Revenue Act of 1861

• 1. Introduction

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  The Revenue Act of 1861, cited in the statute books as Act of the 5th of August 1861, Chap. XLV, 12 Stat. 292, gave the United States its first federal income tax. Abraham Lincoln signed it, and he had already put the matter to Congress in blunt terms: "the people will save their government, if the government itself, will do its part."

  The law was a hurried answer to war. It reached into a citizen's yearly earnings in a way Washington never had before. Why was the government so short of money? Who was expected to pay? And why did this first income tax survive for so short a time?

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• 2. A Treasury Running Dry

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  In the three years before the Civil War, the federal government ran a budget deficit of more than $40 million. The cause was the Panic of 1857, a depression fed by over-expansion of the domestic economy and a financial meltdown in Europe. The looming threat of secession made the strain worse.

  By 1860, the Treasury was paying between 8 and 12 percent interest on government bonds just to keep money coming in. Raising a volunteer force added a new burden. Treasury notes with attractive interest rates brought in cash quickly, but every note created a bill for interest that someone would have to pay later.

  The weakness showed even after the act became law. In December 1861, the Treasury offered five million dollars of interest-bearing notes at 12 percent, and buyers took only four million dollars' worth.

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• 3. Lincoln Takes Stock

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  In March 1861, Lincoln wrote to members of his cabinet, including Edward Bates, Salmon Chase, and Gideon Welles. He asked whether a president had the constitutional authority to collect duties of several kinds, from an import tariff to a property tax. Documents held at the Library of Congress show that his worry centered on tariffs at ports along the Southeastern seaboard, where secession was close at hand.

  On the 4th of July 1861, Lincoln opened a special session of Congress for the purpose of handling the war through legislation. The money problem had a strange cause. So many men had volunteered that the Union Army was spending heavily to train and arm them, and Lincoln fretted that troops were arriving faster than the government could supply them.

  Congress set a target of roughly $50 million in new revenue. Lawmakers chose three tools to reach it: higher tariffs on certain imports, a brand new property tax, and the first personal income tax.

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• 4. Debate in Congress

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  Senator William Pitt Fessenden of Maine chaired the Senate Finance Committee, and under his leadership Congress drafted the act in a relatively short span of time. The bill still stirred real argument.

  Thaddeus Stevens, who chaired the House Committee of Ways and Means, did not pretend to like it. "This bill is a most unpleasant one. But we perceive no way in which we can avoid it and sustain the government. The rebels, who are now destroying or attempting to destroy this Government, have thrust upon the country many disagreeable things." Many members shared his view that the income and property taxes were necessary evils.

  The tariff portion carried the least novelty, since it built on the protectionist precedent set earlier that year by the Morrill Tariff of 1861.

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• 5. Duties at the Dock

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  Sugar, tea, nuts, brimstone, coffee, liquor, and an assortment of fruits and herbs all landed on the act's list of taxed imports. Most goods were taxed per unit, meaning a fixed charge on each measure of the item.

  Goods whose prices swung widely were handled differently. Hides, citrus fruit, silk, and gunpowder were taxed ad valorem, which means as a percentage of their value. Those rates ran from 10 percent on hides and rubber up to 50 percent on wines.

  Shipping carried its own penalty. Articles brought in on foreign vessels from beyond the Cape of Good Hope owed a further 10 percent ad valorem.

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• 6. The Land Tax

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  Each state's share of the new real estate tax was set in proportion to its population. That formula drew complaints from representatives of rural states. Because the tax fell on real estate and spared other kinds of personal property, they argued, it weighed unfairly on the large, sparsely populated states and territories of the West and Southwest.

  New York shows the other side of the argument. A dense population meant it was assessed at a higher rate, yet a larger share of its wealth sat in personal property rather than land.

  The act's enforcement was thin, but it did create tax districts, assessors, and collectors. That machinery laid groundwork for the Internal Revenue Service, which was formed on the 1st of July 1862.

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• 7. The Three Percent

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  Section 49 of the act reached "every person residing in the United States," and it did not care whether the money came from property, a profession, a trade, a job, or "any other source whatever." Income earned in the United States or elsewhere counted alike.

  The rate was a flat 3 percent on annual incomes of $800 or more. In 1861, that threshold was 5.6 times the nominal gross domestic product per capita of $144.31. In 2021 terms, it matches an income of about $384,000.

  Only 3 percent of the population earned that much in 1861. That narrow reach helps explain why the tax found wide support among legislators.

  Lincoln was given the power to appoint one principal assessor and one principal collector in each state or territory to enforce it.

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• 8. Repeal and Replacement

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  A second clause in the same law undercut those federal officers. It allowed each state to collect and pay its own portion of the direct tax in whatever way it chose. Together with the 3 percent flat rate and the weak enforcement, this meant the act failed to bring in the revenue its authors wanted.

  The Revenue Act of 1862 repealed the income tax provisions, Sections 49, 50, and 51, and replaced them with something broader. Its Section 89 established a progressive scale. Incomes beyond $600 paid 3 percent; that figure was 3.4 times the 1862 nominal gross domestic product per capita of $177.69, or roughly $234,000 in 2021 terms. Incomes above $10,000 paid 5 percent, as did the incomes of people living outside the United States. The $10,000 line was 56 times per capita output and corresponds to about $3.9 million in 2021.

  The 1862 act also called for the Internal Revenue Bureau, which was later renamed the Internal Revenue Service. Perhaps its most telling feature was that it was openly temporary, ending the income tax in "the year eighteen hundred and sixty-six."

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