However, both elements of the trade walk collapsed within a decade. The congress soon discovered that income taxes yielded much more income than the old tariff system that they replace. To pay for the accession to us in the First World War, they shot up the highest marginal rate to 77 percent in 1918. Attempts to bring income tax under control, briefly successful in the 1920s, but President Hoover increased the top rate to 63 percent and Franklin Roosevelt increased to 79 percent. Under FDR, the congress also reduced the exemption threshold for earners with a lower income. What started as a low “class tax”-a tax on very incomes only earners in 1913-in 1942, a “massive tax”, a broad tax on most American families.
When the congress turned back to the protectionist -dominated Republican party in 1920, the average rate percentage restored to 38 percent. In 1930 the congress again opened its doors for industries looking for government protection against the stock market crash. The intended “stimulans” became the notorious Smoot-Hawley rate, which caused the average rates to 59 percent and caused a global trade war.
The damage caused by the collapse of this original tax change lasted decades to untangle. The congress acknowledged its fault and handed over its trade policy to the Ministry of Foreign Affairs in 1934 as an emergency measure to circumviate the tariff system. The liberalization of the world economy since the Second World War has arisen through treaties and trade agreements. These measures remain vulnerable and they depend on an executive branch that still honor international similarities. If Trump leaves our free trade obligations with other countries, the Smoot-Hawley schedule still remains on the books.
This is from David R. Henderson and Phillip W. Magness, “Do not replace rates with income taxes: you get both” National assessmentJanuary 28, 2025.
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