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Revenue Act of 1913, also known as the Underwood-Simmons tariff was signed by President Woodrow Wilson in 1913 after successfully passing both houses of the Congress. Its primary purpose was to cut or, in many cases, eliminate tariff rates on goods, thus encouraging import. The Underwood Tariff Act established the federal income tax system, which became a significant source of the replenishment of the treasury.

Explanation:

Following the American Civil War, the federal revenue of the USA consisted predominantly of tariff rates, which at some periods reached even 57 percent. Such a system was especially unfair to the consumers as those rates elevated the prices on goods and the cost of living. Although the Payne-Aldrich Tariff Act of 1909 reduced the rates to approximately 40%, the prices remained inadequately high, and further cutting was needed. The Underwood-Simmons Act has marked a substantial change in the history of the US tax system transforming the sources of federal revenue. It was preceded by the Sixteenth Amendment, which set a background for the development of the bill, allowing levying income taxes and made possible the implementation of the bill.

It should be mentioned that import tariffs were inadequately high before 1913, causing unfair market conditions and affecting prices on goods. After taking his office, President Woodrow Wilson set it as his main priority to lower tariff rates. That is why he asked Congress to develop the new tariff system, which would create more opportunities for trade. The Underwood tariff bill was introduced by a representative Oscar Underwood by May 1913, and, after a complicated passage through both houses, it was signed by Wilson in October of the same year. After the passage of the Underwood Simmons tariff of 1913, the average tariff rates were cut to 26%. The duties were ad valorem basis, meaning that the rate was calculated as the percentage from the total cost of goods. Zero rates were taken from woolens, agricultural implements, iron ore, steel rail, and an extensive list of raw materials.

It is evident that tariff rates could not be reduced without any compensation for the federal revenue. That is why the Democrats developed the system of income tax rates that replenished the treasury instead of tariffs. Thus, the income tax had been restored for the first time since the Civil War, following the Sixteenth Amendment, which allowed it to be levied. The notable detail is that all individuals with yearly incomes less than $4000, including farmers and factory workers, were not subject to the income tax, so only about three percent of Americans had to pay it. The income tax rates started from one percent to the maximum of six percent for the highest income levels. One percent tax was imposed on those whose income ranged from $4000 to $20 000 per year.

The durable effect of the Underwood tariff act on the US tax system is particularly noticeable in the composition of federal revenue, which now extensively relies on income tax. The implementation of the bill also promoted the development of tax-exempt social organizations. The influence of the act on foreign trade was questionable due to the outbreak of World War I and the further implementation of protective tariffs. Nevertheless, Underwood tariff had a major significance for the country’s economy, as it established fair market conditions and substantially lowered prices.