This timeline of 1940s U.S. tax history is drawn from the new Tax History Museum, part of the Tax History Project’s revamped website, which will be relaunched this fall.
Necessity is the mother of invention, as the old saw goes, and that’s certainly been true for taxation. Over the course of American history, crisis has been the catalyst for tax reform — or at least the kind of tax reform that lasts:
The Civil War forced Congress to create the first broad, durable system of internal revenue taxes, as well as the bureaucratic machinery to collect them.
World War I transformed the income tax from a small experiment in progressive reform to a mainstay of federal finance.
The Great Depression expanded the possibilities of redistributive taxation during peacetime, beginning a new debate about the meaning of fiscal citizenship.
World War II followed this pattern of crisis and reform. As fighting began in the late 1930s, U.S. policymakers began to grapple with the prospect of American involvement. In particular, they began planning for a rearmament program — and the means to pay for it.
Tax experts debated the relative merits of taxing income and consumption. So did politicians, who were acutely sensitive to the demands of voters and interest groups. Eventually, policymakers settled on taxing both income and consumption — hardly a surprise, since the peacetime revenue system did the same.
But increasingly, lawmakers looked to income taxes — both individual and corporate — when trying to find new revenue. They raised rates on wealthy individuals and profitable businesses to extremely high levels. Many of these high rates (especially on individuals) would long outlast the war.
Even more important, however, lawmakers transformed the very nature of the individual income tax. The levy had long been used to tax the rich — that was its traditional function. But under the stress of war, political leaders expanded the levy, pushing it down the income scale. The number of people paying it increased sevenfold over the course of the war. The “class tax” became a “mass tax.”
The transformation of the personal income tax would remake American public finance for decades to come. The wartime fiscal regime proved remarkably durable; key elements remain intact even today. More important, wartime taxes provided the foundation for the postwar state, including its huge Cold War military complex and the social welfare programs of the Great Society.
When the war changed the structure of taxation, it also changed the politics. Debates over the income tax were always contentious. But for most people, they had been arguments about taxes that someone else — someone rich — would pay. After the war, these debates were suddenly personal for millions of new taxpayers.
Moreover, new taxpayers found themselves tethered to the federal state through a process of visible, salient taxpaying. Paycheck withholding made income taxes a regular fact of life for American workers whenever they received a paycheck. Even more important was the annual process of tax return filing: a civic ritual that reinforced notions of fiscal citizenship — and fiscal accountability.
In January President Franklin D. Roosevelt told Congress to expect a net deficit of $2.8 billion for fiscal 1941. He premised that number on defense expenditures of almost $2 billion, a figure that would soon prove optimistic; by August, it had risen to $5 billion. And allowing for funds slated to be spent in later years, Congress actually approved some $14 billion in new defense spending.
To help limit borrowing, FDR had asked Congress for $460 million in new taxes — a request that Congress studiously ignored. But as the war in Europe raged, and U.S. military expenditures soared in response, lawmakers agreed to boost revenues. A hastily drafted bill provided for higher taxes on individual and corporate incomes. It also raised estate and gift taxes while extending varied excise taxes slated to expire.
The First Revenue Act of 1940 (Congress would pass a second tax law act just a few months later) raised surtax rates (the rate applied to high incomes in addition to “normal” income tax rates) for individuals earning between $6,000 and $100,000 annually. It also boosted corporate tax rates by 1 percent in every bracket.
Ultimately, the most important provision of the First Revenue Act of 1940 was its change to the exemption levels for the individual income tax. The law dramatically increased the number of people paying the income tax by lowering the threshold for filing returns and paying taxes. For single taxpayers, the exemption fell from $1,000 to $800; for a married couple, from $2,500 to $2,000. Experts projected that these changes would add more than 2 million taxpayers to the rolls.
As it happened, the exemption changes produced an even larger increase in the number of taxpayers. In fiscal 1940, Americans filed 7.8 million returns, of which 4.3 million showed taxable income. In fiscal 1941, they filed 14.9 million returns, of which 7.9 million showed taxable income. That represented an increase of more than 80 percent in the number of people paying personal income taxes.
To be sure, the income tax was still a burden mostly for the well-to-do. But it was making its way down the income scale, reaching into the middle class. Lower exemptions were part of the story, but so was rising income, as the U.S. economy continued its recovery from the Depression. More people were working, and they were earning higher incomes. That meant that more people would have been paying income taxes even without the exemption reductions.
