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 (see Sec. 49). The Act, motivated by the need to fund the Civil War, imposed an income tax to be "levied, collected, and paid, upon 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 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.

The income tax provision (Sections 49, 50 and 51) was repealed by the Revenue Act of 1862. (See 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 million dollars of interest-bearing notes at 12 percent but found itself able to dispose of only four million dollars' worth.

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, Salmon Chase, and Gideon Welles 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 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. In Congress, the bill provoked considerable debate: Thaddeus Stevens, 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."

  • 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.

References

  • 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]