The Mellon tax plan was a set of income tax rate cuts that Treasury Secretary Andrew Mellon pushed through Congress between 1921 and 1926, dropping the top marginal rate from 73 percent to 25 percent, repealing the gift tax, trimming the estate tax, and lifting personal exemptions enough to remove roughly a third of filers from the federal rolls. It largely worked on the terms Mellon set: the wealthy stopped sheltering income, reported far more of it, and ended up paying a bigger share of total income taxes at the lower rates. It also ended badly. The prosperity of the 1920s collapsed into the worst financial crisis in American history, and Congress reversed the entire program in a single 1932 statute.
Mellon’s Reasoning
Andrew Mellon took over the Treasury in 1921 under President Warren G. Harding, inheriting a wartime tax code. The Revenue Act of 1918 had pushed the top marginal income tax rate to 77 percent on income over $1 million, and by 1920 the combined top rate sat at 73 percent.1Wolters Kluwer. Historical Income Tax Rates Mellon argued these rates were self-defeating, and his Treasury branded the approach “scientific taxation.”2Cambridge University Press. Selling Scientific Taxation: The Treasury Department’s Campaign for Tax Reform in the 1920s
The core claim was behavioral. At a 73 percent marginal rate, wealthy taxpayers had every reason to park their money in tax-exempt municipal bonds rather than in taxable stocks or business ventures.3Securities and Exchange Commission Historical Society. The Municipal Securities Rulemaking Board Gallery on Municipal Securities Regulation – Section: Share in the Growth That drained capital from productive investment and starved the Treasury at the same time. Mellon’s argument, laid out in his 1924 book Taxation: The People’s Business, was that a 25 percent rate would collect more real money from the rich than 73 percent would, because taxpayers would stop hiding income once the penalty for earning it dropped low enough. It was the first articulation of what later became known as supply-side economics.
What the Plan Proposed
Mellon’s agenda went well beyond the top rate. He wanted to:
- Drop the combined top marginal rate from 73 percent to 25 percent.
- Cut rates at every income level and raise personal exemptions high enough to push low earners off the rolls.
- Eliminate the federal estate and gift taxes, which he viewed as confiscatory.
- Reduce the wartime excise taxes still layered on commerce and consumer goods.
Congress was skeptical of a dramatic cut for the wealthy, and progressives in both parties resisted at every step. The plan moved through in pieces over five years.
How It Became Law
Revenue Act of 1921
The first cut brought the combined top rate from 73 percent down to 58 percent for the 1922 tax year.1Wolters Kluwer. Historical Income Tax Rates Mellon had pushed for more. The act also began repealing some wartime excises.
Revenue Act of 1924
The second round lowered the combined top rate to 46 percent and introduced a credit for earned income, treating wages more favorably than passive investment income.1Wolters Kluwer. Historical Income Tax Rates It moved against Mellon on wealth transfer taxes, increasing the estate tax and enacting the first federal gift tax.
Revenue Act of 1926
The third act was Mellon’s breakthrough. The top marginal rate fell to 25 percent on income over $100,000, the estate tax was reduced, and the two-year-old gift tax was repealed.4U.S. Department of the Treasury. OTA Paper 100: The Federal Gift Tax – History, Law, and Economics Higher personal exemptions removed about a third of income taxpayers from the federal rolls. In five years, the top marginal rate had dropped 48 percentage points.
What Happened to Revenue
Total federal income tax collections fell sharply as rates came down. Revenue dropped from $3.2 billion in 1921 to $1.7 billion in 1923 and never climbed back to wartime levels. By 1929, collections had recovered to $2.3 billion, still below the pre-cut peak. From 1923 to 1929, though, revenue grew by roughly 38 percent under a top rate of 25 percent, which supporters read as taxpayers pulling income out of shelters and into the open.
The composition of who paid changed dramatically. As the top rate fell from 73 to 25 percent, the share of total income taxes paid by taxpayers earning over $100,000 roughly doubled, from about one-third of all income taxes in the early 1920s to nearly two-thirds by the late 1920s.5Joint Economic Committee. The Mellon and Kennedy Tax Cuts – A Review and Analysis The share paid by taxpayers earning under $25,000 dropped from over 36 percent to under 13 percent. That specific prediction of Mellon’s held up almost exactly.
The 1920s Boom
The years after the cuts brought one of the strongest expansions in American history. Real gross national product grew at roughly 4.2 percent a year from 1920 to 1929.6EH.net. The U.S. Economy in the 1920s Unemployment in key industries fell from over 23 percent in the 1921 recession to around 7.5 percent by 1926.7Social Security Administration. Estimates of Unemployment in the United States The federal government ran budget surpluses through the mid-1920s, and the national debt fell substantially from its postwar peak of about $24 billion.
How much of that boom the tax cuts caused is genuinely unresolved. The decade also brought the mass adoption of electricity in manufacturing, the explosive growth of the automobile industry, the rise of consumer credit, and the spread of radios and household appliances.6EH.net. The U.S. Economy in the 1920s By 1929, about 60 percent of American families owned a car, and 78 percent of manufacturing power came from electricity, compared with 30 percent in 1914. Those are structural changes that would have driven growth under nearly any tax regime.
Criticisms and Complications
The rate cuts were far larger at the top. A taxpayer earning $750,000 saw a 51-point reduction, from 76 percent to 25 percent, while someone earning $6,000 saw a 10-point cut, from 13 percent to 3 percent. Conventional data from the era showed significant increases in income inequality across the 1920s. Defenders argue much of that measured inequality was a statistical artifact: as rates fell, the wealthy moved money out of tax-exempt shelters and into taxable investments, so their reported incomes rose even where their real economic position may not have changed as much. Stripping out realized capital gains, they say, erases most of the measured increase.
The capital flow question cut the other way. With the top rate at 25 percent, there was far less reason to hold safe, low-yield municipal bonds, and money flooded into the stock market. That was the outcome Mellon wanted, but the reallocation fed a speculative bubble as well as productive investment. By the late 1920s a giant financial bubble was sitting under a lot of the decade’s apparent prosperity.
Then there is the attribution problem. Crediting the cuts for the boom ignores electrification, mass production, and the automobile, forces large enough to have reshaped the economy on their own. Separating the effect of the rate cuts from the effect of the second industrial revolution is essentially impossible with the available data.
The Reversal
The October 1929 crash and the Depression that followed destroyed the political consensus behind Mellon’s approach. Federal revenue collapsed as incomes and profits cratered. The Revenue Act of 1932, signed by President Herbert Hoover, pushed the top marginal rate from 25 percent to 63 percent in a single stroke, erasing the entire Mellon program in one session of Congress. For the next five decades, the top rate never fell below 63 percent and at times exceeded 90 percent.
Where the Mellon Rates Sit Today
The top federal income tax rate in 2026 is 37 percent, applying to taxable income above $640,600 for single filers and above $768,700 for married couples filing jointly.8Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates That is 12 points above Mellon’s 25 percent target and 36 points below the 73 percent rate he inherited. Whether the tax cuts caused the crash, failed to prevent it, or had little to do with it remains one of the more productive arguments in American economic history. What is clearer is the narrower verdict: Mellon’s behavioral prediction about high rates and hidden income held up, and his broader claim that a 25 percent top rate represented a stable equilibrium did not survive the decade.