– War and Taxes: 1765 to 1872

– By: Larry Walker, Jr. –

“There is a limit to the taxing power of a State beyond which increased rates produce decreased revenue. If that be exceeded intangible securities and other personal property become driven out of its jurisdiction, industry cannot meet its less burdened competitors, and no capital will be found for enlarging old or starting new enterprises. Such a condition means first stagnation, then decay and dissolution. There is before us a danger that our resources may be taxed out of existence and our prosperity destroyed.” ~Calvin Coolidge

From Taxing the Rich

The American Revolution was the product of war and taxes. There are few topics more cantankerous, for war has oft been used as an excuse to enslave a populace through taxation, and unfair over-burdensome taxes have oft led to war. With the United States government’s passage of the quixotic Affordable Care Act of 2010, which would regulate the lives of every man, woman and child from cradle to grave, and add a new set of taxes and mandates; the Tea Party revolution was reborn. Elected officials who take the movement flippantly are likely to find themselves buried in the trash heap of human history.

In 1765, Great Britain imposed a series of taxes upon the American Colonies, in order to pay for its lengthy French and Indian War (1754-1763). After the war, the British forced upon the Colonies, the Stamp Act of 1765, requiring the purchase of tax stamps for any printed documents including newspapers, legal documents, marriage licenses and more. This was followed by the Townshend Acts of 1767 which were passed: to raise revenue in order to pay the salaries of governors and judges so that they would be independent of colonial rule; to create a more effective means of enforcing compliance with trade regulations; to punish the province of New York for failing to comply with the 1765 Quartering Act; and to establish as precedent the British Parliament’s right to tax.

Just like the Tea Party Movement of today, our founding fathers resented insidious taxes and regulations imposed upon them without their consent. Then as now, it is simply a matter of ‘taxation without representation’, an act which early Americans likened to tyranny. By 1773, when the East India Company was granted a virtual monopoly on the importation of tea, it was the last straw. In protest, a group of Boston citizens disguised as Mohawk Indians boarded a ship and dumped 342 chests of tea into Boston harbor. The Revolutionary War ensued, and the United States of America was born. Today, the Affordable Care Act is only a symptom of the disease. The disease being: over-regulation, over-burdensome covert and overt taxes, unsustainable federal debt, and a small minority of ideologues with socialist tendencies forcing its will upon the people.

“Collecting more taxes than is absolutely necessary is legalized robbery.” ~Calvin Coolidge

Far-left demagogues often speak in platitudes, but the utopian paradise they seek, through raising taxes on millionaires and billionaires, is a myth. Behind closed doors, they secretly plot to raise taxes on every soul, from the bottom up. They seem to have no recollection of American history, a history in which Americans have only been subject to an income tax for 110 out of 236 years. The United States has only endured an income tax between the years of 1862 to 1872, and 1913 through 2011. The income tax was initially spawned to fund the Civil War, errantly raised during the Great Depression, hiked to the max during both World Wars, and is today being exploited by left-wing politicians whose only goal is to reduce American exceptionalism to a failed, redistributive, collectivist state.

Ever since the income tax was introduced in the United States, the balance has tilted between having no income tax at all, to a top marginal rate of 94.0% (1944); and from a top tax bracket of $15,200 in 1867, to $79,412,681 in 1936 (in today’s dollars). In this series, we will examine the tax rate schedules in use from 1861 through 2011, and in so doing, will uncover the rates levied on incomes of $250,000, $1,000,000, and $10,000,000, throughout U.S. history. We will discover how the purpose of the income tax has shifted from a means to fund war, to an apparatus of wealth redistribution.

We will determine the average historical tax rates, and weighted average tax rates imposed upon upper incomes. We shall learn that throughout American history, an income of $250,000 has been taxed at an average historical rate of 23.6%. We shall hopefully gain some sense of what the term “fair tax” really means, as for some no income tax at all is considered fair, while for others a tax of 94.0% upon the rich is deemed just. Yet we believe as Calvin Coolidge, John F. Kennedy, Ronald Reagan, and George W. Bush believed, that ‘there is a limit to the taxing power of a State beyond which increased rates produce decreased revenue, and that if taxes are too high America’s resources may be taxed out of existence and our nation’s prosperity destroyed’.

The Revenue Act of 1861

The first income tax levied by the United States Government was imposed to fund the Civil War (1861). Prior to this, the government was funded strictly through customs duties, tariffs levied on imported goods. During the War of 1812, the government experimented briefly with excise taxes on certain goods, commodities, housing, slaves and land, but a tax on income was out of the question. What is significant is that prior to 1861, or for the first 86 years of American history, whether a citizen had an annual income of $800, $250,000, $1,000,000 or $10,000,000, every dime was considered to be private property of the individual, and not subject to any federal claim.

