Today is tax day so I felt it would be appropriate to say something about the American Civil War’s role in the creation of the national income tax. I’ve adapted this from an article I wrote several years ago when I was doing some P.R. work for the National Civil War Museum in Harrisburg, Pennsylvania.
“Nothing in this world is certain but death and taxes,”” said Benjamin Franklin. The American Civil War was responsible for plenty of both.
Congress passed the first Federal income tax in 1861 to help fund the Union effort. Although Great Britain already had an income tax and some states had experimented with the concept, it was a first for the U.S. government. But the times cried out for innovation. South Carolina had seceded from the Union in December 1860, starting a chain reaction as other Southern states followed its lead. On April 12, 1861, Southern guns in Charleston, South Carolina, opened fire on Union-held Fort Sumter. The Civil War had begun.
Few realized how much it would cost—by 1863 the Union was spending more than $2 million a day on the war. The country’s previous methods of raising money, primarily from tariffs and the sale of public land, were inadequate to handle this new crisis.
Salmon P. Chase, Lincoln’s secretary of the treasury and a member of his “team of rivals.” Young George Gordon Meade had once been a student at a school that Chase ran. When he later met the treasury secretary during the Civil War, Meade declined to point out their former connection (Library of Congress).
President Abraham Lincoln’s Treasury Secretary was Salmon P. Chase, a former Ohio governor and senator who had been Lincoln’s rival for the Republican nomination in 1860. When Congress returned to Washington in July 1861 Chase told it the government needed $318 million—six times what it had spent the year before. He expected most of it would come from loans and some from land sales and tariffs, but Chase estimated a $20 million shortfall. He asked Congress to use its “superior wisdom” and close the gap.
The income tax was just one way to do that. In August Congress passed a bill that imposed a flat 3% rate on net earnings after an $800 exemption, with taxes due by June 30, 1862. It also introduced the nation’s first tax loophole: Interest from government bonds was taxed at only 1.5%, in an attempt to spur sales.
The 1861 tax was one everyone could love, because Congress created no system to collect it. By the next spring the realities of the war’s costs were obvious to all, and Congress set out to tax with a vengeance. It passed an internal revenue bill that was seventeen pages long—119 sections of tiny type printed in three columns. It included stamp taxes, excise taxes, inheritance taxes, license taxes—taxes, it seemed, on just about everything. President Lincoln signed it on July 1, 1862.
The bill taxed incomes at a rate of 3% on earnings between $600 and $10,000, and 5% above that, with deductions allowed for other taxes paid. The progressive rate was merely a point of practicality. As John F. Witte pointed out in The Politics and Development of the Federal Income Tax, “[P]rogressivity was introduced not out of concern for equity, but rather to increase revenues.” Only a small percentage of Americans paid the income tax, because relatively few earned more than $600 a year. For example, a private in the army earned a mere $13 a month.
To collect all the new taxes, Congress established the first Bureau of Internal Revenue, and Chase asked George S. Boutwell, a former Massachusetts governor, to serve as its first commissioner. Boutwell did not lack self-esteem. “Mr. Chase’s mental processes were slow,” he said of his boss, “but time being given, he had the capacity to form sound opinions.” The new commissioner set himself up in a small office in the Treasury Building and oversaw the creation of a growing bureaucracy that would employ almost 4,000 people by war’s end.
One of Boutwell’s first hires was a cashier to handle the millions of dollars in incoming revenue. The cashier started at a salary of $1,200 a year, $600 of it subject to income tax. As a federal employee, his taxes would have been withheld directly from his paycheck—something we take for granted today.
Non-federal employees dealt with tax collectors, who handed out four-page forms of personal questions. If that weren’t bad enough, until 1870 newspapers printed individuals’ incomes and payments for everyone to see. As one taxpayer wrote, “The satisfaction of knowing how much our neighbor was worth was no compensation for the exposure of our own affairs.”
The Confederacy, in increasingly dire financial straits, passed its own income tax in April 1863, even though it ran contrary to its states’ rights philosophy. The Confederacy’s tax had a $1,000 exemption, a 1% rate for the first $1,500 after that, and 2% for incomes above $2,500. It was too little, too late.
Congress revised the federal tax in 1864. By then the national debt had ballooned to $1.8 billion, so the new tax raised rates to 5% for incomes between $600 to $5,000; 7.5% for $5,000 to $10,000, and 10% above that. Now the idea of progressivity sparked some serious debate. “It is seizing the property of men for the crime of having too much,” protested Vermont Representative Justin Morrill.
Congress began to find ways to fiddle with the tax laws—adding new deductions (for example, rent) and adding exceptions for farmers. And as an emergency measure in 1864 it raised rates for the previous year’s incomes, to 8% for earnings between $600 and $10,000.
Income tax revenues trickled in slowly at first. In 1863 the tax raised only $2 million—enough to fund the war for a day. In 1866 it raised $73.5 million. In the end income taxes accounted for only about 20% of government revenue during the Civil War. By 1867 the war was over and income tax revenues were declining, as Congress raised exemptions and lowered rates, and as more and more citizens simply stopped paying. “Does anybody believe that out of the whole 40,000,000 people in the United States there are only 272,843 who have incomes exceeding $1,000, that only about half that number have incomes not above $1,400?” sputtered an outraged Congressman in 1870.
Congress also began hearing from an ever-increasing variety of “special interests” who wanted the income tax repealed. “They speak through the daily press, from high official stations, from great corporations, from cities where wealth accumulates, and with all the advantages of social, personal, and delegated influence,” complained Ohio Senator John Sherman.
Congress finally killed the income tax in 1872. It lay dormant until 1894, when Congress, after much heated debate, passed a flat 2% tax. The Supreme Court struck down the bill as unconstitutional. Ratification of the 16th amendment in 1913 ended any questions about the tax’s constitutionality and Congress passed a limited income tax that ushered in the age of Form 1040.
The income tax has been with us ever since.
Searching for GEORGE GORDON MEADE 