The government has the right to “demand” 99 percent of a man’s property when the nation needs it.
That was the argument made by a Republican congressman in 1862 to introduce a novel idea: the federal income tax.
The Civil War was then costing the Treasury $2 million a day. To pay for uniforms, guns, food, mules, wagons, bounties and burials, Congress had issued hundreds of millions of dollars of bonds and paper money. But Republicans had a horror of debt and the runaway inflation that paper currency usually caused.
Taxes were the obvious answer. A conservative Republican newspaper declared, “There is not the slightest objection raised in any loyal quarter to as much taxation as may be necessary.”
Until then, taxes in the U.S. had always been apportioned by state according to population, and were generally levied on land holdings. But when it came to the huge sums necessary to fight the Civil War, such direct taxes would ruin farmers.
Instead, Republicans turned to what they called “indirect taxes,” which were essentially sales taxes of 3 percent on all manufactured goods. These, however, wouldn’t be sufficient to raise the needed revenue without making basic necessities prohibitively expensive for most Americans.
So what could Congress do to ensure, as Sen. William Fessenden, R-Maine put it, that tax burdens would “be more equalized on all classes of the community, more especially on those who are able to bear them?”
The answer was a federal tax on incomes.
“It would be manifestly unjust to allow the large money operators and wealthy merchants, whose incomes might reach hundreds of thousands of dollars, to escape from their due proportion of the burden,” said Thaddeus Stevens, a House Republican leader and wealthy iron manufacturer.
The staunchly Republican Chicago Tribune agreed: “The rich should be taxed more than the poor.”
After experimenting with a 3 percent tax on incomes of more than $800 in the summer of 1861, Congress expanded the income tax in 1862. It placed a tax of 3 percent on incomes exceeding $600 and of 5 percent on those of more than $10,000.
“The weight must be distributed equally,” Rep. Justin Morrill, R-Vt., explained, “not upon each man an equal amount, but a tax proportionate to his ability to pay.” There was little debate.
Republican congressmen not only imposed an income tax but also shifted tax collection from the states to the federal government. A new national system would be cheaper to institute than a variety of state systems, the measure’s Republican sponsor argued. There was an additional benefit: If Americans paid taxes to the national government, they would have a personal stake in its survival and stability. In 1862, Republicans created the Internal Revenue Bureau in the Treasury Department, the precursor to the Internal Revenue Service.
The new system worked so well that it was expanded after two years. As the national debt climbed toward $1.5 billion, Americans clamored for Congress to raise money. “What do the people of the United States ask of this Congress?” demanded a New Hampshire Republican. “To take off taxes? No, sir, they ask you to put them on. The universal cry of this people is to be taxed.”
Congress obliged. In 1864, taxes on manufactured goods rose to 5 percent. Rates increased to 5 percent for incomes from $600 to $5,000; 7.5 percent for incomes from $5,000 to $10,000; and 10 percent for those of more than $10,000. Days after President Abraham Lincoln signed the new law, Congress passed a joint resolution imposing a 5 percent surtax on all three brackets.