The Internal Revenue Act

President Abraham Lincoln signed a bill into law imposing taxes on almost everything to help finance the war. This became the first enforceable national income tax. The new measure imposed unprecedented taxes on countless items, including:

  • Liquor and tobacco
  • Carriages, yachts, and jewelry
  • Gold, silver, and other precious metals
  • Licenses for nearly every trade
  • Patent medicines
  • Newspaper advertisements and stamps
  • Manufactured goods
  • Inheritances
  • Income from banks, insurance companies, and other corporations
  • Individual income

The Revenue Act of 1861 had imposed the first national income tax, but it had no practical mechanism for enforcement. This law provided for the appointment of an internal revenue commissioner and a bureau to oversee tax collection. Income was automatically withheld from government pay, dividends, and interest payments to cover the tax. The act greatly expanded the size of the Treasury Department, allowing Treasury Secretary Salmon P. Chase to appoint hundreds of new officials that would be loyal to him.

The income tax system required individuals to pay 3 percent of their income if it fell within the range of $600 to $10,000 per year, and 5 percent if higher than $10,000. The Federal government taxed death for the first time, with a tax on all inheritances after the first $1,000. Businesses worth less than $600 were exempt from taxation.

U.S. Rep. Thaddeus Stevens | Image Credit: Wikipedia

Republican Congressman Thaddeus Stevens of Pennsylvania, chairman of the House Ways and Means Committee, championed this measure’s passage and celebrated its apparent emphasis on taxing the rich while leaving the poor alone: “While the rich and the thrifty will be obliged to contribute largely from the abundance of their means… no burdens have been imposed on the industrious laborer and mechanic… The food of the poor is untaxed; and… no one will be affected by the provisions of this bill whose living depends solely on his manual labor.”

However, this did not take into account the money businesses and the wealthy had to pay in taxes rather than using that money for potential innovation, expansion, and job creation. The income tax also discouraged business owners from raising wages, even though the issuance of paper money made basic necessities more expensive for the working class.

By mandating that Americans must pay to support the national government, this law was the first of its kind in the U.S. As such, it drastically changed the relationship between the individual and the Federal government. The $600 minimum for income taxation ultimately proved too high to generate maximum revenue, but this law nevertheless generated $2 million in 1863 and over $20 million the following year.


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