Simple Liberty  

 

     
   
     

The American Income Tax

Chapter 3

The First Income Tax — Domesticating the Camel

Written by Darrell Anderson.

When there is an income tax, the just man will pay more and the unjust less on the same amount of income.

Plato, The Republic, Book I

The American income tax is quite old, existing long before the infamous year of 1913. Incomes in the nature of profits and gains were taxed in the colonial days of America, but such taxes were called personal property or more specifically, faculty taxes. The idea was hardly new. The French had known the taille personnelle levied upon artisans, laborers, state officials, and others whose earnings came from services and skills rather than property.[1] From Noah Webster’s 1828 American Dictionary of the English Language:

Faculty: That power of the mind or intellect which enables it to receive, revive or modify perceptions . . . The power of doing anything; ability . . . The power of performing any action, natural, vital, or animal . . . Facility of performance; the peculiar skill derived from practice, or practice aided by nature; habitual skill or ability . . . Personal quality.

The idea was to tax the estimated gross revenues received from one’s trade or business, regardless of whether the person received the estimated amount.[2] The personal property or faculty tax is rooted in the concept of “an ability to pay.” The more a person accumulates in personal property, and similarly, the more a person advances in skills and knowledge, the more that person is presumed to possess an ability to pay. The first recorded American property tax on the profits of tradespeople and workers was enacted in New Haven, Connecticut in 1649.[3] A similar tax was enacted in 1684 in New Jersey.[4] Efforts continued sporadically in the states at directly taxing the property of income.[5] Throughout this period these faculty taxes were called capitation taxes.[6] A capitation tax was always understood to be a direct tax.

One of the unique distinctions between the American national constitution and state constitutions is the concept of how legislators collect direct and indirect taxes. The national constitution contains two rules for collecting taxes. Direct taxes must be collected according to the rule of apportionment and duties, imposts, and excises according to the rule of uniformity. Within the Constitution apportionment means that such taxes are to be collected according to the relative population within each state.

These early pre-constitution faculty or “primitive” income taxes were all levied and collected at the local and state level. In hindsight, a plausible modern argument against classifying taxes on incomes as a direct tax, is that the rule of apportionment would make collecting such a tax all but impossible. Yet that argument holds only for national taxation. Individual state legislators never have had any such restriction. Furthermore, even if national legislators imposed a direct tax, within the boundaries of the states, state legislators could raise those apportioned revenues by taxing the net profits and gains of people. The rule of apportionment would be irrelevant within the boundaries of the state. Indeed, with respect to the modern income tax imposed in 1913, Wisconsin legislators had already set the mold for state income taxes in 1911.

Despite this established history of income taxation within the states, the first national income tax was not levied until 1861 with the War Among the States.[7] A number of state legislators, both in the north and south, enacted income taxes.[8] During the War of 1812 congressional legislators considered an income tax but never enacted one.[9] That 1861 tax also included a direct tax known as the Direct Property Tax Act of August 5, 1861, similar to those imposed in 1798, 1813, and 1815.[10] The direct tax on land was not well received in western states. Land values were not yet comparable or equivalent to those values in long established eastern states. With the tax being collected constitutionally according to population apportionment, the tax would bear a heavy burden on the less populous western states. In the west such a tax also would fall heavily on farmers and only lightly on eastern business owners and investors.

The 1861 act established a system of tax districts, assessors, and collectors.[11] Some legislators found this aspect detestable. Roscoe Conkling, representative from New York, motioned to strike those elements and wanted instead that the direct tax be requisitioned upon the Governor of each state:[12]

Mr. Chairman, reluctant as every gentleman on this floor will be to vote for this bill, one of the most obnoxious — perhaps the most obnoxious — of all its features is that which creates an army of officers whose business it is to collect these taxes. I call the attention of the committee to that point, in order to see whether . . . we may not be able to expunge from the bill this feature of it.

Most of the congressional debate about the 1861 act had to do with the direct tax. To avoid debates about direct taxation of incomes, the income tax was cleverly labeled by legislators as a duty, which, within the national constitution, is recognized as an indirect tax. Yet there was little doubt that legislators understood the income tax as a direct tax being masked otherwise. Congressman Stevens of Pennsylvania recognized that “the many taxes on carriages, horses, and watches” were taxes on personal property.[13] Congressman Schuyler Colfax of Indiana objected that:[14]

. . . there was no direct tax levied on personal property such as stocks, merchandise, etc.

