Beginning in 1935, the economic crisis of the Great Depression, together with the political creativity of President Franklin D. Roosevelt, transformed the World War I tax and fiscal regime into a distinctive new one. New Deal liberalism now incorporated tax reform. A push toward democratic statism and a more robust tax base for expanded social programs amplified the long swing toward the greater progressivity of fiscal policy.

Presidential leadership proved crucial to the reforms. Tension between the executive and the legislative branches intensified during the Great Depression, as did the demands of local interests on the federal government. Consequently, the administration of Franklin D. Roosevelt found it more difficult to influence the new tax regimes demanded by national emergencies than had the administrations of Abraham Lincoln during the Civil War and Woodrow Wilson during World War I. But Roosevelt's appeals to party loyalty worked to his advantage, and he succeeded in forging coalitions both inside and outside of the federal government. As a result, the two tax regimes produced by the New Deal and World War II bore the imprint of the executive branch more than that of Congress, and the imprint of a national interest more than that of local interests.

Subsequently the second major war in a generation would yield yet another democratic-statist fiscal regime. This war, like World War I, created opportunities for public finance reforms that had clear social intent and organizational coherence. During World War II the administration of President Franklin D. Roosevelt – motivated by a concern for social justice as well as by the threat to the nation's security – shaped the enactment of a wartime fiscal regime that appeared to have even greater potential for reform than the one created in 1935.

Resumption of Democratic Statism

In 1935, Roosevelt concluded that political and economic conditions now favored a resumption of a democratic-statist tax policy. His timing was influenced by the growing “Thunder on the Left,” particularly Huey Long's “Share Our Wealth” movement, which proposed redistributional taxation designed to remedy flaws in the nation's economic structure. Moreover, as Roosevelt had gained confidence in the prospects for economic recovery, he had become less worried about a business backlash. And Secretary of the Treasury Henry Morgenthau had finally established the infrastructure of professional expertise that Roosevelt needed within the Treasury.