Internal Revenue taxes

The first income tax in the United States was levied to help finance the Civil War. In August 1861 Congress approved a tax of 3 percent on incomes above $800; by 1864 it had graduated to 10 percent on incomes in excess of $10,000. In addition, excise taxes on virtually every raw and manufactured material were levied by Congress in July 1862. By 1865 these internal revenue taxes provided the bulk of federal tax receipts. Congress removed most of the excise taxes from 1866 to 1870 (distilled liquors was one of the exceptions) and the income tax in 1872. During the Ulysses S. Grant administration, the “whiskey ring” of Internal Revenue officers and distillers defrauded the federal government of excise tax revenues.

In the late 19th century the income tax received wide support. Such tax legislation would improve the government’s revenue base while securing more tax dollars from corporations and the wealthier individuals. The idea of a graduated or progressive income tax that would require people with higher incomes to pay a higher percentage than those with less income was supported by several agrarian and labor organizations. The Greenback-Labor Party, the People’s Party (Populists), the Knights of Labor, and several members of the Democratic Party endorsed the graduated income tax. By the 1890s the movement for a federal graduated income tax was taken up by the Progressive reformers.

Efforts to enact federal income tax legislation encountered a major constitutional obstacle over the question of whether the federal government could levy direct taxes on individuals instead of apportioning them out to the states according to their respective populations. In 1894 Congress included in the Wilson-Gorman Tariff a 2 percent tax on all incomes above $4,000. It was the first direct tax on Americans during peacetime. The constitutionality of the income tax was immediately challenged in the U. S. Supreme Court, and in the case of Pollock v. Farmers’ Loan and Trust (1895) the income tax was ruled unconstitutional. The Court held that it constituted a direct tax and hence was subject to the constitutional requirement of apportionment among the states according to population.

Despite the Supreme Court’s ruling in the Pollock case, the demand for a federal income tax did not go away. As the Progressive movement gained momentum in the early 20th century, so did the push for a federal income tax. Progressive reformers argued that an income tax was the best and fairest means of raising revenue for the federal government. In 1913 the Sixteenth Amendment was ratified, permitting a federal income tax.

Further reading: W. Elliot Brounlee, Federal Taxation in America: A Short History (New York: Cambridge University Press, 1996); Morton Keller, Affairs of State: Public Life in Late Nineteenth Century America (Cambridge, Mass.: Harvard University Press, 1977); Sidney Ratner, Taxation and Democracy in America (New York: Norton, 1967).

—Phillip Papas