Theme 2: Taxes in U.S. HistoryLesson 5: The Wealth Tax of 1935 and the Victory Tax of 1942

Educational Standards

State and National Standards

Time Frame

One to three hours

Curriculum Area(s)

• History/Social Studies
• Civics/Government
• Economics
• Technology

Purpose

To help students understand that during the Great Depression and World War II, the Roosevelt administration implemented new, broader, and more progressive taxes in order to cover the costs of the New Deal programs and the war

Objectives

Students will be able to

• explain the history of the Wealth Tax of 1935 and the Victory Tax of 1942.
• explain the purpose of the Wealth Tax and the Victory Tax.

Background

The Wealth Tax of 1935

During the Great Depression, President Franklin D. Roosevelt's New Deal programs put millions of jobless Americans back to work and stabilized the economy. Social Security programs provided pensions to those who could not work. However, the government needed new taxes to pay for these programs. The Revenue Act of 1935 put a new progressive tax, the Wealth Tax, in place. Those making more than $5 million a year were taxed up to 75 percent. Unlike their Civil War grandparents, the wealthy were not happy to pay income taxes during crisis times. Loopholes in the tax code were used. The federal government aggressively prosecuted tax evaders. The Revenue Act of 1937 cracked down on tax evasion by revising tax laws and regulations.

The Victory Tax of 1942

In 1939 only about five percent of American workers paid income tax. The United States' entrance into World War II changed that figure. The demands of war production put almost every American back to work, but the expense of the war still exceeded tax-generated revenue. President Roosevelt's proposed Revenue Act of 1942 introduced the broadest and most progressive tax in American history, the Victory Tax. Now, about 75 percent of American workers would pay income taxes. Because so many citizens paid the tax, it was considered a mass tax. To ease workers' burden of paying a large sum once a year, and to create a regular flow of revenue into the U.S. Treasury, the government required employers to withhold money from employees' paychecks. Additional taxes were put in place in 1943. By war's end in 1945, about 90 percent of American workers submitted income tax forms, and 60 percent paid taxes on their income. The federal government covered more than half its expenses with new income tax revenue.

Key Terms

mass tax

A broad tax that affects a majority of taxpayers.

progressive tax

A tax that takes a larger percentage of income from high-income groups than from low-income groups.

tax code

The official body of tax laws and regulations.

tax evasion

A failure to pay or a deliberate underpayment of taxes.

withholding ("pay-as-you-earn" taxation)

Money, for example, that employers withhold from employees paychecks. This money is deposited for the government. (It will be credited against the employees' tax liability when they file their returns.) Employers withhold money for federal income taxes, Social Security taxes and state and local income taxes in some states and localities.

Opening the Lesson

Ask students for their impressions of life in the United States during the Great Depression and World War II. They may suggest that the 1930s and 1940s were a time when people came together during hardships and that the government took a much larger role in people's day-to-day lives. Share information from the background section above, and distribute Info Sheet 1: Taxes in the 1930s and 1940s: Problems and Solutions.

Developing the Lesson

Discuss how most American taxpayers in the 1930s and 1940s considered paying taxes a duty, not a burden. Ask students how they would feel if they were asked to give up all but a set amount of their income in order to support the government during a crisis. Remind students that tax legislation in the 1930s and 1940s did not pass unopposed. Many Republicans thought the New Deal programs would bankrupt the country. Many activists thought the New Deal programs were weak and limited. Have students develop arguments for and against a mass tax like the one passed in 1942.

Concluding the Lesson

Ask students to describe the Wealth Tax of 1935 and the Victory Tax of 1942. Extend the lesson by having students research President Roosevelt's background and explaining the accusation made by wealthy taxpayers that Roosevelt "was a traitor to his class." Engage students in a debate about the role of the wealthy in a troubled economy.