CHAPTER III THE CIVIL WAR INCOME TAX § 1. The Origin of the Tax THE first suggestion of a federal income tax 1 was made in January, 1815, by Secretary Dallas.2 As a so-called direct tax on lands and slaves was already in existence, Dallas, like virtually everybody else at the time,3 assumed that this suggested income tax would not be one of the direct taxes contemplated by the constitution. Had the war lasted a few months longer there is every probability that an income tax would have been imposed, but the conclusion of peace made any further resort to internal taxes unnecessary, and two years later the whole system of internal revenue was abolished. It was not until the outbreak of the Civil War that the government again resorted to the system. On July 4, 1861, Secretary Chase made a report in which he suggested that a 1 A short account of the Civil War income tax will be found in F. C. Howe, "Federal Revenues and the Income Tax,” in Annals of the American Academy of Political and Social Science, vol. iv (1894), pp. 64 et seq., and in the same author's Taxation in the United States under the Internal Revenue System, New York, n. d. [1896]; and in an official return entitled Income Tax, prepared by Henry H. Smith, the Assistant Register of the United States, and published in November, 1893. A somewhat longer account will be found in an article by J. A. Hill, in the Quarterly Journal of Economics, vol. viii (1894), pp. 416 et seq. Among the contemporary works mention may be made of G. S. Boutwell, Manual of Direct and Excise Tax System in the United States, 1863; the works of Bump and of Estee mentioned infra, p. 469; and manuals like The Taxpayer's Manual, The Taxpayers' and Assessors' Guide, published from 1862 to 1872. 2 "Special Report on the State of the Finances, January 17, 1815," in American State Papers, vol. vi (1832), pp. 885-887. Dallas, after suggesting a tax on inheritances, a tax on wheat flour, and a tax on bank dividends, added that "an income tax may be easily made to produce three millions." 3 The committee on ways and means, in reporting adversely a bill to tax certain incomes, in Dec. 1814, assumed that it was not a direct tax. See op. cit., p. 873. small part not to exceed twenty millions of the required revenue be raised by direct taxes or internal duties or excises, or both. Following his suggestion, Stevens, the chairman of the committee of ways and means, introduced, on July 24, a bill providing for a direct tax and certain internal duties.1 The direct tax suggested was modelled upon that of 1813. It was to amount to thirty millions, the quotas expected from the loyal states being put at twenty millions. The introduction of the bill led to a heated discussion. Conkling spoke of the obnoxious features of the law, and proposed in its stead a system of requisitions on the states. Stevens conceded that the bill was a most unpleasant one, but contended that Congress must choose "between these disagreeable duties," since "the annihilation of this government is the alternative." 2 As the discussion in the House proceeded, it was manifest that the chief objections to the scheme consisted in the fact that it was confined to real estate, and that the constitutional method of levying the tax by apportionment would result in crass inequality, bearing with especial rigor upon the western states. Colfax, for instance, stated that "the most odious tax of all we can levy is going to be the tax upon the land of the country." And in reply to the plea of urgent necessity he said: "There is no stress of weather which can induce me to vote for the bill as it now stands. I cannot go home and tell my constitutents that I voted for a bill that would allow a man, a millionnaire, who has put his entire property into stock, to be exempt from taxation, while a farmer who lives by his side must pay a tax." McClerland pointed out that it would fall "with very heavy, if not ruinous, effect upon the great agricultural states of the West and Southwest," and Arnold called attention to the inequality that would ensue as between Massachusetts and Illinois. Stevens, however, replied that a direct tax under the constitution is necessarily a tax upon real estate, and Bingham agreed that 1 The Congressional Globe, 37th Congress, First Session. Washington, 1861, 4 Op. cit., p. 325. P 246. 2 Op. cit., p. 247. 8 Of cit., p. 248. the uniform construction of the constitutional provision had been "that the power to levy and apportion direct taxes could be rightfully applied only to lands and slaves."1 As a consequence of this position, Colfax now proposed that the direct tax clause be stricken out, and that a provision be made for a tax on stocks, bonds, mortgages, money, and interest, as well as for an income tax. Pike supported this motion in a strong speech. Referring to the disproportion of population and wealth as between Rhode Island and Kansas, he said: "It is unfair to levy such a tax when we have the ready and fair way of raising that sum by an income tax upon real and personal estate." The bill was accordingly recommitted, with instructions to arrange for taxing something else besides lands. On the next day the chairman of the committee reported they were "unable to devise any provision that will be constitutional which would carry into effect the instructions of the house." 