The Revenue Act of 1862 (July 1, 1862, Ch. 119, ), was a bill the
United States Congress
The United States Congress is the legislature of the federal government of the United States. It is bicameral, composed of a lower body, the House of Representatives, and an upper body, the Senate. It meets in the U.S. Capitol in Washing ...
passed to help fund the
American Civil War
The American Civil War (April 12, 1861 – May 26, 1865; also known by other names) was a civil war in the United States. It was fought between the Union ("the North") and the Confederacy ("the South"), the latter formed by states ...
. President
Abraham Lincoln
Abraham Lincoln ( ; February 12, 1809 – April 15, 1865) was an American lawyer, politician, and statesman who served as the 16th president of the United States from 1861 until his assassination in 1865. Lincoln led the nation thro ...
signed the act into law on July 1, 1862. The act established the office of the
Commissioner of Internal Revenue
The Commissioner of Internal Revenue is the head of the Internal Revenue Service (IRS), an agency within the United States Department of the Treasury.
The office of Commissioner was created by Congress as part of the Revenue Act of 1862. Section ...
, a department in charge of the
collection of
taxes
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, o ...
, and levied
excise taxes
file:Lincoln Beer Stamp 1871.JPG, upright=1.2, 1871 U.S. Revenue stamp for 1/6 barrel of beer. Brewers would receive the stamp sheets, cut them into individual stamps, cancel them, and paste them over the Bunghole, bung of the beer barrel so when ...
on most items consumed and traded in the United States. The act also introduced the United States' first
progressive tax
A progressive tax is a tax in which the tax rate increases as the taxable amount increases.Sommerfeld, Ray M., Silvia A. Madeo, Kenneth E. Anderson, Betty R. Jackson (1992), ''Concepts of Taxation'', Dryden Press: Fort Worth, TX The term ''progre ...
with the intent of raising millions of dollars for the
Union
Union commonly refers to:
* Trade union, an organization of workers
* Union (set theory), in mathematics, a fundamental operation on sets
Union may also refer to:
Arts and entertainment
Music
* Union (band), an American rock group
** ''Un ...
.
Background
The American Civil War commenced in 1861 with the secession of many southern states (the group known as the
Confederate States of America
The Confederate States of America (CSA), commonly referred to as the Confederate States or the Confederacy was an unrecognized breakaway republic in the Southern United States that existed from February 8, 1861, to May 9, 1865. The Confeder ...
) from the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territori ...
(also known as the Union). In the early stages of the war, the Union believed that the conflict would be a relatively quick and easy victory.
[Thorndike, Joe. An Army of Officials: The Civil War Bureau of Internal Revenue. Tax History Project. TaxAnalysits, 21 Dec. 2001. Web. 25 Mar. 2013.] The federal government was in need of funding because of economic issues in the years leading up to the war, and as result, Congress' first attempt to fund the war came with the Act of July 17, 1861. It authorized the Secretary of the Treasury
Salmon P. Chase
Salmon Portland Chase (January 13, 1808May 7, 1873) was an American politician and jurist who served as the sixth chief justice of the United States. He also served as the 23rd governor of Ohio, represented Ohio in the United States Senate, a ...
to raise money by issuing $50,000,000 in Treasury Notes.
[Mitchell, Wesley Chair, "A History of the Greenback With Special Reference to the Economic Consequences of Their Issue 1862-65", University of Chicago, Chicago, 1903.] Deteriorating economic conditions of the years before the war made the production of those notes cease, and they were officially declared unredeemable.
[The Treasury Department, Report of Secretary Chase, The New York Times, New York, NY, December 10, 1861.]
As economic conditions worsened in the North, Chase needed to raise more revenue. He was initially opposed to the notion of internal taxes, and believed that the better way to raise revenue was through the selling of
war bonds
War bonds (sometimes referred to as Victory bonds, particularly in propaganda) are debt securities issued by a government to finance military operations and other expenditure in times of war without raising taxes to an unpopular level. They are a ...
.
Citing the success of war bonds in raising revenue during the
War of 1812
The War of 1812 (18 June 1812 – 17 February 1815) was fought by the United States, United States of America and its Indigenous peoples of the Americas, indigenous allies against the United Kingdom of Great Britain and Ireland, United Kingdom ...
, Chase consulted Philadelphia banker
Jay Cooke
Jay Cooke (August 10, 1821 – February 16, 1905) was an American financier who helped finance the Union war effort during the American Civil War and the postwar development of railroads in the northwestern United States. He is generally acknowle ...
to administer the sale of war bonds to citizens in the Union. Cooke employed a sophisticated propaganda campaign to market bonds to the middle classes as well as to the upper classes. He was able to persuade almost one million northerners to invest, resulting in bond sales of over $3 billion.
The majority of these sales occurred during the later stages of the war, and the Union needed an immediate method of raising funds.
