From Servitude to Bondage
By: Larry Walker, Jr.
War has oft been used as an excuse for raising taxes, and tax hikes have sometimes led to war. Prior to the imposition of the income tax, the federal government’s primary source of revenue was through tariff duties. Tariffs were taxes imposed on certain imported goods which were produced by cheap foreign labor. Protectionists demanded higher tariffs to protect Northern industries from cheaper imports. Southerners favored lower tariffs as a means of encouraging foreigners to import their cotton and other agricultural exports. Some historians say that it was the bad blood over tariffs, between the years of 1828 and 1861, which actually lead to the Civil War.
The first income tax was levied in 1861 at a flat rate of 3%, but was quickly replaced with a progressive structure. The income tax was intended to be a temporary measure to help pay for the Civil War, but eventually became the primary source of federal funding. When the first full fledged progressive tax was imposed in 1913, it only applied to about 1% of the population. Today, roughly 60% of Americans are affected by income taxes, and every working person is subject to a Social Security tax of 6.2% levied on the first $106,800 of wages, and a Medicare tax of 1.45% on all wages. It's interesting to note that the top tax rate of 7% imposed in 1913 was less than the minimum rate of 7.65% imposed on most workers today (and let's not forget that employers get soaked with a matching amount).
The Revenue Act of 1861
The Revenue Act of 1861 included the first U.S. Federal income tax statute. The Act had been motivated by the need to fund the Civil War. 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% on income above $800 ($19,389 in 2010 inflation adjusted dollars) and 5% on income of individuals living outside the country. It was signed into law by Abraham Lincoln, the first Republican President.
The Revenue Act of 1862
The Revenue Act of 1862, also imposed to help fund the Civil War, and also signed into law by Abraham Lincoln, imposed the first progressive rate tax in U.S. history. The office of the Commissioner of Internal Revenue was established, with the Act specifying that 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 ($13,632 in 2010 dollars), was taxed at a rate of 3%; those earning over $10,000 per year ($227,214 in 2010 dollars) were taxed at a 5% 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.
The Revenue Act of 1913
The Revenue Act of 1913, signed into law by Woodrow Wilson, re-instituted the federal income tax as the primary source of revenue for the federal government. It would require only a few years for the federal income tax to become the chief source of income for the government, far outdistancing tariff revenues.
The previous effort to tax incomes (Wilson-Gorman Tariff of 1894) had been declared unconstitutional by the Supreme Court because the tax on dividends, interest, and rents had been deemed to be a direct tax not apportioned by population. That obstacle, however, was removed by ratification of the Sixteenth Amendment on February 3, 1913.
The 1913 Act provided in part that:
“ . . . subject only to such exemptions and deductions as are hereinafter allowed, the net income of a taxable person shall include gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, businesses, trade, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in real or personal property, also from interest, rent, dividends, securities, or the transaction of any lawful business carried on for gain or profit, or gains or profits and income derived from any source whatever . . . “
The incomes of couples exceeding $4,000 ($88,100 in 2010 dollars), as well as those of single persons earning $3,000 or more ($66,100 in 2010 dollars), were subject to a one percent (1.0%) federal tax. Further, the measure provided a progressive tax structure (shown below), meaning that high income earners were required to pay at higher rates.
It has been said that less than 1% of the population paid federal income tax at the time.
Tax Rates: 1913 vs. 2010
The following table shows what the 1913 tax rates would look like in current dollars:
Amazing! That's what our tax rates would look like today, if we had a fiscally responsible and efficient government. Under the first Revenue Act imposed after ratification of the 16th Amendment, most Americans would be exempt from taxes today.
In 1913, a single taxpayer was allowed an exemption of $3,000 ($66,100 in 2010 dollars), while a married couple was allowed $4,000 ($88,100 today). The following table compares the standard deduction and personal exemption(s) provided today versus what was allowed in 1913.
National Debt: 1913 vs. 2010
Nowadays, the excuse for raising taxes isn't related to war, it's related to a drive to help irresponsible politicians pay for their devil-may-care spending sprees. The national debt in 1913 was about $64 billion, in 2010 dollars, which is 211 times less than today's appalling $13.5 trillion. Even with the lowest tax rate today being greater than the top tax rate in 1913, politicians have managed to 'muck things up'.
So how high need our tax rates grow in order to keep pace with the national debt? If we were to presume that tax rates are a function of the amount of revenue needed by the federal government, then tax rates should either shrink or grow in line with the need. The answer (shown below) would require a bottom rate of 211% and a top rate of 1,477%, or 211 times the rates of 1913.
Meanwhile, Washington continues to borrow at a rate of $100,000,000,000 per month. The first priority of the Congress should have been tax and spending reform, yet we find ourselves in a bigger mess than the one they promised to clean up. To raise taxes on producers would only bring economic disaster. To cut taxes would mean a much smaller federal government, fewer entitlements, and a surge in economic activity. It's time.