The Wealth Tax Act

Franklin Roosevelt signed the Wealth Tax Act into law in 1935.
Franklin Roosevelt signed the Wealth Tax Act into law in 1935. (Image: roosevelt memorial image by Ritu Jethani from

The Wealth Tax Act of 1935 was passed during the Great Depression to help pay for President Franklin Roosevelt's New Deal programs designed to create jobs and provide social security programs. The Revenue Act of 1935 became known as the Wealth Tax Act because it contained a provision to tax high-earning Americans, and closed loopholes that were allowing high-earners to legally avoid paying tax.

Amendments To Surtaxes

The 1934 Revenue Act imposed surtaxes on individuals with incomes above certain levels. The Wealth Tax Act of 1935 made amendments to the surcharges imposed by the 1934 act. According to the Wealth Tax Act of 1935, Title I, section 106, individuals with a net income falling between $50,000 and $56,000 had to pay $7,700, and a 31 percent tax on net income between $50,000 and $56,000. Net income refers to income after federal taxes have been taken, so a surtax is an additional tax charged against net income remaining after standard income is taken into account. The Wealth Tax Act imposed surcharges against individuals that the government considered to be high-earners. The surtax was progressive, meaning that the more an individual received in income, the greater the amount of surtax that was charged against each higher band of income. The highest rate of surtax imposed was the 75 percent rate charged against incomes of more than $5 million.

Corporation Income Tax

The Wealth Tax Act also imposed a progressive tax on corporate income. This was another progressive tax, so a corporation paid higher rates of tax the more income it received. The tax referred to in Title I, section 102 of the act was charged against a corporation's net income, meaning income after all deductions had been subtracted. A tax of 13 1/4 percent was charged against all net income up to $15,000. A 14 1/2-percent tax was charged against income above $15,000, and income in excess of this amount attracted an extra charge of $1,987.50.

Charitable Contributions

According to section 102 (r) of the act, contributions used for religious, literary, educational scientific and charitable purposes can be allowed as deductions for the purposes of calculating the net income of a corporation. If the contributions are made to a trust or foundation, the contributions must be made for use exclusively in the United States. A corporation can not deduct an amount of more than 5 percent of its net income, even if its contributions amount to more than that.

Excess Profits Tax

Insurance companies conducting business other than life insurance or mutual business, may be subject to an excess profits tax, according to section 105 of the act. Only the portion of the profits represented by business other than life or mutual fund business is subject to the tax, when companies engage in general insurance business and also offer life insurance and mutual fund insurance. Where the net income of a companies non-life and non-mutual business represents between 8 and 12 percent of the total value of net income, this portion of its income is subject to tax at a rate of 5 percent. This excess profits tax increases progressively until a 20 percent tax is imposed on non-life and non-mutual business income representing more than 25 percent of an insurance company's net income.

Inheritance Tax Avoidance

If individuals or families create corporations with the intention of avoiding inheritance tax, all benefits conferred on beneficiaries, or used to provide income for beneficiaries, are taxed at a rate of 80 percent, according to Title II, section 202 of the act.

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