Underwood Tariff Act
UNDERWOOD TARIFF ACT
Congress passed The Underwood Tariff Act in 1913. Its purpose was to reduce levies on manufactured and semi-manufactured goods and to eliminate duties on most raw materials. To compensate for the loss of revenue, the act also levied a graduated income tax (made legal by ratification of the Sixteenth Amendment earlier that year) on U.S. residents.
Protective tariffs had been the subject of political debate since they were first passed in 1828. After the American Civil War (1861–1865) the controversy over duties had become partisan, with Republicans, for the most part, favoring them, maintained duties were favorable to U.S. industry, and Democrats believed to the contrary. Republican administrations during the 1890s raised tariffs to unprecedented levels: The McKinley Tariff Act of 1890 was followed by the Dingley Tariff Act, which raised duties to as much as 57 percent and caused the cost of living to increase. Around the turn of the century, however, Republicans began to support opposition to high tariffs as well. As a result rates were reduced somewhat by the Payne-Aldrich Tariff Act of 1909, but prices remained artificially high and Democrats continued to press for a reduction in duties.
The election of 1912 proved a turning point for the Democrats: Woodrow Wilson (1856–1924) was voted into office and the party won control of Congress. In 1913 Wilson supported the Underwood Tariff Act, cutting or eliminating tariff rates. The legislation, sponsored by Representative Oscar Underwood (1862–1929), passed both houses of Congress. The reduced tariffs encouraged the import of foreign materials and manufactured goods, and prices of goods came down. The federal government now collecting less revenue in duties on foreign goods.
To offset the effect of less revenue from tariffs, the government levied an income tax for the first time. Incomes less than $4000 per year were exempt by the Underwood act, thus, nearly all factory workers and farmers were not required to pay the taxes. Those earning more than $4000 but less than $20,000 paid a mere one percent tax. Rates rose from there, but the highest tax was still just a scant six percent—on earnings exceeding $500,000.
The effect of the Underwood Tariff on foreign trade and on prices was limited: World War I (1914–1918) began the following year, curtailing imports. Protective tariffs became an issue again in the early 1920s, with the Emergency Tariff Act (1921) and the Fordney-McCumber Tariff Act (1922), which raised duties once again and gave the president authority to increase and decrease customs duties.
See also: Dingley Tariff, Fordney-McCumber Tariff, Sixteenth Amendment, Tariff, Tariff of Abominations