Taxes and the Great Depression
The onset of the Great Depression in 1929 again changed the politics of taxation. At first President Franklin Roosevelt paid little attention to tax policy despite the government’s need for new revenue. Excise taxes on liquor, which became effective again after the repeal of Prohibition in 1933, proved an incredibly productive revenue source. In 1936, federal liquor taxes raised $1.5 billion; the income tax raised only $1.4 billion. (Brownlee 2003, 87)
In 1935, facing pressure on his left, Roosevelt adopted a more populist tax policy. The Revenue Act of 1935 promised to break up the “undesirable concentration of great wealth” by raising taxes on corporations and the wealthy. According to supporters, this “Wealth Tax” went a long way toward shifting the tax burden away from the “forgotten man.” (Thorndike 2010)
The progressivity of New Deal tax policy was more apparent than real. (Leff, 1983) In the first place, the Wealth Tax affected only a very few very wealthy individuals. More important, payroll taxes enacted as part of the Social Security Act of 1935, offset progressivity in the income tax system. Because it applied only to wages, and did not affect incomes over a certain threshold, the payroll tax was, and continues to be, regressive.