Worth Fighting For

One hundred and fifty years ago this week, Confederate soldiers fired on South Carolina's Fort Sumter. That shot touched off a Civil War that would eventually claim over 600,000 American lives and haunt the nation's memory. The war's legacy lives on in obvious ways, such as a history of racial conflict. But it lives on in more subtle ways as well "? for example, would you believe the taxes you pay are also a Civil War legacy? Up until the Civil War, the government raised nearly all its revenue from excise taxes and tariffs. In 1860, when our population was just 31.4 million, the U.S. raised $56.1 million in excise taxes and $8.5 million from business and other revenue. (The deficit back then was $13.4 million, and total public debt just $64.8 million!) But the Civil War challenged the Treasury like no other crisis before it. Congress passed the first "emergency" income tax on July 1, 1862. The rate was 3% on incomes above $600 (roughly $13,000 in today's dollars) and 5% on incomes above $10,000 (roughly $212,000 in today's dollars). The Commissioner of Internal Revenue supervised monthly collections from various sources, including transportation companies, bond interest income, auction sales, and sales of slaughtered cows, pigs, and sheep. There were also complicated excise taxes on hotels, eating houses, theatres, and circuses, as well as licenses for bankers, auctioneers, pawnbrokers, doctors, lawyers, and jugglers. ("Every person who performs by sleight of hand shall be regarded as a juggler under this act.") Congress passed the first tax hike in 1864, with rates going up to 5% for incomes between $600 and $10,000 and 10% for incomes above $10,000. Taxpayers filed Form 24, "Detailed Statement of Income, Gains, and Profit," with their local assessor. Business owners got many of the same deductions they get today. But landlords reporting income from land and buildings got just one deduction, and that was for repairing fences! There was even a "kiddie tax" on minors' incomes over $600. Filing late cost an extra 25%. Filing a false return meant the local assessor did your taxes for you, with a 100% penalty and no appeal. Ouch! David Wells was appointed chairman of the U.S. Revenue Commission in 1865. He described the tax system as being "akin to that recommended to the traditionary Irishman on his visit to Donnybrook Fair, 'whenever you see a head, hit it.'" Wells added that Congress was guided by a similar principle: "whenever you find an article, a product, a trade, a profession, or a source of income, tax it!" Sound familiar? Congress finally killed the "emergency" income tax in 1872, and it remained dead until until World War I. The rest, as they say, is history. Once again our nation is at war, and once again our lawmakers are struggling with how to finance it. And just as the Civil War led to a new form of income tax, today's lawmakers are contemplating new national sales taxes, value-added tax, and even carbon taxes. Regardless of what they choose, we'll "respond in kind" in the war to keep your taxes as low as possible!