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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 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 ...
statute (se
Sec.49
. The Act, motivated by the need to fund the
Civil War A civil war or intrastate war is a war between organized groups within the same state (or country). The aim of one side may be to take control of the country or a region, to achieve independence for a region, or to change government policies ...
, imposed an income tax to be "levied, collected, and paid, upon the annual
income Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. For ...
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 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 territorie ...
or elsewhere, or from any other source whatever . . . . The tax imposed was a flat tax, with a rate of 3% on incomes above $800. The Revenue Act of 1861 was signed into law by
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 ...
. The income tax provision
Sections 49, 50 and 51
was repealed by the
Revenue Act of 1862 The Revenue Act of 1862 (July 1, 1862, Ch. 119, ), was a bill the United States Congress passed to help fund the American Civil War. President Abraham Lincoln signed the act into law on July 1, 1862. The act established the office of the Commissio ...
. (Se
Sec.89
which replaced the flat rate with a progressive scale of 3% on annual incomes beyond $600 (which was 3.4 times the 1862 nominal gross domestic product per capita of $177.69; the corresponding income in 2021 is $234K) and 5% on incomes above $10,000 (which is 56 times the 1862 nominal gross domestic product per capita; corresponding to $3.9M of income in 2021) or those living outside the U.S., and perhaps more significantly it was explicitly temporary, specifying termination of income tax in
the year eighteen hundred and sixty-six
).


History

Prior to the Civil War, the United States faced a financial depression subsequent to the Panic of 1857, an event facilitated by over-expansion of the domestic economy and a European financial meltdown. In the three years preceding the Civil War, the Federal Government incurred a budget deficit exceeding $40 million. Coupled with the threat of secession, the Federal deficit placed the US government under considerable financial strain. In 1860, the US Treasury paid between 8 and 12 percent interest on government bonds in order to raise additional funds and meet public expenditures. In December 1861, the US Treasury attempted to sell five millions of interest-bearing notes at 12 percent but found itself able to dispose of only four millions. The Treasury's struggles illustrate the precarious nature of the US government's financial state. As the nation edged closer to war, the need to mobilize a volunteer force placed an additional financial burden upon the Federal government. While treasury notes with enticing interest rates allowed the US government to raise revenue quickly, they also established a need for additional revenue streams with which to pay off interest. In March 1861, President Lincoln began to explore the federal government's ability to wage war against the South from a logistical standpoint. He sent letters to cabinet members including
Edward Bates Edward Bates (September 4, 1793 – March 25, 1869) was a lawyer and politician. He represented Missouri in the US House of Representatives and served as the U.S. Attorney General under President Abraham Lincoln. A member of the influential ...
,
Salmon Chase Salmon () is the common name for several commercially important species of euryhaline ray-finned fish from the family Salmonidae, which are native to tributaries of the North Atlantic (genus '' Salmo'') and North Pacific (genus ''Oncorhynchu ...
, and
Gideon Welles Gideon Welles (July 1, 1802 – February 11, 1878), nicknamed "Father Neptune", was the United States Secretary of the Navy from 1861 to 1869, a cabinet post he was awarded after supporting Abraham Lincoln in the 1860 election. Although opposed ...
inquiring whether the president had constitutional authority to collect duties ranging from an import tariff to a property tax. Documents housed at the Library of Congress indicate that Lincoln was concerned with the Federal government's ability to collect tariffs from ports along the Southeastern seaboard, noting the imminent threat of secession. On July 4, 1861, President Lincoln opened a special session of Congress with the explicit purpose of addressing the Civil War from a legislative standpoint. One of the primary concerns facing Congress was the question of funding: given a surfeit of volunteers, the
Union Army During the American Civil War, the Union Army, also known as the Federal Army and the Northern Army, referring to the United States Army, was the land force that fought to preserve the Union (American Civil War), Union of the collective U.S. st ...
military incurred extraordinary expenditures as they trained and armed a martial force. President Lincoln noted that, "One of the greatest perplexities of the government, is to avoid receiving troops faster than it can provide for them. In a word, the people will save their government, if the government itself, will do its part" To raise revenue by approximately $50 million, legislators adopted a three-pronged approach consisting of an increase in certain import tariffs, a newly instituted property tax, and the first personal income tax. Under the leadership of Senator
William Pitt Fessenden William Pitt Fessenden (October 16, 1806September 8, 1869) was an American politician from the U.S. state of Maine. Fessenden was a Whig (later a Republican) and member of the Fessenden political family. He served in the United States House o ...
of Maine, chair of the
Senate Finance Committee The United States Senate Committee on Finance (or, less formally, Senate Finance Committee) is a standing committee of the United States Senate. The Committee concerns itself with matters relating to taxation and other revenue measures general ...
, Congress drafted the Revenue Act of 1861 in a relatively short time-frame. While the legislation effectively introduced import tariffs, property taxes, and a flat rate income tax of 3% on those making above $800, it lacked a comprehensive enforcement mechanism. In Congress, the bill provoked considerable debate:
Thaddeus Stevens Thaddeus Stevens (April 4, 1792August 11, 1868) was a member of the United States House of Representatives from Pennsylvania, one of the leaders of the Radical Republican faction of the Republican Party during the 1860s. A fierce opponent of sla ...
, chairman of the House Committee of Ways and Means, declared that, "This bill is a most unpleasant one. But we perceive no way in which we can avoid it and sustain the government. The rebels, who are now destroying or attempting to destroy this Government, have thrust upon the country many disagreeable things." His sentiment reflected the view that the income and property taxes levied by the bill were necessary evils. The bill was eventually passed by Congress and signed into law by President Lincoln. Despite its sweeping reform, the ineffective enforcement mechanism coupled with a 3% flat tax rate failed to yield the desired revenue.