Taking the Profit Out of War
Many Americans resented the idea that people might profit from the misery of war. The nation had a long history, especially during World War I, of using the tax system to tax away war profits. As the United States ramped up defense spending in 1940, Roosevelt was committed to implementing a war profits tax, and he had broad support in Congress.
On July 1 FDR sent a message to lawmakers asking for a steeply graduated excess profits tax. Congress responded with a complex bill designed to answer the president’s moral challenge while still appeasing business interests. In particular, it gave companies considerable freedom in how they calculated what was “excess” in their profits. Businesses had the choice of measuring current profits against either (1) an average of their prewar profits over several years, or (2) a percentage return on invested capital deemed by tax officials to be normal.
Rates on income determined to be “excess” varied depending on the method of calculation, but they ranged from roughly 20 percent to 50 percent, with rates spread across six brackets.
Critics complained that the law was too easy on corporations; by allowing them a choice in how to calculate their “excess” profits, it would let them minimize their taxes at a time when minimization was indefensible.
At the same time, the law was horrendously complicated. But complexity was hard to avoid, especially if lawmakers wanted to avoid gross inequities. “The fact is that this kind of tax cannot be both fair and simple,” wrote Roy and Gladys Blakey, two of the nation’s most prominent tax experts. “Doubtless this one will work hardships in some special cases, but, in general, it appears equitable, if not generous, especially so to small corporations.”
As the United States edged closer to war, defense spending continued to rise. But so did tax revenues, thanks to tax increases already on the books, coupled with a steady rise in economic output. Still, when Roosevelt delivered his January 3 budget message to Congress, he sounded a familiar note, warning of large budget shortfalls.
The nation’s fiscal outlook, FDR told lawmakers, was “a reflection of a world at war.” The federal government was faced with twin imperatives, both expensive. It had to build the weapons of national defense, safeguarding the nation from foreign enemies. But at the same time, it had to bolster “jobs, health, and security” at home — needs that Roosevelt described as “the bulwarks of democracy.”
Turning to specifics, Roosevelt told Congress to expect large deficits in both the current and following fiscal years: $6.2 billion in fiscal 1941 and $9.2 billion in fiscal 1942. He urged lawmakers to approve new taxes, with a broad goal of financing about two-thirds of wartime spending with tax revenue, one-third with borrowing.
When Treasury officials provided a detailed set of recommendations in April, they asked for a wide range of increases: higher tax rates on personal income, especially for wealthy taxpayers; lower exemptions for the personal “surtax,” thereby boosting the number of taxpayers subject to the income tax’s progressive rate schedule; higher excess profits taxes on corporations; and varied new excise taxes on consumer goods.
Notably, Treasury rejected any suggestion of a new federal sales tax, arguing that it would be complicated and hard to administer. At least one Democratic lawmaker detected inconsistency between the administration’s support for specific kinds of consumption taxes and its opposition to others. “I notice that where you refer to taxes that you like on the list they are excise taxes, but those that you frown on, they are sales taxes,” quipped Rep. Wesley E. Disney, D-Okla.
The House revised some of the administration’s recommendations before passing a bill in August. But by the time the Senate began consideration, the nation’s revenue needs had soared beyond Roosevelt’s January estimate. Now facing a projected deficit between $13 billion and $16 billion, senators revised the House bill to raise more money. Both senators and Treasury officials believed increased revenue was necessary to limit borrowing and help control price inflation (by draining consumers of more disposable income, thereby slowing consumption).
The Senate bill became the basis for the final legislation. As eventually signed into law, the Revenue Act of 1941 lowered personal exemptions for the individual income tax to $750 for individuals (down from $800) and $1,500 for married couples (down from $2,000). The lower exemptions were expected to produce 5 million added returns, with roughly 2.25 million of them showing taxable income. The act also raised rates for the individual tax, beginning at the very bottom and continuing up the income scale; surtax rates now started at 6 percent on the first $2,000 and topped out at 77 percent on incomes over $5 million.
Corporations saw an increase in normal income tax rates, with the top rate rising from 24 percent to 31 percent. Rates for the excess profits tax also increased in every bracket; the minimum rate moved from 25 percent to 35 percent while the top rate rose from 50 percent to 60 percent.
