August 5, 1861 – The 37th U.S. Congress approved the Revenue Act of 1861, which raised taxes on imported goods, imposed taxes on the states, and provided for the first tax on individual income in American history.
In this special session of Congress, members rushed to enact measures that would increase government revenue to pay the interest on the war bonds being sold. The Republican Party, which dominated this Congress, had long supported higher tariffs on imports, so a measure to raise tariff rates 10 percent higher than the Morrill Tariff Act enacted earlier this year was not surprising. However, it did produce resentment among free trade advocates, including trading partners such as Great Britain, who favored the Confederacy’s free trade policies.
Unlike any other Congress before, this Congress introduced two new and innovate methods of taxation–taxing states and individuals.
Under the “Act of August 5,” states would be required to collectively pay $20 million to the Federal government. The sum was to be apportioned among all the states–even Confederate–according to their population. Thus the more populous states would be responsible for more of the total than those with fewer residents. Pennsylvania, for instance, was billed $1,946,719.33, while Oregon was taxed $35,140.66. Taxes from Confederate states were to be collected once they came under Federal military occupation.
The more controversial provision of the law provided that “there shall be levied, collected, and paid, upon annual income of every person residing in the U.S. whether derived from any kind of property, or from any professional trade, employment, or vocation carried on in the United States or elsewhere, or from any source whatever.” Such a tax had been approved to help finance the War of 1812, but that war ended before it could take effect. Republican Congressman Roscoe W. Conkling of New York argued that, like in 1812, wartime emergencies demanded such taxation:
“War is not a question of valor, but a question of money…It is not regulated by the laws of honor, but by the laws of trade. I understand (that) the practical problem to be solved in crushing the rebellion of despotism against representative government is who can throw the most projectiles? Who can afford the most iron or lead?”
Republican William P. Fessenden of Maine, chairman of the Senate Finance Committee, explained that the import tariff and the income tax complemented each other because the former was a regressive tax while the latter was progressive. He said, “Taking both measures together, I believe the burdens will be more equalized on all classes of the community.”
The income tax provision mandated that all U.S. citizens earning more than $800 per year would pay three percent to the Federal government. Some opponents of this law argued that the Constitution did not give the Federal government power to tax individuals, and thus only states could be subject to Federal taxation. But wartime demands trumped constitutional arguments, and the law passed. The income tax was to take effect on January 1, 1862. The levies on imports, states, and people were expected to generate $90 million in revenue.
A vague provision to the income tax part of the law opened a path to do away with the independent sub-treasury system that had regulated Federal finance since the 1840s. Under that system, the gold that people used to buy government bonds had to be deposited into a sub-treasury. This new provision authorized the Treasury to instead keep the gold in banks as government credit to help fund bank notes. However, Treasury Secretary Salmon P. Chase’s decision not to invoke this provision threatened to deplete gold reserves in the banks and cause a financial panic if Federal military fortunes did not improve.
Congress adjourned the following day, but not before President Lincoln approved what many considered an even more controversial bill.
CivilWarDailyGazette.com; Crocker III, H.W., The Politically Incorrect Guide to the Civil War (Washington: Regnery Publishing, 2008), p. 139; Fredriksen, John C., Civil War Almanac (New York: Checkmark Books, 2007), p. 53-54; Jackson, Donald Dale, Twenty Million Yankees: The Northern Home Front (Alexandria, VA: Time-Life Books, 1983), p. 59; Long, E.B. with Long, Barbara, The Civil War Day by Day (New York: Da Capo Press, Inc., 1971), p. 104-05; Ward, Geoffrey C., Burns, Ric, Burns, Ken, The Civil War (New York: Alfred A. Knopf, 1990), p. 127