The Revenue Act of 1861 included the first U.S. Federal income tax statute. It introduced the federal income tax as a flat rate tax. The income tax was 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”. Rates under the Act were 3.0% on income above $800 ($20,400 in 2011 inflation adjusted dollars) and 5.0% on income of individuals living outside the country.

From Taxing the Rich

Under the 1861 Act, a married couple earning the equivalent of $250,000 (in 2011 dollars) would have paid a tax of just 2.8%; those earning $1,000,000 would have paid 2.9%; and those earning $10,000,000 would have incurred a tax rate of just 3.0% (see table above).

It is important to note that: (1) America’s first income tax was a flat rate tax, (2) it was meant to be temporary, with the proceeds used solely to fund the Civil War; (3) for the preceding 86 year period, personal income of American citizens was not subject to any federal tax; and (4) that no revenue was ever raised under the 1861 Act, because it was revised (on June 30, 1862) before any tax was due.

The Revenue Act of 1862

In 1862, the initial Revenue Act was revised to reflect the first progressive rate tax in U.S. history. The office of the Commissioner of Internal Revenue was established. The Act specified that the Federal income tax was a temporary measure that would terminate in the year 1866. Annual income of U.S. residents, to the extent it exceeded $600 ($13,400 in 2011 dollars), was taxed at a rate of 3.0%; those earning over $10,000 per year ($224,000 in 2011 dollars) were taxed at a 5.0% rate. With respect to the income tax liability generated by the salaries of “officers, or payments to persons in the civil, military, naval, or other employment or service of the United States, including senators and representatives and delegates in Congress,” the law also imposed a duty on paymasters to deduct and withhold the income tax, and to send the withheld tax to the Commissioner of Internal Revenue.

Under the Revenue Act of 1862, a married couple earning the equivalent of $250,000 (in 2011 dollars) would have paid a tax of just 3.4%; those earning $1,000,000 would have paid 4.6%; and those earning $10,000,000 would have incurred a tax rate of just 5.0% (see table below).

From Taxing the Rich

The Revenue Act of 1864

Since in 1862 the Union War Debt stood at $505 million, and since the income tax only raised $2.7 million in 1862 and $20.2 million in 1863, rates were raised in 1864. The 3.0% tax on incomes above $600 ($8,590 in 2011 dollars due to devaluation) was increased to 5.0%, a new 7.5% rate was introduced on incomes over $5,000 ($71,600 in 2011 dollars), and the old rate of 5.0% on incomes above $10,000 ($143,000 in 2011 dollars) was raised to 10.0%.

Under the Revenue Act of 1864, a married couple earning the equivalent of $250,000 (in 2011 dollars) would have paid a tax of just 7.7%; those earning $1,000,000 would have paid 9.4%; and those earning $10,000,000 would have incurred a tax rate of just 9.9% (see table below).

From Taxing the Rich

Ending the Income Tax (1865 to 1872)

When the Act finally expired, the United States was again without an income tax; a condition that would last from 1873 until 1912, adding another 40 years to our tax-free heritage. By 1865, the 7.5% rate was increased to 10.0% leading to the highest tax rates for the period. By the end of 1866, when it was to have expired, the income tax was instead gradually phased out. The top rate was lowered to 5.0% between 1867 and 1869, and then to 2.5% from 1870 to 1872 (see tables below).

Between 1865 and 1866, a married couple earning the equivalent of $250,000 (in 2011 dollars) would have paid a tax of 8.4%; those earning $1,000,000 would have paid 9.6%; and those earning $10,000,000 would have incurred a tax rate of 10.0% (see table below).

From Taxing the Rich

From Taxing the Rich

Summary

“The freedoms won by Americans in 1776 were lost in the revolution of 1913.” ~Frank Chodorov

During the first 137 years of American history (1776 – 1912), the income tax only existed for 11 years, while no income tax was imposed upon private citizens for 126 years. The highest tax rate assessed on married couples occurred between 1865 and 1866, when those earning the equivalent of $250,000 (in 2011 dollars) paid a tax of 8.4%, those earning $1,000,000 paid 9.6%, and those earning $10,000,000 incurred a tax rate of just 10.0%. In the current tax debate, those caterwauling for higher taxes on the wealthy should, if it is within them, remember their own heritage. An understanding of the origin of the American income tax system, its original intent and early rates, is essential to any meaningful dialogue.

To be continued… Taxing the Rich – 1765 to 2011, Part II

References / Related:

Spreadsheets: Historical Income Tax Data

Images: Tax Tables and Charts

Tax Foundation – Income Tax Tables: 1913 to 2011

Tax Acts of the United States, 1861 through 2010

The Origin of the Income Tax

Quick Revolutionary War Tour 1765-1777

#Taxes

CPI Adjusted Dollars:

http://www.measuringworth.com/uscompare/

http://www.dollartimes.com/calculators/inflation.htm