During this special session of Congress, bills were rushed through to raise money to pay the interest on the war bonds being sold. Without southern opposition, Republicans now dominated this Congress, and having long supported protective tariffs on imports, they unsurprisingly approved a tariff rate hike of 10 percent higher than the Morrill Tariff enacted earlier this year. This protected northern manufacturers from cheaper imports, but it also caused resentment among key trading partners such as Great Britain, who favored the Confederacy’s free-trade approach to tariffs.
Wartime exigencies prompted this Congress to introduce two new and innovative methods of taxation never before tried in American history–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 bear more of the burden. 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 enacted to help pay for 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. Until collection of these taxes began, the government would have to rely on loans to finance the war effort.
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 Abraham Lincoln approved what many considered an even more controversial bill.
- Crocker III, H. W., The Politically Incorrect Guide to the Civil War. Washington: Regnery Publishing, 2008.
- Jackson, Donald Dale, Twenty Million Yankees: The Northern Home Front. Alexandria, Va.: Time-Life Books, 1983.
- Long, E.B. with Long, Barbara, The Civil War Day by Day. New York: Da Capo Press, Inc., 1971.
- McPherson, James M., War on the Waters: The Union and Confederate Navies, 1861-1865. Littlefield History of the Civil War Era, The University of North Carolina Press (Kindle Edition), 2012.
- Ward, Geoffrey C., Burns, Ric, Burns, Ken, The Civil War. New York: Alfred A. Knopf, 1990.