America's First Income Tax

July 18, 2023
Ian Zapolsky

Head of Product

by 
Ian Zapolsky

In the summer of 1861, just three months after Confederate soldiers fired the first shots of the Civil War at Fort Sumter in Charleston, South Carolina, President Abraham Lincoln found himself in dire need of money to fund a burgeoning Union war effort. The tariffs on tobacco, alcohol, and other goods that had sustained the relatively lean budget of the federal government up to that point simply would not generate enough revenue alone to support the northern army.

On July 4, 1861, President Lincoln opened a special session of Congress with the goal of devising a mechanism to raise more money. Under the leadership of Senator William Pitt Fessenden of Maine, Chair of the Senate Finance Committee, Congress drafted the Revenue Act of 1861, which Lincoln signed into law on August 5. The bill raised existing tariffs and created new ones, instituted a tax on real estate, and, most importantly, levied the nation's first income tax: a 3% flat rate on citizens with an annual income of $800 or more.

Unfortunately, only 3% of the population of the United States at the time made over $800 per year, which made the Revenue Act of 1861 fairly ineffective (for reference, $800 in 1861 is worth about $20,000 today). The income tax provision of the Revenue Act of 1861 was repealed just 11 months later by the Revenue Act of 1862. This bill established the Office of the Commissioner of Internal Revenue, creating the agency that would later become known as the Internal Revenue Service (or IRS), and replaced the original income tax of the Revenue Act of 1861 with a progressive income tax. This new tax established the first income tax brackets, which were again revised by the Internal Revenue Act of 1864, where they stayed until the income tax was repealed altogether in 1872:

  • Americans earning under $600 per year were exempt.
  • Americans earning $600 - $5,000 per year owed 5%.
  • Americans earning $5,000 - $10,000 per year owed 7.5%.
  • Americans earning greater than $10,000 owed 10%.

Modern aspects of the income tax that we are familiar with today like filing status were absent from this early income tax. It was applied per household, as opposed to per person, and it was collected annually in a lump sum (payable no later than June 30th), instead of withheld from employee paychecks. Much would change in the years to come, including the basic legality of the income tax itself, but the foundation had been laid for what we all know (and pay) today.

Sources

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