In 1942 the United States entered World War II as an active combatant. Committed to fighting in the European and Pacific theaters simultaneously, the nation faced enormous fiscal challenges — a point Roosevelt drove home in his January 5 budget message.
“In practical terms the Budget meets the challenge of the Axis powers,” he told lawmakers. “We must provide the funds to man and equip our fighting forces. We must provide the funds for the organization of our resources. We must provide the funds to continue our role as the Arsenal of Democracy.”
Roosevelt underscored the magnitude of this challenge, emphasizing the need to overwhelm the combined Axis war machines. “We cannot outfight our enemies unless, at the same time, we outproduce our enemies,” he said. “It is not enough to turn out just a few more planes, a few more tanks, a few more guns, a few more ships, than can be turned out by our enemies. We must outproduce them overwhelmingly, so that there can be no question of our ability to provide a crushing superiority of equipment in any theater of the world war.”
To that end, Roosevelt proposed spending some $59 billion in fiscal 1943, with $56 billion slated for defense. He left open the possibility that he might ask for more before the year was out. The budget featured $7 billion in new taxes, as well as $2 billion in new levies earmarked for Social Security.
Roosevelt urged Congress not to shrink from hard decisions. “Tax programs too often follow the line of least resistance,” he said. While putting off most specific tax recommendations, he emphasized his commitment to progressive taxation. Taxes on incomes, estates, gifts, and business profits were vital, he said. Not only did they raise substantial revenue; they were also bulwarks of social justice and economic fairness.
Roosevelt took special aim at loopholes in the federal tax law. “Because some taxpayers use them to avoid taxes, other taxpayers must pay more,” he declared. “The higher the tax rates, the more urgent it becomes to close the loopholes.”
FDR would continue to beat this anti-loophole drum throughout the war, excoriating anyone who tried to avoid taxes even when their efforts remained technically legal. Just as he had during the 1930s, FDR refused to acknowledge any important moral distinction between legal tax avoidance and illegal tax evasion: Both represented, in his view, an abdication of civic responsibility.
In response to Roosevelt’s request, Congress set about drafting a new tax law. Lawmakers settled on a collection of reforms that continued patterns already familiar to observers of recent tax legislation.
The normal tax, paid by everyone with taxable income, rose from 4 percent to 6 percent. The lowest surtax rate increased from 6 percent to 13 percent. The top surtax rate rose to 82 percent from 77 percent. Changes to the bracket limits also made many higher brackets applicable to larger shares of personal income. The top bracket, for instance, was revised to apply to all income over $200,000, down from $500,000 under the 1941 law.
Exemptions for the individual tax fell again: to $500 for a single filer (down from $750) and to $1,200 for married couples (down from $1,500).
The top corporate income tax rate increased from 31 percent to 40 percent.
Excess profits taxes increased, with nominal rates reaching 90 percent. Varied relief provisions, however, eased the burden of those high rates for many companies.
New and increased excise taxes boosted the cost of consumer goods.
Lawmakers also established a new victory tax — a flat rate, 5 percent tax on net income (excluding capital gains and interest). With an exemption of just $624, the tax was levied on top of the regular income tax. It was also withheld directly from salaries and wages — an innovation that would soon be extended to the regular income tax.
Lawmakers were determined to link the victory tax directly to the war effort, which started with its name. It was certainly designed to accomplish some very practical goals (like raising revenue and controlling inflation). But it was also created to send a message: that the burden of war finance should be explicit and broadly shared by working Americans.
Of course, the tax burden was already broadly shared. Lawmakers had expanded the regular income tax by lowering its exemptions; if not yet a true tax for the masses, it was no longer just a tax for the upper classes. Moreover, almost everyone paid excise taxes of one sort or another. Levies on alcohol, tobacco, and other consumer goods were a touchstone of homefront sacrifice.
But lawmakers wanted something more, so they created the victory tax to fill the gap. The tax was intended to raise money for the war effort — and it proved to be a revenue workhorse — but also to be a less tangible instrument of civic engagement.
Taken as a whole, the Revenue Act of 1942 was designed to fund the war effort while also aiding in the battle against inflation. This last goal was central to its design and shaped debate over which taxes to include in the package.