Congressman John Bingham of Ohio did not object to the direct tax on land, nor to taxing incomes, but objected to attempting to levy “internal duties” on personal property to avoid the Constitutional rule of apportionment:[15]

. . . I do object to any attempt on the part of the House here, on the mere suggestion of gentlemen, to depart from the established precedent, the established construction, and true meaning of the terms used in the Constitution in its grant of power to Congress to levy and collect taxes, duties, excises, etc. The uniform construction has been that the power to levy and apportion direct taxes could be rightfully applied only to lands and slaves. I think that this is not the time for the friends of the country and of the Constitution to undertake to establish a new construction . . . I undertake to say that the uniform construction of that clause of the Constitution, to be apportioned among the several states . . . there is nothing to be taxed except land, tenements, and slaves . . . unless it be a direct capitation tax on the person, without respect to his property or his income.

After further questioning by other legislators, Bingham clarified his point:[16]

There is no power conferred by the Constitution to impose direct taxes upon personal property. That is what I said, and what I say now. [emphasis original.]

Bingham seemed to understand that legal trickery was required:[17]

. . . that by the particular mode of taxation provided in the first section of the bill — by direct taxation — it would not be competent for Congress, by the universal construction put upon the Constitution, to impose a tax upon money or upon incomes; but I said that by the mode prescribed in another portion of the bill, it would be competent to tax money, incomes, and mortgages.

The 1861 act imposed a 3 percent duty tax on annual incomes in excess of $800. The word duty was not used in the typical constitutional sense to mean an impost or customs tax on imports.[18] Legislators realized that such a tax was a direct tax and difficult to impose and collect with the rule of apportionment. Many congressional legislators opposed any kind of levy on income and they merely changed the name of the tax to avoid that problem. Many denounced the inquisitorial nature of the income tax.[19] The statutes were ineffective because Treasury Secretary Salmon P. Chase refused to collect the tax.[20]

Before that 1861 tax was due on June 30, 1862, legislators replaced that act with the revenue act of 1862.[21] The 1862 act was comprehensive and complicated. Collection and assessment districts were maintained.[22] Duty and ad valorem taxes were imposed on numerous commodities.[23] Annual license taxes were required for almost three dozen occupations, trades, and businesses.[24] Legislators included an inheritance tax.[25] Numerous stamp duties were imposed.[26] The act imposed a 3 percent duty tax on the “gains, profits, or income of every person residing in the United States” in excess of $600 per year. The duty tax was 5 percent for incomes in excess of $10,000.[27] The act imposed the same tax on the salaries of officers, or payments to any person in the civil, military, naval and other employment of the United States, including senators, representatives, and delegates.[28] Although everybody was expected to file a return, a simple affidavit denying having had received $600 in annual income was allowed in lieu of a return.[29]

The 1862 act established the Bureau of Internal Revenue as well as the office of the Commissioner of Internal Revenue with an annual salary of $4,000.[30] The act empowered the Secretary of Treasury to expand the office as necessary and within budgetary limitations. All regional collectors were paid by commission,[31] which undoubtedly created a conflict of interest in encouraging “healthy” bottom lines. The effects of paying by commission was felt many years after the war, as seen in the history of revenuers attacking southern whisky makers.[32] The 1862 act allowed for the deduction of other taxes paid.[33] The 1862 act established the preliminary foundations of the modern American tax system, including withholding at the source, exemptions, deductions, and graduated tax scales.

The 1862 act was amended several times. Although probably intended primarily for providing themselves and tax collectors relief, in the 1863 act legislators allowed deducting the cost of rent and repairs of one’s residence.[34] After much debate, with the 1864 act legislators introduced an additional rate.[35] The duty tax was 5 percent for incomes greater than $600, 7.5 percent for incomes greater than $5,000 and 10 percent for incomes greater than $10,000.

With the 1865 act,[36] enacted one month before the end of the war, legislators modified the duty tax to 5 percent for incomes greater than $600 and 10 percent for incomes greater than $5,000.

The income tax was always accepted as a war exigency and not as a permanent revenue mechanism. Most people believed the tax unconstitutional, but sacrificed and accepted the tax only because of the war.[37] After the war public pressures to terminate the tax increased and people formed anti-income tax associations.[38] In 1866, George Ticknor Curtis, writing for Harper’s New Monthly magazine, challenged the constitutionality of the income tax because of the lack of apportionment with a direct tax.[39] Legislators obliged. The duty tax rates remained the same as with the 1866 act, but legislators statutorily ended the income tax with the year 1870.[40]

In 1867, in addition to reducing or eliminating many war taxes, legislators eliminated the graduated income tax rates and imposed a flat 5 percent tax on all incomes greater than $1,000.[41] As the statutory date for terminating the tax grew near, legislators debated whether to extend or continue the tax.

