The first major reduction in tariffs occurred under the Underwood Tariff Bill. The average tariffs was decreased from 41 percent to 27 percent. One hundred items became free of tariff. To replace the lost income, a graduated income tax was imposed. This was the first income tax since the Civil War..

The problem of tariffs was a difficult one politically to tackle. By the early 20th century economist all understood that high tariffs were harmful. In addition if at one time American industry needed protection by this point in American history that protection was no longer needed. However, every time an attempt was made in Congress to lower the tariffs special interests became involved and blocked the change.

President Wilson made it a priority of his to convince the Congress to lower the tariffs. Wilson called a special session of Congress to pass tariff reform in April of 1913. Wilson addressed the session, the first time since John Adams that a President did so. With the Democrats in control of both houses of Congress, it was their responsibility to pass a new law.

Alabama representative Oscar Underwood sponsored the law in the House of Representatives and on May 8, 1913, the new law was passed in the House 281-139. The Senate proved more difficult, with special interests trying to add tariffs on various goods. The President became personally involved twisting arms of individual Senators. On September 9, 1913, it passed the Senate.

The law which was officially known as the Revenue Act of 1913 lowered tariffs on hundreds of items, bringing the average tariff down to 26%. The list of items exempted from tariffs was large and included items like steel rails and agricultural implements.

At the time tariffs were the major source of revenue for the Federal government. To offset the losses caused by the lowering of tariffs, the act reimposed income tax for the first time since the Civil War.

The rate of income tax was progressive. Earners between $3,000 ($76,000 in 2018 dollars) and $20,00 paid 1%. Earners between $20,000 and $50,000 paid 2% ($20,000 in 2018 dollars is $509,000) $50,000 to 75,000 3%. $75,000 to $100,000 4%. $100,000 to $250,000 5%,$250,000 to $500,000 6% and above $500,000 ($12,727,575 in 2018 dollars) 7%.