The new Democratic Congress took advan tage of the recent constitutional amendment au thorizing the levying of an income tax, by in cluding in the Tariff Law a tax upon net per sonal income in excess of $3,000 or $4,000 in case of a married couple. Surtaxes were also imposed which made the tax a progressive rate. In 1914 the yield was $28,000,000; in 1915, $41,000,000; and in 1916, $68,000,000. This was a disappointment to the supporters of the tax, but is accounted for par th tly because the law was not clear and the administration had not had experience in interpreting and enforcing its provisions. The yield of the corporation in come tax was also not large, rising from $35,000,000 in 1913 to $57,000,000 in 1916.
The Democrats also determined to make a settlement of the banking difficulties which had hampered business for many years. In Decem ber 1913, the Federal Reserve Act was passed. This in part followed the plan proposed by the National Monetary Comnussion, previously re ferred to, but instead of creating one central bank provided for a central Federal Reserve Board with 12 regional banks. This new sys tem was brought under the control of the gov ernment more strictly than was proposed in the original plan, by the requirement that the mem bers of the Reserve Board be appointed by the President, and that the Secretary of the Treas ury and the comptroller be ex-officio members of the board. The district banks hold the de posits of the government.
The European War (August 1914) quickly disturbed these new financial plans and it was necessary to add financial support to the treas ury. Internal revenue duties were revised up ward, 22 Oct. 1914, but the decline of cus toms duties and the falling off of duties from liquors owing to the spread of prohibition, more than offset the advance in rates. In creased expenditures were necessary in 1916 owing to troubles on the Mexican border and the need of providing for the new Shipping Board.
In his annual message, December 1915, President Wilson was finally aroused to the need of preparedness of this country and ad vocated an increase in the army and navy with corresponding financial legislation to meet these expenditures. The army appropriation bill consequently enacted called for an increase of more than $150,000,000; naval appropriations also were largely increased. Altogether the a ropriations noted amounted to over $1,600, 111,000, or more than $500,000,000 larger than in the previous year. The nation was started
on the road of big finance.
President Wilson advocated a pay-as-you-go policy of taxation in preference to borrowing by the sale of bonds. While Congress did not follow the more specific recommendations of the President as to the kinds of taxes to be levied it did accept his general principle and enacted, on 9 Sept. 1916, a revenue measure designed to raise some $200,000,000. This measure increased income tax rates, imposed a Federal inheritance tax and introduced the special tax on the profits of munitions makers. The performance of Congress was not equal to the need of the treasury and Congress again had to take up the question of further income. It increased the inheritance tax and introduced, from foreign financing, a new tax on excess profits of corporations and partnerships. These new taxes were calculated to raise about $250, 000,000. Iri addition authority was given to make new loans of over $600,000,000. Thus the situation stood when Congress adjourned in March 1917.
The next month saw the declaration of war, with the necessity of financial operations only paralleled by the tremendous undertakings of Europe. There was much discussion as to whether the enormous expenditures should be met by taxation or by borrowing. There were two opposing opinions. One argued that the material for the war must be furnished by the existing population and that consequently the real cost of the war must at once be sustained. The other held that it was impracticable to take all the existing income by taxation with out imperiling future production. A compro mise was reached. Roughly a program of one third taxation and two-thirds borrowing was adopted.
Income taxes were increased in October 1917 and higher super-taxes were imposed, the limit of exemption was lowered and the excess profits tax was increased upon a graduated scale. The result was seen in 1918 when the ordinary receipts were four billions ($4,179, 000,000), or approximately four times that of the pre-war period. Of this total, customs duties produced an insignificant amount, $183 000,000; miscellaneous sources gave $300,000,000, and internal revenue taxes, $3,695,000,000. In this latter group, however, the new taxes on in come and profits furnished more than three fourths, or $2,839,000,000.