Wednesday, October 03, 2007 10/03/07-Income Tax

In today's excerpt--faced with the unprecedented cost of the Civil War, the U.S. implements an income tax:

"With steady news of the Union's defeats in 1861, public confidence fell sharply. ... Adding to [Abraham] Lincoln's concerns, the Treasury secretary [Salmon Chase] reported that he had underestimated the cost of the war for 1861-62. Rather than $318 million, Chase now put the figure at $532 million. And only $55 million in taxes was expected. ...

"The Union army's defeat at Bull Run in July 1861 cooled the desire of banks to lend to the government. Chase and congressional Republicans decided they must raise taxes aggressively to produce more revenues to reassure investors. They first considered a property tax, a method last used in the War of 1812 ... [but] the suggestion evoked a sharp reaction from populist and agrarian interests ... [and] intense congressional opposition led to a search for a tax that would be considered fairer by rural constituencies. Legislators were aware of the various features of the British income tax, which had first been proposed by William Pitt the Younger in 1798 to pay for weapons and supplies in preparation for the Napoleonic Wars with France. Implemented in 1799, the tax featured graduated payment rates, with the lowest set below 1 percent and the highest at 10 percent. ...

"The idea of a federal income tax was widely regarded as radical and nearly inconceivable. Those suspicious of any increase in federal financial power considered it another attempt by the federal government to undermine the power of the states. Wealthy Americans deplored it as an unjust and heavy-handed federal intrusion. ... [However,] in need of revenues and anxious to offset grumblings that low-income farmers and workers were bearing the brunt of the war's cost due to high tariffs, the [Congress] passed legislation levying ... a 'flat' 3 percent on incomes above $800 signed into law by President Lincoln on August 5, 1861. Most Americans made far less than $800--the average annual income that year was $150--so the vast majority did not have to pay the tax. ... Interest on mortgages was made deductible ... Congress attempted to increase tax fairness further, as well as obtain additional revenues, by including in the bill an inheritance tax--the first in U.S. history--on estates in excess of $1,000. ...

"To improve tax collection, Congress adopted another practice from Britain called 'collection of revenues at the source.' ... It required federal agencies to withhold taxes from the pay of civilian and military employees and railroad and financial institutions to withhold taxes before distributing dividend and interest payments to investors."

Robert D. Hormats, The Price of Liberty, Times Books, Copyright 2007 by Robert D. Hormats, pp. 63-69.


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