The outbreak of World War I found the United States unprepared for the enormous strains the war would place on its fiscal system. When the guns finally fell silent in 1918, the United States had embraced a significantly different tax system, seen its government assume a dramatically enlarged place in the financial affairs of its citizens, and changed from an international debtor to an international creditor nation.

Prewar Taxes

Before 1914, the American government had customarily received much of its income from the tariff. After wartime conditions shrank foreign imports, the duties collected on "vices" such as alcohol and tobacco products, cosmetics, and playing cards eclipsed the tariff as the largest source of revenue. The adoption of the Sixteenth Amendment in 1913 had legalized the income tax, but Congress embraced this change without much eagerness. The initial rates were so low and the exemption so...