In 1870 Samuel Clemens, a.k.a. Mark Twain, in the Buffalo Express newspaper with a piece titled “The Mysterious Visit,” titled from his experience of talking with a revenue agent, offered his typical humorous and cynical perspective of the income tax and playing the deductions and expenses game. James A. Garfield, then in the House of Representatives, challenged the principle of a graduated tax as unconstitutional.[42]

O. Cleveland, representative from New Jersey, said:[43]

To reenact this law will be bad faith, at least upon the part of those who were members when the original law was adopted, and in fact bad faith on the part of Congress. It could not have been adopted originally as anything but a war measure, and then only for a short time. A pledge was thus given that it should cease, and I demand that you shall redeem that pledge.

John D. Stiles, representative from Pennsylvania, said:[44]

Mr. Speaker, I am the only member of this body that voted against this tax in the Thirty-Seventh Congress when it first became law . . . I was satisfied then, and time has strengthened my first convictions of its inequality and injustice. It was passed during the war as a war measure, as a necessity . . . It is the most expensive type of taxation . . . I am in favor of its absolute, unconditional repeal, because it creates a horde of officers who are eating out the very substance of the people.

B. Winchester, representative from Kentucky, detested the means of collecting the tax:[45]

It has placed over us an army of spies, detectives, assessors, and collectors, who meet us at every corner of the streets and in every avenue of business. No portion of this burden has been more odious, oppressive, and demoralizing in its influence than that is known as the income tax.
No tax ever imposed has been regarded by the people as more obnoxious since the establishment of free government, unless it be our iniquitous tariff, which limits the amount and quality of food and raiment of the consumer for the benefit of a few producers. It was generally believed and hoped that by limitation in the law this tax would cease in the present year, 1870 . . . The great mass of the people are for the repeal of the income tax, its entire and absolute repeal.

B. C. Cook, representative from Illinois, favored renewing the tax, but argued that the statutory exemption must allow for a man to provide the ordinary and necessary expenses of supporting a family:[46]

Mr. Speaker, I think that this tax should be retained, but that the exemption should be increased to at least the sum of $2,000. The tax ought not to be made to deprive any man of any portion of the amount necessary for the maintenance of his family and the proper education of his children . . . In so far as the tax takes from any person any portion of the amount which is fairly necessary to the support of his family it is oppressive.

In the end, legislators reneged on their commitment to end the tax and continued the duty tax with the act of 1870.[47] Legislators adjusted the duty tax rate to 2.5 percent of incomes greater than $2,000.[48] The 2.5 percent tax was imposed only for the years 1870 and 1871. Contrary to popular belief, the income tax was not repealed in 1872, but through this 1870 act was allowed to quietly expire after 1871 — as was originally intended with the 1866 act.

Numerous other taxes imposed during the war were repealed in 1872.[49] A subsequent 1872 act significantly reduced the size of the Bureau of Internal Revenue.[50]

Was the income tax successful? The tax generated approximately $346 million during those ten years, less than one-fourth of all national revenues.[51] The income tax was hated and difficult to assess and collect.[52] All of the tax acts were draconian requiring oaths attesting to correctness, forced forfeiture of assets to satisfy the tax, including seizure of land, and stiff monetary penalties for non-compliance. In response, American ingenuity found ways to evade this tax.[53] Fraud was expected and normal, both with taxpayers and assessors. Tax returns were made available to members of the press. Employees of the Bureau of Internal Revenue department developed a reputation for inefficiency and corruption.[54] The Commissioner of Internal Revenue, Alfred Pleasonton, in a letter dated January 20, 1871, addressed to the House Ways and Means Committee, reported the obnoxious and inquisitorial nature of the tax, which he found repugnant to the “genius of our people” and recommended ending the tax.[55] This would not be the last time a Commissioner found the tax repugnant, unpopular, or difficult to collect.

Finis.

Terms of Use

Next: Chapter 4: Long Black Dresses — Harnessing the Camel

Table of Contents

Bibliography

Endnotes

[1] Carson, “The Income Tax and How It Grew,” http://www.americanheritage.com.

[2] Hart, Constitutional Income, p. 14.

[3] Holland, The Law That Always Was, p. 25, citing Records of the Colony and Plantation of New Haven.

[4] Holland, The Law That Always Was, p. 26.

[5] Ekirch, “The Sixteenth Amendment,” p. 162.

[6] Holland, The Law That Always Was, pp. 27.

[7] Volume 12 Statutes at Large, 37th Congress Session I, Chapter 45, section 49, p. 309, enacted August 5, 1861. During the war that act was superceded and replaced by the Act of July 1, 1862, Volume 12 Statutes at Large, Chapter 119; amended March 3, 1863; June 30, 1864; March 3, 1865; March 10, 1866; July 13, 1866; March 2, 1867; July 14, 1870.

