Here are the reasons why the income tax rate was so high in 1918:
1. Financing World War I: The United States entered World War I in 1917 and faced significant financial demands. The government needed to raise funds to pay for the war, including military operations, troop mobilization, arms production, and other wartime expenses.
2. Increased Demand for Revenue: The traditional sources of revenue, such as tariffs, were insufficient to meet the massive financial requirements of the war. Therefore, the government sought alternative ways to generate funds.
3. Rising Government Expenditures: The cost of conducting a global war, including troop deployment, transportation, food supplies, munitions, and more, led to unprecedented levels of government expenditures.
4. Tax on High Incomes: The Revenue Act of 1918 introduced a progressive tax system, where higher income earners paid a higher percentage of their income as tax. This policy was considered a fair and equitable way to raise revenue while spreading the burden of war financing across different segments of society.
5. Excess Profits Tax: In addition to the high income tax rate, the Revenue Act also included an excess profits tax. This tax targeted corporations that made unusually high profits during the war, ensuring that businesses would contribute their share to the war effort.
6. Patriotism and Wartime Sentiment: There was a strong sense of patriotism and moral responsibility during World War I. Many wealthy individuals willingly embraced higher taxes as a means of contributing to the nation's defense.
7. Graduated Tax Brackets: The tax rates were structured with graduated brackets, meaning the higher the income, the higher the percentage of tax paid. This approach ensured a progressive tax system that placed more significant burdens on those with the greatest means.
However, it's worth noting that the high income tax rate of 77% in 1918 was exceptional and implemented specifically as a wartime measure to address the extraordinary financial needs of the war. Later adjustments and reforms to the tax system resulted in lower tax rates in subsequent years.