Revenue

In the early Congresses, the House mainly used tariffs to generate revenue, setting rates at levels designed to provide sufficient funding for the government to operate. The Ways and Means Committee was charged with raising revenues and making appropriations at the same time. The committee controlled tariff legislation for most of the nation’s first half century—except for the decade following 1818, when the Committee on Manufactures had jurisdiction over most tariff bills.⁶

When the nation needed vital resources for national defense during the War of 1812, lawmakers raised tariffs on imports to generate revenue and protect domestic industries from foreign competition. The high tariffs added to the U.S. Treasury, and, over time, also revealed distinct regional interests concerning imports. For example, the South, which exported cotton harvested by enslaved laborers in exchange for foreign goods, wanted to avoid tariff retaliation overseas. By the 1830s, a high tariff wall was a crucial part of the both the national debate over public finance as well as the emerging sectional crisis that led to the Civil War.⁷

From Tariff to Income Tax

From 1861 to 1865, federal spending rose to unprecedented levels during the Civil War. The Ways and Means Committee turned to creative methods—including a temporary income tax and new tariffs—to mobilize the vast sums needed to wage a costly war. In the immediate aftermath of the conflict, the Republican Party, which controlled Congress during Reconstruction, remained committed to a high tariff and sought to use the resultant budget surpluses to assist the millions of formerly enslaved people in the South. Within a decade, however, Democrats representing the former Confederate states rejoined Congress in greater numbers and were determined to lower tariff rates, creating conditions for an increasingly politicized revenue process.⁸

In the House, the Ways and Means Committee became the forum for a decades-long battle over the tariff in the late nineteenth century. As control of the chamber oscillated between the two major parties, Republicans produced three protectionist tariffs (1890, 1897, 1909) and Democrats passed two lower tariffs (1894 and 1913). For most of this period, however, Congress failed to agree on new tariff legislation.⁹

By the 1890s, changes in tariff policy coupled with more frequent budget deficits highlighted the need for new methods to raise revenue. In 1913, the states ratified the Sixteenth Amendment, which allowed the government to tax personal incomes. Later that year Congress passed legislation that both lowered tariff rates and included a provision for a federal income tax. Over the next decade, the Ways and Means Committee presided over a transition in which income taxes replaced tariffs as the major source of government revenue.¹⁰

New Revenue Streams

By 1920, the income tax accounted for almost 60 percent of the money the federal government took in. As a result, the priorities of the Ways and Means Committee shifted toward tax policy. In 1926, Congress established the Joint Committee on Internal Revenue Taxation (now known as the Joint Committee on Taxation) that brought together members of the Ways and Means Committee and the Senate Finance Committee. The joint committee created a dialogue between both chambers of Congress on tax policy and provided Members with a staff of financial professionals and tax experts.¹¹

Despite Congress’s shift to incomes taxes, tariffs remained an important source of revenue and a key component of America’s trade policy. During the 1920s, House Republicans used high tariff rates to protect domestic manufacturers. This decision provoked retaliatory tariffs abroad. Following the stock market crash in 1929 and the onset of the Great Depression in the 1930s, income tax receipts plummeted. To give the federal government more flexibility to address the crisis, lawmakers began to rethink how Congress handled tariffs. In 1934, in an effort to facilitate rapid changes in trade policy, Congress passed the Reciprocal Trade Agreements Act to give the President the power to adjust tariff schedules and negotiate bilateral agreements, significantly diminishing the role of lawmakers in this process.¹²

In 1935, the Social Security Act created federal social welfare benefits, such as unemployment insurance and old-age insurance, which were not tied to the passage of an annual appropriation bill. To generate the revenue to pay for these new federal programs, Congress introduced a payroll tax. The creation of new federal spending obligations went on to significantly shape the budget process in the postwar era.¹³

America’s involvement in World War II increased federal spending to extraordinary levels in the early 1940s. On tariff policy, the Ways and Means Committee continued to cede leadership to the executive branch and the United States honored the provisions of the General Agreement on Tariffs and Trade (GATT), an international agreement that reduced trade barriers among member nations and created a forum to resolve trade disputes. In the decades after the Second World War, high corporate tax rates and progressive individual income tax rates became the primary sources of federal revenue.¹⁴

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