[8] Ekirch, “The Sixteenth Amendment,” p. 163.

[9] Carson, “The Income Tax and How It Grew,” http://www.americanheritage.com.

[10] Volume 12 Statutes at Large, 37th Congress Session I, Chapter 45, section 49, sections 8–48, pp. 294–309, enacted August 5, 1861.

[11] Volume 12 Statutes at Large, 37th Congress Session I, Chapter 45, section 9, p. 296, enacted August 5, 1861.

[12] Congressional Globe, 37th Congress Session I, July 24, 1861, p. 247.

[13] Congressional Globe, 37th Congress Session I, July 24, 1861, p. 247.

[14] Congressional Globe, 37th Congress Session I, July 24, 1861, p. 248.

[15] Congressional Globe, 37th Congress Session I, July 24, 1861, p. 249.

[16] Congressional Globe, 37th Congress Session I, July 24, 1861, p. 250.

[17] Congressional Globe, 37th Congress Session I, July 25, 1861, p. 272.

[18] Hart, Constitutional Income, p. 23.

[19] Ekirch, “The Sixteenth Amendment,” p. 163.

[20] Stratton, Moore, Roberts, “The Roots of the Income Tax.”

[21] Volume 12 Statutes at Large, 37th Congress Session II, Chapter 119, p. 432, enacted July 1, 1862.

[22] Sections 2–3, p. 433.

[23] Sections 39–56, 68–75.

[24] Sections 57–67. These license taxes, as amended in subsequent acts, were partially challenged and upheld in the License Tax Cases, 72 U.S. (Wall.) 462 (1866).

[25] Sections 111–113, pp. 485–487.

[26] Sections 94–110, pp. 475–484.

[27] Section 90, p. 473.

[28] Sections 86, 91, pp. 472, 473.

[29] Section 93, p. 475.

[30] Section 1, pp. 432–433.

[31] Section 115, p. 488.

[32] Adams, Those Dirty Rotten Taxes, pp. 117–128.

[33] Volume 12 Statutes at Large, Chapter 119, section 91, p. 473.

[34] Volume 12 Statutes at Large, 37th Congress Session III, Chapter 74, section 11, p. 713, 723, enacted March 3, 1863

[35] Volume 13 Statutes at Large, 38th Congress Session I, Chapter 173, sections 116–123, pp. 281–285, enacted June 30, 1864.

[36] Volume 13 Statutes at Large, 38th Congress Session II, Chapter 78, p. 479, enacted March 3, 1865.

[37] Holland, The Law That Always Was, p. 133.

[38] Ekirch, “The Sixteenth Amendment,” p. 164.

[39] “An Inquiry Into One of the Constitutional Restrictions on the Revenue Powers of the United States,” Harper’s New Monthly, Volume 33 No. 195 (August 1866), p. 354.

[40] Volume 14 Statutes at Large, 39th Congress Session I, Chapter 184, section 9, p. 138, enacted July 13, 1866.

[41] Volume 14 Statutes at Large, 39th Congress Session II, Chapter 169, section 13, pp. 477–478, enacted March 2, 1867

[42] Ekirch, “The Sixteenth Amendment,” p. 164.

[43] Congressional Globe, 41st Congress Session II, June 3, 1870, p. 426.

[44] Congressional Globe, 41st Congress Session II, June 2, 1870, p. 428.

[45] Congressional Globe, 41st Congress Session II, June 2, 1870, p. 430.

[46] Congressional Globe, 41st Congress Session II, June 2, 1870, p. 447.

[47] Volume 16 Statutes at Large, 41st Congress Session II, Chapter 255, section 6, p. 257, enacted July 14, 1870.

[48] Volume 16 Statutes at Large, 41st Congress Session II, Chapter 255, section 6, p. 257, enacted July 14, 1870.

[49] Volume 17 Statutes at Large, 42nd Congress Session II, Chapter 315, p. 230, enacted June 6, 1872.

[50] Volume 17 Statutes at Large, 42nd Congress Session III, Chapter 13, p. 401, enacted December 24, 1872.

[51] Ekirch, “The Sixteenth Amendment,” p. 164.

[52] Adams, Those Dirty Rotten Taxes, pp. 139–140.

[53] Holland, The Law That Always Was, p. 131, citing David A. Wells, The Theory and Practice of Taxation, p. 528.

[54] Thorndike, “An Army of Officials: The Civil War Bureau of Internal Revenue,”

[55] Miscellaneous House Document No. 51, 41st Congress Session III, January 26, 1871.