Little Bits of History

Taxing

Posted in History by patriciahysell on August 5, 2015
Abraham Lincoln

Abraham Lincoln

August 5, 1861: The Revenue Act of 1861 is enacted. The government needed to pay for the ongoing US Civil War and so imposed, for the first time, an income tax which was to be “levied, collected, and paid, upon the annual income of every person residing in the United States”. The source of the income was immaterial. A flat tax was applied to all incomes over $800 with a straight 3% going to the government. It was signed into law by Abraham Lincoln and was modified the year after. The flat tax was rescinded in 1862 and 3% was paid beyond $600 (about $14,000 today) and 5% was paid on annual incomes beyond $10,000  (about $237,000 today). Those living outside the US were also taxed at a higher rate. The law also included a termination date of 1866.

The US faced economic issues even before the outbreak of the Civil War. The Panic of 1857 had led the Government to deficit spending with the annual budget having a shortfall in excess of $40 million. They were paying between 8 and 12% interest on loans to fund public expenditures. With impending war, the nation was faced with even more expenses and the need for greater cash flow. On July 4, 1861, Lincoln opened a special Congressional session to discuss the Civil War from a purely legislative standpoint. One of the major issues was funding and how to pay for the Union Army and military expenditures. In order to increase income, the government used a three prong approach. Increase tariffs, institute a property tax, and create the first personal income tax.

Tariffs were introduced for many imports – sugar, tea, nuts, brimstone, coffee, liquor, and various fruits and herbs. Luxury items such as wines were taxed at a rate as high as 50%. The property tax was levied in proportion to each state’s population. Their enforcement was limited and the groundwork for the Internal Revenue Service was laid in order to collect funds. Sparsely populated states were charged less, but their territory was greater. Populous states were charged more with more people available to pay the bill. No one seemed to think it was fair. The flat income tax was levied on those making over $800 which at the time was only about 3% of the population. Lincoln was to assign one principal collector for each state or territory to collect the taxes.

While this was the first time a personal income tax was levied on Americans, it was not the first time the idea was tried. In the early Roman Republic, taxes were levied on wealth and property and were fairly modest – between 1 and 3%. The East also had income taxes. In 10 AD, Emperor Wang Mang of the Xin Dynasty instituted a brand new revenue scheme when he levied a 10% tax on all profits for professionals and skilled labor. The Saladin tithe was introduced by Henry II in 1188 in order to fund the Third Crusade. This again was a straight 10% levied for personal income and movable property. The modern income tax was begun in Great Britain when Prime Minister William Pill the Younger introduced it into the budget in December 1798. Today, there is a sliding scale with deductions and assessments added to the basic income of all Americans.

One of the greatest perplexities of the government, is to avoid receiving troops faster than it can provide for them. In a word, the people will save their government, if the government itself, will do its part. – Abraham Lincoln to Congress

Income tax returns are the most imaginative fiction being written today. – Herman Wouk

The hardest thing in the world to understand is the income tax. – Albert Einstein

Nothing hurts more than having to pay an income tax, unless it is not having to pay an income tax. – Thomas Robert Dewar

Also on this day: Candle in the Wind – In 1962 Norma Jeane died, mysteriously.
Road Trip – In 1888, Bertha Benz went for a drive.
Jobless – In 1981, 11,345 striking air traffic controllers were fired.
Dot, Dot, Dot – In 1858, the first transatlantic cable was finished.
Truth is Not an Excuse – In 1735, John Zenger was found not guilty of libel.

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