Republicans Forget Lincoln’s First Income Tax Paid for the Civil War

Think the Trump or any Republican "tax reform" will put money in your pocket and you are not really, really rich?  What the hell have you been smoking?

Well now that all attempts to repeal and/or replace Obama Care have gone down in flames in the Senate to the sputtering outrage of the Cheeto-in-Charge and the kill the poor lobby—Majority Leader Mitch McConnell says it is now time to move on.  Move on to what you may ask.  Evidently so-called Tax Reform. 

The Grifter-in-Chief has announced a vague bullet-point plan to do the job bigly.  In the House both the Ayn Randist sociopaths of the Freedom caucus and the insufficiently fascist Speaker Paul Ryan who they deride have ideas.  The Koch Bros and other billionaire oligarchs are ginning up their lobbyists and calling in their markers on bought and paid for lawmakers.  What all of these folks have in common are schemes to slash taxes on corporations and wealthy investors and to shift the burden to the middle class, working poor, and even the virtually indigent.  There is a lot of loose talk about making “everyone pay their fair share” which translates to hunting down waitresses and cab drivers for their tips, requiring even minimum wage workers to pay “something,” and from the most flinty hearted suggestions for taxing food stamps, free school lunches, and welfare benefits as income. 

Democrats will put up some fight, although some Blue Dog fiscal conservatives will go along with some of the upper income tax cuts blithely ignoring that without replacement income from somewhere  the whole Federal Government fiscal house of cards comes tumbling down.  Republicans will drum up support for their schemes by swinging a shiny watch before the eyes of blue collar supporters while intoning the words “Tax cut” despite the fact that those folks would bear the burden of the GOP pickpocketing scam.

Nobody, and I mean nobody—not even liberals—likes paying taxes.  Especially income taxes.  We are aware of the need to fund the essential work of government, may even support wider spending for the public benefit, but when the tax bite falls on us personally, it hurts.  

The Lincoln/Chase Income Tax proposal was far from popular, especially among Democrats and the wealthiest citizens on whom the burden must fall.  This anti-tax cartoon went right for the jugular, portraying Lincoln as a stereotypical sly,hook nosed, money grubbing Jew trying to seduce liberty. 

On August 5, 1861 President Abraham Lincoln signed into law the first American income tax.  It was a provision of the Revenue Act of 1861.  The new tax was  3% on all income above $800 to be,  “…levied, collected, and paid, upon the annual income of every person residing in the United States, whether such income is derived from any kind of property, or from any profession, trade, employment, or vocation carried on in the United States or elsewhere, or from any other source whatever…”  The same act hiked the tax to 5% on all citizens living outside the country.  It was essentially a flat rate tax. 

Needless to say, it was unpopular.  But the President had few alternatives.  He had raised a massive Army, outfitted, and armed it on money that the government didn’t have.  And despite the hopes for a quick victory, Lincoln knew that the War to Preserve the Union, as he called it, was apt to take awhile. 

Since the foundation of the Republic the Federal government had been on a strict revenue diet for both philosophic and practical reasons.  The realm of Federal activity was strictly limited by the Constitution as it was interpreted at the time.  Most governmental functions fell to the individual states and local governments. 

Federal revenues were limited.  Most came either from the Tariff or from sale of government land.  But because of anti-tariff feeling in the agricultural South, where the plantation elites relied on the importation of cheap manufactured goods from Europe and resented protectionist levies that benefited Northern manufacturers, import levies had been slashed in 1841 and lowered again in 1856.  Land sales were also on the decline as most Federal land east of the Mississippi was settled and western sales were slowed by the continuing border wars in Kansas and Indian peril elsewhere.   Then, of course, the secession of the Southern states cut Tariff revenue from important ports like Charleston, Savannah, and New Orleans. 

