Income tax in the United States prior to the sixteenth amendment

              THE INCOME TAX IN THE UNITED STATES
PRIOR TO THE SIXTEENTH AMENDMENT
by William D. Wallace
University of Mississippi
The issue of taxation has been the subject of
debate since the establishment of the thirteen
colonies. Citizens have consistently disapproved of
being taxed (once to the extent of going to war
about taxation, among other issues). To be taxed
was viewed as being forced to give up a portion of
the taxpayer's wealth. However, the philosophy
stated by Justice Oliver Wendell Holmes, Jr.
("Taxes are the price we pay for civilization.")
prevailed with the enactment of the Sixteenth
Amendment in 1913.
The Sixteenth Amendment culminated a ninety-eight-
year effort to instigate a permanent income
generator for the United States. This paper presents
a description of the attempts at taxation of income
prior to the adoption of the Sixteenth
Amendment.
The Civil War and Before
After the American Revolution there was an
adverse feeling concerning taxes of any kind. The
states, however, did create taxes and systems of
collection, concentrating on goods or property.
Secretary Dallas suggested the first federal income
tax in 1815 to help finance the War of 1812. At this
time, there was already a direct tax imposed on
land and slaves, so Dallas could see no conflict of
the income tax with the direct tax problem
imposed by the constitution. The coming of peace
eliminated any need for the income tax, so no
income tax provision was enacted.1
In 1861, the outbreak of the Civil War put
pressure on Congress to provide some means of
raising revenue. On July 4, 1861, Secretary Chase
suggested that a "small part-not to exceed twenty
million-of the required revenue be raised by direct
taxes or internal duties or excises or both."2 The
first proposed method of raising revenue was the
1Seligman, Edwin R. A., The Income Tax (New
York: McMillan Company, 1914), p. 431.
2The Congressional Globe, 37th Congress, First
Session, Washington, 1861, p. 248.
The Accounting Historians Notebook, Fall, 1980
use of a tax on real estate. Western citizens opposed
the real estate tax, claiming that they would suffer
the most from such a tax. Congressman Colfax
stated,
"I cannot go home and tell my constituents
that I voted for a bill that would allow a
man, a millionaire, who has put his entire
property into stocks, to be exempted from
taxation, while a farmer who lives by his
side must pay a tax."3
The westerners had a valid argument. In order to
achieve greater equality, Congress was forced to
consider income taxation. A portion of Secretary
Chase's proposal-direct taxes-was unconstitutional.
However, Congressman Edwards stated that, "We
can tax it [income] in some mode if we cannot
impose on it what is technically called a 'direct
tax' . . "4
Deliberation and debate continued until July 29,
when the Bill was finally voted and passed by a
narrow margin-seventy-seven to sixty. Setting a
trend that still continues, the House and Senate
versions of the bill were different: the House
version called for a levy of 3 % on all income over
$600 per year, while the Senate version called for a
3% rate on all income over $1,000. The two bodies
compromised, and the floor was established at
$800.
The income tax law of 1861 was delayed,
however; there had been no provision for the
assessment and collection of the taxes. Finally, the
Internal Revenue Bureau was established in July
1861, and the law of 1861 was revised. This
resulting revision imposed a tax of 3 % on income
in excess of $600 and up to $10,000 and 5% on
income above $10,000. Deductions were allowed
for all other national, state and local taxes levied on
"property or source of income." The initial bill in
1862 also allowed for the exclusion of "all gains
3bid.
4Ibid., p. 432.
3