Underwood Tariff Slashes Corporate Protection, Establishes Modern Income Tax After 16th Amendment

President Woodrow Wilson signed the Revenue Act of 1913, also known as the Underwood Tariff or Underwood-Simmons Act, slashing average tariff rates from 40 percent to 27 percent and establishing the modern federal income tax for the first time since 1872. Wilson made tariff reduction his first priority upon taking office, viewing high tariffs as unfair taxes on consumers that protected corporate monopolies. In an unprecedented move not seen since John Adams, Wilson personally appeared before both the House and Senate to press for tariff reform. The legislation put raw wool, cattle, sheep, wheat, eggs, meat products, iron ore, pig iron, coal, and lumber on the “free list” exempt from tariffs. The duty on woolens plummeted from 56 percent to 18.5 percent. Steel rails, agricultural implements, and other goods received zero rates, directly attacking the protective tariffs that had enriched industrial monopolies for decades.

The income tax provision, enabled by ratification of the Sixteenth Amendment shortly before Wilson took office, represented a monumental shift from a regressive consumption-based tax system to one based on ability to pay. Democratic leaders attached the income tax to the tariff bill partly to replace lost revenue and partly to shift the government funding burden to high earners. The tax hit only about 2 percent of the population, levying 1 percent on incomes above $3,000 for single filers ($4,000 for joint filers), with progressively higher rates on incomes above $20,000, reaching 6 percent on incomes above $500,000. Representative Oscar Underwood sponsored the legislation, which passed the Democratic-controlled 63rd Congress as part of Wilson’s “New Freedom” progressive agenda. The act was followed in short order by the Federal Reserve Act (1913), Federal Trade Commission Act (1914), and Clayton Antitrust Act (1914)—an unprecedented burst of progressive federal legislation.

However, the Underwood Tariff’s progressive promise would be systematically undermined over subsequent decades. While it instituted only mild progressivity and raised relatively small revenue initially, corporate interests immediately began working to reverse tariff reductions and capture the income tax system. World War I would provide the excuse to raise income tax rates dramatically, but also to introduce corporate lobbying for special deductions, exemptions, and loopholes. The brief Progressive Era window of 1913-1914 represented the last time significant anti-corporate legislation passed before business interests reorganized and captured the regulatory apparatus. By the 1920s, Republican administrations under Harding, Coolidge, and Hoover slashed income tax rates on the wealthy while corporations secured favorable tax treatment, demonstrating that even landmark progressive victories could be reversed when corporate money recaptured the political system. The pattern established here—progressive reform followed by gradual corporate counter-mobilization and regulatory capture—would repeat throughout the 20th century.