American Taxation


The act exempted the first $600 in income, and income between $600 and $10,000—a very comfortable sum indeed at the time—was taxed at 3 percent. Income over $10,000 was taxed at 5 percent. Taxes had to be raised sharply again in 1864, so the top rate on income was doubled to 10 percent, while taxes on liquor reached two dollars a gallon, no small sum when it would have sold for about twenty cents a gallon untaxed. But resistance to the heavy taxes—and high taxes’ inevitable handmaiden, evasion—were not widespread during the war. One of the natural principles of taxation, it turns out, is that the people will willingly pay very high taxes during wartime.

Peacetime is another matter altogether. Immediately after the war the cry for repeal of the wartime taxes became insistent. With military expenses quickly dropping, the problem, basically, was what taxes to cut. American industrialists, who had prospered mightily thanks to wartime demand and wartime high tariffs, naturally did not want the tariff cut. Because the Civil War had broken the political power of the South, the center of opposition to the tariff, they got their way. The tariff was kept at rates far above the government’s need for revenue as the North industrialized at a furious pace in the last three decades of the nineteenth century and became the greatest—and most efficient—industrial power on earth.

Of course, no matter how large, efficient, and mature these industries became, they continued to demand protection and, thanks to their wealth and political power, get it. As Professor William Graham Sumner of Yale explained as early as 1885, “. . . the longer they live, the bigger babies they are.” It was only after the bitter dispute between Andrew Carnegie and Henry Clay Frick had caused the astonishing profits of the privately held—and highly protected—Carnegie Steel Company to become public knowledge, in 1899, that the political coalition behind high tariffs began to crack.

Hard as they fought to maintain high tariffs, the industrializing states fought equally hard to diminish the wartime income tax and then to abolish it. In 1867 rates were cut to a uniform 5 percent on incomes over $1,000. In 1870 they were reduced again, and in 1872 they were allowed to expire altogether.

Before the Civil War there had been little pressure for a federal income tax in this country, although by the start of the war six states had implemented such taxes. But once a federal income tax was in place, it quickly acquired advocates, as political programs always do. These advocates pushed the idea relentlessly, and they had some compelling arguments.

The indirect taxes, such as excises and tariffs, by which the government was funded are inherently regressive. That is to say they fall harder on the poor than the rich because they are based on consumption, and the poor necessarily consume far more of their income than the rich do.

IT WAS NOT JUST ADVOCATES OF THE POOR WHO ARGUED for an income tax to redress the balance, however. The Republican senator John Sherman, no radical by a long shot, said during the debate on renewing the income tax in 1870, “Here we have in New York Mr. Astor with an income of millions derived from real estate . . . and we have alongside of him a poor man receiving $1,000 a year. What is the discrimination of the law in that case? It is altogether against the poor man—Everything that he consumes we tax, and yet we are afraid to tax the income of Mr. Astor. Is there any justice in it? Why, sir, the income tax is the only one that tends to equalize these burdens between the rich and the poor.”

As for the claim by the wealthier states that they paid a disproportionate share—New York State alone paid onethird of the Civil War income taxes—Oliver Morton, Republican of Indiana, had a simple answer: “I should be very willing to exchange with New York and agree that we would take her incomes and pay her taxes. . . . They have to pay the income tax simply because the large incomes are there.”

But as usual with taxes, it was political power, not equity, that prevailed. Representatives of seven Northeastern states plus California, which collectively had paid 70 percent of the income tax, voted 61 to 14 not to renew the tax. Meanwhile fifteen mostly Southern and Western states, which had paid only 11 percent of the tax, voted 69 to 5 in favor. Support for the income tax, in other words, was inversely correlated with its local impact. Politicians will always try to live up to the dictum usually credited to former Sen. Russell Long of Louisiana: “Don’t tax you and don’t tax me. Tax the man behind the tree.”

But perhaps the decisive reason not to renew the Civil War income tax was that it was simply not needed for revenue. The traditional federal taxes more than covered federal expenses once the war was over and it was politically impossible to lower them. The argument to continue to utilize an income tax, then, was basically an argument for social engineering, using taxes to affect the distribution of wealth, not to raise revenue. This is the third purpose of taxation and one that developed only in the late nineteenth century. It would flower greatly in the twentieth.