For at least two years before the Pearl Harbor attack, policymakers had been thinking long and hard about war taxation and the problem of inflation. The spending side of the fiscal equation was taken as something of a given; military needs would drive spending upward. Tax policy, however, would play a dual role: raising money to pay for the war and siphoning off consumer purchasing power to help slow inflation. Treasury officials forecast a rising number of consumer dollars chasing ever-fewer nonmilitary goods. Steep taxes would help check the growth in purchasing power, thereby slowing inflation.
In 1942 debate over the revenue act featured much discussion of a federal sales tax as a possible weapon against inflation. Advocates believed it would slow consumption and therefore inflation. But many Democrats — and Roosevelt in particular — believed a sales tax would bear heavily on those least able to pay.
FDR’s opposition proved decisive, and lawmakers eventually chose to make broader income taxes the centerpiece of federal finance. It was a crucial decision, one that shaped American public finance for decades to come. In combination with laws enacted in the previous two years, the Revenue Act of 1942 transformed the income tax from a class tax to a mass tax. As the law professors Stanley Surrey and William Warren later quipped: “Almost overnight it changed its morning coat for overalls.”
Immediately after passage of the 1942 act, Treasury officials began debating the next round of tax increases. The war’s cost continued to escalate, and the Roosevelt administration was determined to pay for as much as possible with current revenues. Meanwhile, inflation pressures continued to mount, with prices rising for a broad array of consumer and commercial goods. Higher taxes might slow the increase.
Members of Congress, however, didn’t share Treasury’s enthusiasm for more tax hikes. The traditional dynamics of fiscal legislating — including an exquisite sensitivity to the mood of taxpaying voters — had begun to resurface.
In his January 1943 State of the Union message, Roosevelt asked for $16 billion in new taxes; subsequent negotiation with Congress reduced that number to $10.5 billion. That figure included $6.5 billion from the individual income tax, $400 million in estate and gift taxes, $1 billion in new corporate taxes, and $2.5 billion in excise taxes. To simplify the tax system, Treasury also asked for repeal of the victory tax, the flat rate income tax imposed on top of the normal income tax.
Congressional taxwriters were unimpressed. To say the package got a chilly reception on Capitol Hill would be an understatement; one observer reported that lawmakers fell upon the plan “like Caesar’s assassins.”
Federal Reserve Chair Marriner Eccles actually proposed an even more ambitious set of tax increases: $13.8 billion, including $4 billion that would be refundable after the war (essentially a plan for forced saving designed principally to slow inflation). House Ways and Means Committee Chair Robert “Muley” Doughton, D-N.C., dismissed the Eccles plan out of hand. “Amazing, fantastic, and visionary. I don’t like it at all.”
Doughton went to work on his own bill, which the House passed on November 24. The legislation bore little resemblance to the Treasury plan, let alone the Eccles scheme. Committee members argued that the need for new taxes had been diminished by revenue already in the pipeline. Coupled with promised reductions in nonmilitary spending, this revenue would be nearly adequate. As for inflation, the panel declared that it could be controlled through discretionary spending cuts, effective price controls, rationing, and wage controls. Higher taxes were unnecessary.
The Ways and Means Committee specifically opposed corporate tax increases. It was important, they said, that “our corporations be kept in sound financial condition so that they may be able to convert to peacetime production and provide employment for men leaving the armed forces after the war.”
New revenue in the Ways and Means bill came from several sources, including repeal of the earned income credit and a new minimum for the victory tax (which apparently struck lawmakers as better than repealing it). In total, the bill would raise only about $2 billion — less than a fifth of what Treasury had suggested.
When the Senate Finance Committee took up the bill, it tinkered with a few provisions but produced something much like the House measure. As finally approved by both houses, the Revenue Act of 1943 was expected to yield just $2.3 billion.
FDR vetoed the bill. It was the first tax bill in American history to meet that fate. In explaining his decision, Roosevelt contended that the legislation did little to provide vital revenue but granted numerous special favors to business interests. “In this respect, it is not a tax bill but a tax relief bill providing relief not for the needy but for the greedy,” he complained.
FDR cited various provisions that provided “indefensible special privileges to favored groups.” Those privileges — loopholes, in common parlance — set a bad precedent, threatening the very survival of the tax system; by undermining fairness, they eroded popular support for the tax system as a whole.
Roosevelt noted that some of his advisers had suggested signing the revenue act, arguing that having asked for a loaf of bread, he should be content with a small piece of crust: “I might have done so if I had not noted that the small piece of crust contained so many extraneous and inedible materials.”