Congress passed the
Revenue Act of 1861
The Revenue Act of 1861, formally cited as Act of August 5, 1861, Chap. XLV, 12 Stat. 292', included the first U.S. Federal income tax statute (seSec.49. The Act, motivated by the need to fund the Civil War, imposed an income tax to be "levied, c ...
as an initial attempt to raise much-needed funds for the war. This act levied the first
income tax
An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...
ever levied on American citizens. The income tax placed a 3% tax on all individuals whose annual incomes were above $800 per year.
[Revenue Act of 1861, sec. 49, 12 Stat. 292, at 309 (July 1, 1861).] That would have resulted in the exemption of many citizens due to lower average income. By 1862 the United States government realized that the war would not end quickly and the revenue from the income tax would be insufficient. As a result, the Revenue Act of 1862 was passed in July 1862 before any income tax was collected under the first system.
Summary
The Revenue Act of 1862 contained three important provisions, all aimed at the goal of increased revenue:
#The creation of the office of the Commissioner of Internal Revenue, a department whose duty was to ensure the collection of taxes,
#the levying of excise taxes on many everyday goods and services, and
#an adjustment to the income tax that was created under the Revenue Act of 1861.
The Revenue Act of 1862, section 92, states that "duties on incomes herein imposed shall be due and payable" in 1863 and each year thereafter until and including 1866 "and no longer."
[Revenue Act of 1862, section 92, 12 Stat. 432 (July 1, 1862)](_blank)
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Office of the Commissioner of Internal Revenue
The first section of the act established "an office… in the Treasury Department to be called the Office of the Commissioner of Internal Revenue."[Revenue Act of 1862, first section, 12 Stat. 432 (July 1, 1862).] This commissioner, selected by the President of the United States
The president of the United States (POTUS) is the head of state and head of government of the United States of America. The president directs the executive branch of the federal government and is the commander-in-chief of the United States ...
, was in charge of preparing and distributing all the instructions, regulations, directions, forms, and licenses "pertaining to the assessment and collection of the duties, stamp duties, licenses, and taxes, which may be necessary to carry this act into effect." This office was the predecessor for today's Internal Revenue Service (IRS).
Excise taxes
The Revenue Act of 1862 placed taxes on the majority of items available for retail and consumption. Among the items taxed were many luxury and sin items including, but not limited to liquor, tobacco, playing cards, gunpowder, feathers, telegrams, iron, leather, pianos, yachts, carriages, billiard tables, and jewelry. More importantly, the federal government placed taxes on many services and public goods as well. Other taxed items included patented medicines, newspaper advertisements, stamp taxes, inheritance taxes, taxes on licenses for all services and professions (with the exception of clergy), and value added taxes on manufactured goods and processed meats.[Revenue Act of 1862, sections 56-81, 12 Stat. 432 (July 1, 1862).] One particular new tax required that corporations, banks, trust companies, savings institutions, and insurance companies report their finances, including receipts and interest earned, so that these could be taxed as well.[Revenue Act of 1862, section 82, 12 Stat. 432 (July 1, 1862).]
The majority of these taxes and tariffs were consumer-oriented, and affected lower-income Americans more severely than the higher-income Americans. To reinforce the fairness of the system, Congress implemented a supplementary system of taxation via a new income tax.
Progressive income tax
The new tax proposed by Congress in the Revenue Act of 1862 was the first progressive income tax placed on United States residents. This tax reflected the taxpayers' "ability to pay" by separating citizens into multiple categories and taxing accordingly:[Revenue Act of 1862, section 86, 12 Stat. 432 (July 1, 1862).]
# For U.S. residents whose annual incomes were less than $600, no tax was collected.
# For U.S. residents whose annual incomes were greater than $600 and less than $10,000, a percentage of 3% of total income was demanded in tax.
# For U.S. residents whose annual incomes were greater than $10,000, a percentage of 5% of total income was demanded in tax. The 5% tax rate also applied to the entire U.S.-source income over $600 of U.S. citizens who resided abroad, regardless of their income, unless they worked for the United States government.
The act also stated that to assure timely collection, income tax be "withheld at the source."
Aftermath
In the long term, the Revenue Act of 1862 was only partially successful. The Office of the Commissioner of Internal Revenue became the IRS, which is still a functional department of the Treasury. The excise taxes remained in force, though the majority of the revenue was eventually generated through the taxes on liquor and tobacco. The progressive nature of the income tax remains, but the rates established in 1862 did not produce enough revenue to support war expenditures and were increased with the Revenue Act of 1864 The Internal Revenue Act of 1864, 13 Stat. 223 (June 30, 1864), increased the income tax rates established by the Revenue Act of 1862. The measure was signed into law by President Abraham Lincoln.
Provisions
Section 116 of the Act imposed the tax ...
.
Incomes adjusted for inflation - Bureau of Labor Statistics (BLS)
Adjusted for inflation based on Consumer Price Index (CPI) data:
Notes
{{Authority control
United States federal taxation legislation
1862 in American law
1862 in the United States