw all of their deposits, causing the bank’s insolvency.

“Bank runs” were actually the primary impetus for the creation of the FDIC, since they were quite prevalent during the time of the last major financial crisis – the Great Depression.

And just as the Banking Act of 1935 was intended to stabilize elements of the financial industry that were contributing to the Great Depression, so was the comprehensive set of reforms that it was a part of – the New Deal – intended to stabilize the economy at large.

And historians generally agree that the New Deal accomplished what it set out to: stabilize not only the nation’s economy, but also its democracy itself (the global financial crisis saw the fall of democracy in several nations).

Much like the government responses to the 2008 financial crisis, the New Deal required the government to shell out a lot of money – a major point of contention both then and now.

To remedy the deficits created by these programs, the government needed more revenue, which it sought through increasingly progressive income taxation regimes.

One of the most progressive of these regimes was enacted by the Revenue Act of 1935, signed into law by President Franklin D. Roosevelt on August 30, 1935.

The Act increased income tax liability for individuals earning over $50,000 per year (approximate $850,000 today).

Unlike today’s tax code, in which all income above $400,000 (or $450,000 for married couples)  is taxed at the same rate, the 1935 Act had 18 different brackets for income over $50,000:

Net Income (range) 1935 Act rate (%) Increase over 1934  rate (%)
Low High
$50,001.00 $56,000.00 31 1
$56,001.00 $62,000.00 35 2
$62,001.00 $68,000.00 39 3
$74,001.00 $74,000.00 43 4
$80,001.00 $80,000.00 47 5
$90,001.00 $90,000.00 51 6
$100,001.00 $100,000.00 55 5
$150,001.00 $150,000.00 58 6
$200,001.00 $200,000.00 60 7
$250,001.00 $250,000.00 52 8
$300,001.00 $300,000.00 64 10
$400,001.00 $400,000.00 66 11
$500,001.00 $500,000.00 68 12
$750,001.00 $750,000.00 70 13
$1,000,001.00 $1,000,000.00 72 14
$2,000,001.00 $2,000,000.00 73 14
$5,000,001.00 $5,000,000.00 74 15
Over $5,000,000.00 75 16

 

As you can see, the percentage increase over the 1934 tax rate became gradually higher along with income, with the top tax bracket of any annual income over $5 million ($85 million by today’s numbers) being 75%.  At the time, this rate applied to only one person: John D. Rockefeller.

Because of the disproportionate effect the Act had on the rich, the law became labeled by critics as the “Soak the Rich” tax.

Critics further charged that the rich simply didn’t have enough money to pay for the government’s programs, and that “soaking the rich” would ultimately lead to severe harm to the economy and the middle and lower classes.

Finally, critics argued that the most effective method of raising government revenue would be taxing middle-income earners – in other words, to “broaden the tax base.”

These arguments continue to be heard today, in response to similar calls – particularly from President Obama – to increase income taxes on higher earning taxpayers.

According to recent polls, a majority of Americans support the idea of taxing the rich.  Regardless, it remains contentious today, just as it was 78 years ago, as critics continue to label the proposal misguided at best, and born from envy of the rich at worst.

Although we don’t have any true way of determining whether the 1935 “Soak the Rich” Act harmed the economy at large, we do know that 1935 – the first tax year that the Act was effective – saw a greater amount of revenue than had been forecast, resulting in a smaller deficit than anticipated.

Thus, it seems that by “soaking the rich,” the 1935 Act accomplished what it set out to do: increase revenue and decrease deficits.