Roosevelt criticized Congress for enacting complex tax laws, indicting legislators in particular for complexities surrounding the victory tax. “The Nation will readily understand that it is not the fault of the Treasury Department that the income taxpayers are flooded with forms to fill out which are so complex that even Certified Public Accountants cannot interpret them. No, it is squarely the fault of the Congress of the United States in using language in drafting the law which not even a dictionary or a thesaurus can make clear.”
Taxpayers need simplification, Roosevelt stressed. “These taxpayers, now engaged in an effort to win the greatest war this Nation has ever faced, are not in a mood to study higher mathematics,” he said.
Roosevelt’s veto did little to dissuade legislators. Within a week, Congress overrode it.
As Congress moved to expand the income tax, lawmakers understood the need to modernize collection techniques. Before 1943, taxpayers were required to submit tax payments during each quarter of the year. In the spring, they would then file an annual return and pay any residual balance due.
This system functioned well enough when income taxes were paid only by the rich, who tended to be well organized and financially sophisticated. But tax experts worried that it would falter once the levy was expanded to include millions of new taxpayers.
Congress therefore passed the Current Tax Payment Act in 1943. This law required all taxpayers to stay current on their tax liability through a system of paycheck withholding. The law represented a victory for the Treasury Department, which had been arguing for “current collection” for years.
Tax withholding was not a new idea in 1943. Lawmakers had tried it during the Civil War and again during the early 20th century. But for all its virtues, withholding was tricky to implement — and unpopular with taxpayers. Lawmakers thus abandoned both experiments.
In the mid-1930s, however, Social Security proved that withholding could work. FDR’s retirement and disability program relied on payroll taxes, withheld “at the source” by employers. By the mid-1940s, the Bureau of Old-Age Benefits had successfully processed 312 million wage reports, posting more than 99 percent of them to 50 million employee accounts. In was a technological marvel, made all the more impressive by the absence of computers.
If withholding could work for Social Security, then it could work for income taxes, Treasury insisted to Congress. Indeed, it had to work: Without it, the new, mass-based income tax would be impossible to administer. Moreover, withholding would make the income tax more effective in the battle against inflation, allowing policymakers to withdraw purchasing power more quickly from the economy.
In November 1941 Treasury Secretary Henry J. Morgenthau Jr. presented a withholding plan to the House Ways and Means Committee. Suggesting an added 15 percent tax on income above exemptions, Morgenthau proposed that the new levy be collected at the source from wages, salaries, interest, and dividends. A wary committee, however, deferred Morgenthau’s proposal.
The victory tax, enacted in 1942, featured a withholding mechanism. In 1943 Treasury urged Congress to expand the innovation to the regular individual income tax. Roosevelt joined the effort to persuade lawmakers, suggesting repeatedly that the income tax be put on a “pay as you go” basis. Such a system would keep taxpayers current, Roosevelt said, instead of forcing them to pay in large quarterly chunks with a possibly even larger, year-end reckoning.
Curiously, the Bureau of Internal Revenue (as today’s Internal Revenue Service was then known) remained a steadfast opponent of withholding. The bureau complained that withholding would be administratively burdensome and hard to implement given limits on wartime hiring.
Lawmakers were largely convinced of the virtues of withholding, if only to save taxpayers some unpleasant year-end surprises. But there was a serious transition problem: Simply dropping withholding onto the existing system would have required taxpayers to spend at least one year making “double” payments. If it were adopted in 1943, taxpayers would be expected to pay taxes on their 1942 income when they filed returns in March (returns were due on March 15 until the filing date was changed to April 15 in 1954). At the same time, however, they would be making “current” payments on their 1943 income.
Some observers saw nothing wrong with doubling up on tax payments during the transition year; it wasn’t really double taxation, since the lump sum payment and the current payments applied to income received during different years. If taxpayers were careful, they should have saved enough money to pay the past year’s liability, leaving them enough room in their paycheck for payments on the current year.
In fact, many taxpayers had not saved enough, making double payments a hardship. Consequently, policymakers and lobbyists offered varied possible solutions, most involving full or partial forgiveness of the previous year’s tax liability.
One leading proposal came from Beardsley Ruml, chair of the New York Federal Reserve Bank and treasurer of R.H. Macy & Co. Ruml proposed an immediate shift to current collection, with complete forgiveness of the previous year’s tax liability.