Lincoln was caught in a bind between soaring costs and plummeting income.  Lincoln turned to his Secretary of the Treasury Salmon P. Chase for advice.  Chase, like other members of Lincoln’s Cabinet, notably Secretary of State William H. Steward, had been Lincoln’s rivals for the Republican presidential nomination.  Unlike Steward, who entered the job thinking he could be a prime minister to a weak President but soon came to respect and admire Lincoln, Chase always looked down on the President and frequently was engaged in political sniping and backstabbing.  None the less Lincoln had to rely on his judgment and the support he had in financial circles. 

Chase dismissed the possibility of any kind of new Federal tax on property as un-Constitutional.  Instead he proposed borrowing most war funds by issuing bonds, the model of Albert Gallatin during the War of 1812.  He engaged Jay Cooke, a Philadelphia financier to handle the bonds.  Cooke performed spectacularly with special patriotic appeals that sold bonds not just to wealthy investors but to many middle class citizens.  Eventually nearly one quarter of all Northern families purchased war bonds.  But those bonds would eventually have to be repaid.  To reassure investors that there would be a revenue stream capable of repaying the bonds, Chase reluctantly advised the income tax.  

A roll of Kentucky Income Tax payers in 1865.  A border state with divided loyalties, voluntary compliance may have lagged that in the Northeast.  These citizens ponied up, perhaps attesting to their loyalty to the Union.

Surprisingly, given the fact that there was little way for the government to assess actual income, voluntary compliance was relatively high, particularly in the industrial and commercial New England and Eastern states where both incomes and support of Lincoln’s war aims was highest.  The starting base for payment, $800, is estimated to be about the equivalent of $18,750 today.  When most Americans were still farmers and  urban workers, even skilled craftsmen, earned far less, the tax fell on only a fraction of families.  Even with subsequent hikes and adjustments over the war 10% of families nationally and 15% in the northeast had paid some income tax by war’s end. 

The Revenue Act of 1862, which also created the office of Commissioner of Internal Revenue, moved from a flat rate to a modified “progressive” system that exempted the first $600, imposed a 3 percent rate on incomes between $600 and $10,000, and a 5 percent rate on those over $10,000. The first withholding taxes were imposed on Federal employees and on dividends paid by corporations.  In addition the Act also imposed a raft of new or greatly hiked excises taxes—many of them sin taxes—and fees. 

Now freed from pesky Southern Democrats, Congress also imposed a high new protective tariff, which would continue to be a hallmark of Republican policy for the next hundred years.  Even these measures were insufficient to the need.  

It wasn't George Washington on the first Federal One Dollar Greenback.  Secretary of the Treasury Salmon P. Chase, architect of wart time bond sales, the income tax, and paper money, modestly put his own picture on the note.  A man with big ambissions and a contempt for his own President, Chase may have looked on it as a campaign advertisement--he hoped that Lincoln would be dumpted by the Republicans in 1864 and he would be the nominee. 

Key to financing the war was the Legal Tender Act of 1862 which authorized the Treasury to issue notes—Greenbacks—that were required to be recognized for the payment of all debts except redemption of bonds and payment of Tariffs.  This departure from traditional hard currency was inherently inflationary, but combined with other measures kept inflation in the North well below out of control Confederate rates and well below inflation during future American wars. 

A bonus was that shrewd investors could purchase war bonds with inflated Greenbacks and be repaid later in specie, which spurred more bond sales.  By war’s end, with costs running to an astonishing $2 million per day, income tax rates had been raised twice more.  In the end the income tax had proven to be a reliable and flexible revenue stream.  But although tolerated as a war time necessity, there was no public support to continue the tax. 

In the post-war era Harper's Weekly, a reliably Republican popular publication, railed against efforts by Greenback Party and proto-populists to reinstate the Income Tax.

After reductions in 1868, it was allowed to expire in 1872.  Efforts by Populists and other reformers in the late 19th Century to resurrect the tax were resisted.  An income tax adopted in 1898 was struck down by the Supreme Court because the tax was not levied proportionally among the states. 

It took the 1913 16th Amendment to the Constitution to make the income tax a permanent fixture in the U.S. tax system.