The Decision
President Calvin Coolidge signed the Revenue Act of 1926 on February 26, 1926. This landmark legislation represented the culmination of his administration’s commitment to fiscal conservatism. The act reduced the maximum income tax rate from 40% to 25%. It eliminated taxes entirely for families earning less than $1,500 annually. 📊 The legislation simplified the complex tax code that had emerged during World War I.
Tax Rate Reductions
The Revenue Act of 1926 created substantial relief for middle-class Americans. Normal tax rates dropped from 2-4% to just 1.5-5% across income brackets. Estate taxes were reduced significantly, benefiting family businesses and farms. Corporate tax rates remained stable while individual burdens decreased dramatically. 💰 Treasury Secretary Andrew Mellon championed these reforms as essential for economic growth.
Legislative Process
Congress passed the bill with bipartisan support after extensive deliberation. House Republicans led the charge for deeper cuts than initially proposed. Senate Democrats offered some resistance but ultimately supported the compromise version. The final legislation balanced revenue needs with growth incentives. Coolidge praised Congress for prioritizing American prosperity over government expansion.
Impact:
Economic Consequences
The Revenue Act of 1926 contributed to remarkable economic expansion throughout the decade. Consumer spending increased as families kept more of their earnings. Business investment surged due to improved after-tax returns for entrepreneurs. 📊 Gross domestic product grew by over 4% annually through the late 1920s. Manufacturing output reached record levels as companies expanded operations.
Revenue Results
Paradoxically, lower tax rates generated higher total tax collections. Individual income tax revenue increased from $719 million in 1921 to $1.16 billion by 1928. Wealthy Americans paid a larger share of total taxes despite reduced rates. The Mellon tax philosophy proved effective in practice. 💰 Federal budget surpluses allowed for debt reduction throughout Coolidge’s presidency. Government debt fell from $24 billion to $16 billion during his tenure.
Long-term Effects
The legislation established principles that influenced tax policy for decades. It demonstrated how strategic rate reductions could stimulate economic activity. The act helped create the prosperity that defined the Roaring Twenties. However, some historians argue it contributed to income inequality that preceded the Great Depression. ⚠️ The policy’s success became a template for future supply-side economic approaches.