8 This led to another important discussion in which the old arguments were repeated. Bingham pointed out that while incomes could indeed not be taxed under the direct-tax clause of the constitution, they could be taxed as duties or excises.4 On the following day after Edgerton had stated that "a more odious bill cannot be devised" than this tax on farmers,5 Edwards made a strong plea for the income tax. Speaking of the scheme to tax all property rather than lands, he said: "We can tax it in some mode if we cannot impose on it what is technically called a 'direct tax.' If so, why should we not do it? Why should we stickle about terms? Why should we not impose the burdens which are to fall upon the people of this country equally, in proportion to their ability to bear 1 He added: "I undertake to say that the uniform construction of that clause of the constitution is this: that under the head of direct taxation, as provided for in the constitution, to be apportioned among the several states, according to the ratio of representation, there is nothing to be taxed except land, tenements, and slaves as appurtenant to land, unless it be a direct capitation tax on the person, without respect to his property or to his income." Op. cit., p. 249. 2 Op. cit., p. 252. 8 Op. cit., p. 268. 4 Op. cit., p. 272. Op. cit., p. 282. them?" 1 Wyckliffe contended that the direct-tax bill was "unjust in its main principles " because it proposed "to impose a tax upon a great interest of the country least able to bear it at this time," and moved an amendment that personal property should be included. After some discussion, this amendment was adopted by a majority of over two-thirds. Accordingly, the committee reported the bill back with a substitute reducing the amount to be raised by the direct tax from thirty to twenty millions, and providing for a tax of three per cent on all incomes over six hundred dollars a year. Morrill stated that the income tax was to be distinguished from the direct or land tax, and pointed out that personal property could not be constitutionally reached by the methods of the direct tax. "The indirect or income tax which is to be raised by this bill will be, in my judgment, at least twice as much as what we shall raise by direct taxation." With these explanations the bill was passed on July 29 by a vote of 77 to 60. In the meantime the matter had been taken up in the Senate. Simmons, the chairman of the finance committee, introduced on July 25 the tariff bill which had passed the House a few days earlier. He moved to strike out all after the enacting clause and insert a substitute which he now proceeded to explain. Instead of proposing a direct tax, he held that the new import duties had better be supplemented by an income tax. "Let us tax property in the last resort, when we have to reach the poor as well as the rich, people of small means as well as those who have large; but I do not believe this country has come to a pass to be driven to a resource of such extreme measures. I think, with what we can collect by a moderate duty on importations and a moderate tax on incomes exceeding one thousand dollars, we can meet all the exigencies of the public service, loaded down as it will be by this wicked rebellion !" 7 Fessenden agreed, stating: "I am inclined very much to favor the idea of a tax upon incomes for the reason that, taking both measures together, I believe the burdens will be more equalized on all classes of the community, more especially on those who are able to bear them."1 On July 29 Simmons reverted to the matter. Referring to the rule of the British Parliament, formed under some "mysterious" and "inexplicable" influence to lay "first imposts, then excises, then land taxes, and then income taxes," he declared: "I am perfectly satisfied, that there is no propriety in our putting a land tax on. The very reasons that induced England to put a land tax on should induce us to put on an income tax." 2 The committee accordingly suggested a five-per-cent tax on all incomes over one thousand dollars, with a lower rate upon incomes from government securities and a higher rate on the income of citizens residing abroad. Senator Clark referred to the ambiguity in the amendment because of the failure to explain whether income meant gross or net income; and when objection was taken to certain other defects, Simmons stated that the desire of the committee was simply to give the government the power to levy the tax, but that all the details should be worked out by the Secretary of the Treasury. The Senate accordingly adopted the committee's amendment, and after the appointment of a committee of conference, the law was enacted. The direct-tax section was included as it had been passed by the House, and the income tax sections provided for a tax of three per cent on the excess over eight hundred dollars of 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 source whatever." In the case of citizens residing abroad the rate was five per cent, and in the case of income from securities one and one-half per cent.4 From the above survey two conclusions stand out clearly. 1 Op. cit., p. 255. 2 Op. cit., p. 314. 3 Op. cit., p. 321. Act of August 5, 1861, c. xlv, sec. 49. |