In 1913, the U.S. Congress passed the Underwood Tariff Act, which reduced taxes on manufactured goods and eliminated duties on raw materials. Lowering these taxes and fees resulted in the concurrent passage of the Sixteenth Amendment, which permitted direct income taxes.
The Underwood Tariff Act was the first legislation proposed by newly elected President Woodrow Wilson and was the first time that tariffs had been significantly reduced since the Civil War. Wilson argued that reducing taxes would promote healthy, competitive trade, lower consumer prices and support continued economic growth in the United States. As a result, tariffs on manufactured goods were substantially reduced, and many raw materials were exempt from import taxes. To compensate for the projected loss of revenue, a graduated income tax amendment was attached to the act. This amendment levied a 1 percent tax on workers making between $4,000 and $20,000 per year and incrementally increased to 6 percent for those making $500,000 or more. The act also established tax-exempt status for civic and commercial nonprofit groups that couldn't qualify as charitable organizations but whose work benefited society in general. The outbreak of World War I and the increased demand for American goods rendered the act largely immaterial.