Federal income taxes
A new era of national taxation was ushered into the United States with the adoption of the Sixteenth Amendment to the Constitution. The first federal income taxes were supplementary emergency measures of the Civil War period, but it was not possible for the United States to have a broad general income tax as a main source of revenue, for peace times as well as for war and other emergencies, until the adoption of the Sixteenth Amendment.
The federal income tax
These short and simple laws were the forerunners of a series of measures that were soon to multiply many fold the revenues of the government and to affect profoundly and permanently, not only the national government, but also state and local governments, all industry and finance in the United States and consequently, the lives of its millions of citizens. The really new era which got well under way in 1909 and 1913 is the one with which this treatise is chiefly concerned, though a brief account of what went before will assist in understanding why and how this era came into existence and will aid also in evaluating the significance of later developments.
Prior to the Civil War the national government was financed chiefly by receipts from customs duties. Some revenue was received from the sale of public lands and from a few temporary excise and other internal taxes. The tariff, although the main source of revenue was not ideal for several reasons, one of them being that the yield fluctuated violently according to the condition of business and bore little relation to the needs of the government. At times the government faced a deficit. Then it borrowed, relying on a hope for surplus some time in the future. At times the surplus became embarrassing and tempted Congress to spend recklessly. Twice at least, in the 1830s and again in the decade preceding the panic of 1893, such surpluses were important factors contributing to economic depressions, though other factors were more important in the latter period.
The civil war taxes
When the opening gun of the Civil War was fired on Fort Sumter, the national government was neither financially nor psychologically prepared for the long struggle. The panic in receipts from customs had left a Treasury deficit. Disagreement as to financial policy between northern and southern members of Congress and President Buchanans apparent indifference or indecision forced the Treasury to borrow more and more. Even before the war broke out the national credit was so poor that New York banks were reluctant to lend to the government.
In the first months after the outbreak of war neither Congress nor the Secretary of the Treasury had much courage when it came to imposing taxes, but perhaps it is difficult now to appreciate the psychology of a people totally unaccustomed to paying anything for support of the national government except indirectly through the tariff. There had not been even a federal excise tax on alcoholic liquors since 1817 when a temporary war measure was repealed. Further more, no one expected the war between the states to be difficult or of long duration.
Aside from borrowing, three new expedients were devised to finance the war:
- Fiat money
- The internal revenue system, that is, excises on liquor, tobacco and other consumption goods, licenses on business and gross receipts taxes on certain corporations, and
- Taxes on incomes of individuals.
The decision to impose an income tax was the result of a determination by the West and South that the eastern part of the United States should pay a fairer share of taxes. The amendment to include an income tax was forced upon the Committee on Ways and Means when Congress met in the special session. Western members resented the imposition of a direct tax on their part of the country where land was plentiful but the population sparse and poor. They were fully aware too that much of the burden of the tariff, though concealed, fell on them. So great was the objection to the bill that it was withdrawn and rewritten to reduce the amount of direct tax on land and to include an income tax that would fall more upon the industrial sections than upon the rural areas.
This first income tax law was very simple and short; in fact, it did not specify whether the tax was on gross or net income nor did it enumerate any allowable deductions other than taxes. Before it went into effort Congress met again and drafted another measure. This law is interesting not only because it provided for the first national income tax to be levied in this country but also because it established the office of Commissioner of Internal Revenue. The law was revised again in order to bring in more revenue and also to make its provisions more definite.
Rural indebtness
Many farmers were heavily in debt and as farm prices declined they resented paying interest or principal in terms of fixed numbers of dollars with increasing numbers of bushels of grain or pounds of hogs and other prudence. Another grievance was the tax burden, principally the local property tax burden, but some knew or suspected that the bulk of the hidden federal tariffs and excises fell with disproportionate weight upon the farmer and labourer. Thus the eastern manufacturers as well as the capitalists conspired with the other monopolists to exploit them. Southern farmers had all the troubles of their western brothers and others in addition, such as the Negro problem, the dependence on cotton and the crop lien system. No wonder the hard pressed classes listened sympathetically to the panaceas promised by the advocates of co-operatives, railroad regulation, more greenbacks, free silver, trust busting, income and inheritance taxes on the rich.
The platform of the Populist Party set forth some of the woes in the following preamble:
Many organizations were formed to right these wrongs. These organizations were chiefly of a social, propagandist nature; in the nineties they were primarily political. Patrons of Husbandry, the Grange, and the Greenback party, the National Farmers Alliance and Industrial Union and the Knights of Labour were some of the more influential ones. It was perfectly logical that a demand for an income tax should be part of the program of this movement. It was a tax that would be paid by the rich, not the poor and the yield would relieve the poor of some of the burdens of supporting the government.
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