The “Ruml plan” was popular with taxpayers, many of whom seemed to think it had already been enacted. As the filing date for 1942 tax drew near, policymakers began to worry that millions of Americans would fail to file returns. “The problem had become critical, because many taxpayers had come to believe that they would have no taxes to pay in March,” one Treasury official later recalled.
Roosevelt, meanwhile, opposed the Ruml plan, insisting that it was a giveaway to the rich; those with the largest tax bills would benefit most from the forgiveness of a full year’s taxes. After a lengthy debate, lawmakers agreed to a compromise.
The Current Tax Payment Act of 1943, as passed by both houses and signed by Roosevelt on June 9, provided for current withholding of all individual income tax liabilities and the cancellation of 75 percent of one year’s existing taxes (the lower of either the 1942 or 1943 tax liability).
With millions of Americans paying income taxes for the first time, complaints about complexity were starting to have broad resonance. And the income tax was undeniably complex. “The chore of filling out income tax returns in March was almost as unpleasant as going to the dentist,” recalled Roosevelt tax official Randolph Paul in his memoirs.
In his 1944 budget address, FDR asked Congress to make an effort at simplification, and lawmakers responded with the Individual Income Tax Act of 1944. The law included several key provisions, most notably elimination of the victory tax. It also streamlined rates and exemptions to make calculations more straightforward.
The net result was a modest reduction in complexity without any meaningful increase in tax liability for most taxpayers, especially at the middle and bottom of the income scale. Wealthy taxpayers found themselves facing somewhat higher marginal rates, with the top surtax rate climbing from 82 percent to 91 percent, for instance. But even some portion of upper-bracket rate increases were simply a reflection of rate reductions elsewhere; the normal income tax rate, paid by all taxpayers, fell from 6 percent to 3 percent.
As World War II drew to a close, lawmakers began easing the heavy wartime tax burden. “A long tax cycle passed a turning point,” observed Carl Shoup, an economist who had served in Roosevelt’s Treasury Department. “For the first time since 1929 a large-scale tax reduction bill has been enacted by the federal government.”
Roosevelt died in April, and Morgenthau, at that point his longtime Treasury secretary, resigned in July. That left President Harry Truman and his new Treasury chief, Fred Vinson, to shape the drive for tax reduction.
And Truman urged lawmakers to be careful. “A total war effort cannot be liquidated overnight,” he counseled. “We must reconcile ourselves to the fact that room for tax reduction at this time is limited.”
But Truman was urging caution at precisely the moment that lawmakers were ready to throw caution to the wind. Congress agreed to a sweeping tax cut, passing the Revenue Act of 1945 in November. The law reduced federal revenue by $5.9 billion in 1946. Chief among its provisions was full repeal of the excess profits tax — at a cost of $2.6 billion in revenue. The law also reduced regular corporate and individual income taxes.
Indeed, the legislation offered something for almost everyone. As one might expect, that made it popular with voters. But it was controversial with economists, who warned darkly about the danger of postwar inflation. And that concern would prove justified, as prices began to rise quickly in 1946.
Republicans won majorities in both houses of Congress in the 1946 election. They immediately set about crafting a second round of postwar tax cuts, insisting that they would help shrink the size of government. “The best reason to reduce taxes is to reduce our ideas of the number of dollars the government can properly spend in a year, and thereby reduce inflated ideas of the proper scope of bureaucratic authority,” explained Sen. Robert A. Taft, R-Ohio.
Other GOP leaders framed tax cuts as a cultural issue. “For years, we Republicans have been warning that short-haired women and long-haired men of alien minds in the administrative branch of government were trying to wreck the American way of life and install a hybrid oligarchy at Washington through confiscatory taxation,” said House Ways and Means Committee Chair Harold Knutson of Minnesota.
The Republican tax cut bill began as a 20 percent across-the-board cut. As it moved through the legislative process, it grew more progressive, with graduated rate reductions. But Truman eventually vetoed it. Republicans passed another version, and Truman vetoed it again. Finally, the GOP majority succeeded with a third bill, thanks to significant support from Southern Democrats.
As passed, vetoed, and finally overridden and written into law, the 1948 tax law cut individual tax rates at all income levels, increased the personal exemption from $500 to $600, and permitted married couples to split their income for tax purposes (thereby permitting them to benefit from lower surtax rates).