Tax structure

*Import Tariff: The Revenue Act of 1861 levied various tariffs on imports including sugar, tea, nuts, brimstone, coffee, liquor, and various fruits and herbs. The majority of imports were taxed on a per unit basis while certain imports, often those with more volatile pricing such as hides, citrus fruit, silk, and gunpowder were taxed
ad valorem An ''ad valorem'' tax (Latin for "according to value") is a tax whose amount is based on the value of a transaction or of property. It is typically imposed at the time of a transaction, as in the case of a sales tax or value-added tax (VAT). An ...
, with rates ranging from 10% on hides and rubber to 50% on wines. The act imposed an additional tax of 10% ad valorem on articles imported in foreign vessels from beyond the
Cape of Good Hope The Cape of Good Hope ( af, Kaap die Goeie Hoop ) ;''Kaap'' in isolation: pt, Cabo da Boa Esperança is a rocky headland on the Atlantic coast of the Cape Peninsula in South Africa. A common misconception is that the Cape of Good Hope is t ...
. The provisions included in the act expanded upon the protectionist precedent set by the Morrill Tariff of 1861. *Property Tax: The Revenue Act of 1861 instituted a tax on real estate, levied in proportion to each state's population. While the act's enforcement mechanism was limited, it formally established a system of tax districts, assessors, and collectors, laying the groundwork for the Internal Revenue Service's formation on July 1, 1862. The property tax drew criticism from representatives of rural states: by taxing real estate and excluding other forms of personal property, the tax, they argued placed an undue burden upon large, sparsely populated states and territories in the West and Southwest. Though densely populated states such as New York were assessed at a higher rate due to a large population, a greater proportion of wealth in such states was invested in personal property other than real estate. *Income Tax: The Revenue Act of 1861 levied a 3% flat rate income tax on those with an annual income at or exceeding $800 (which was 5.6 times the 1861 nominal gross domestic product per capita of $144.31; the corresponding income in 2021 is $384K). In 1861, only 3% of the population had an annual income of at least $800; as such, the tax enjoyed relatively widespread support among legislators. The act granted President Lincoln the power to appoint one principal assessor and one principal collector per state/territory; these officials were charged with enforcing income tax provisions. However, another portion of the bill stipulated that each state may collect and pay its own portion of the direct tax levied upon each state in its own way. Lacking an effective enforcement mechanism, the income tax provision was repealed in 1862 and replaced with a more expansive bill in the
Revenue Act of 1862 The Revenue Act of 1862 (July 1, 1862, Ch. 119, ), was a bill the United States Congress passed to help fund the American Civil War. President Abraham Lincoln signed the act into law on July 1, 1862. The act established the office of the Commissio ...
. The subsequent revenue act called for the establishment of the Internal Revenue Bureau (later renamed Internal Revenue Service) and a
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 ...
scale.


References


External links


Act to provide increased Revenue from Imports, to pay Interest on the Public Debt, and for other Purposes. 37th Congress, 1st Session, Ch. 45, 12 Stat. 292 [Revenue Act of 1861]
{{US tax acts 37th United States Congress United States federal taxation legislation 1861 in law 1861 in the United States