Taxes and Tea Parties
The Smithsonian Associates Civil War E-Mail Newsletter, Volume 10, Number 1
Every known society had some type of tax system—property tax, income tax, excise tax, use tax, estate tax, gift tax. In Russia, there was even a tax on urine and moustaches. Nobody likes taxes, and not many like the people who collect them.
The start of the American Revolution was an immediate reaction to England's Stamp Act, which imposed a tax on legal documents and newspapers. The motto was"taxation without representation," and the result was the Boston Tea Party.
The Colonists did not oppose the idea of taxation; they just did not want to send their money to support England. They recognized that taxes were necessary for things like the common defense, and maintaining the safety of their cities and towns. Once England was out of the picture, the Colonists had to install their own tax system in the form of poll taxes and taxes on property and certain farm products.
The United States Constitution later gave the power to tax to the Federal government"to pay the debts and provide for the common defense and general welfare of the United States." In the early years, the Federal government used customs duties and sales of public land for this purpose so that additional assessments were not necessary. A few local taxes were in place, such as taxes on carriages, liquor, salt, sugar, snuff, and later homes, land, and slaves.
The first income tax in this country was passed the second year of the Civil War. During the first year the Union raised money through use taxes on photographs, playing cards, feathers, telegrams, iron, leather, pianos, patent medicines and many other things. The manufacturer of the product was required to buy a stamp from the Treasury. When an item was sold, the customer paid the tax, a stamp was put on the product, then cancelled with a pen to show the tax was paid.
By 1862, the Civil War was costing the Union $2 million dollars per day and the government was desperate for money. Since it seemed most citizens were burdened with the many taxes already in place, a progressive income tax law was passed to more fairly spread the burden among rich and poor. The tax was 3% for incomes between $600 and $10,000, and 5% over $10,000. The taxes were withheld at the source by employers, just as they are now.
The first year only 3% of the population had to pay income taxes. This was at a time when the average incomes were: Union army private = $160/year, if paid at all; College professor = $800/year; School teacher = $360/year; Government clerk = up to $2000/ year if male; $1000 if female; Female army nurse = 40 cents per day or $146/year, but they rarely lasted that long on the job. None of these would have been subject to income tax, especially after the $600 standard deduction.
Congress found that passing an income tax law was easy. The hard part was deciding how to collect them. The law created the Bureau of Internal Revenue and former congressman George Boutwell of Pennsylvania was named the first Commissioner. He created the national system of collection districts. District assessors were appointed by the President. In less than a year, the Bureau of Internal Revenue had 60 employees in Washington and almost 4000 assessors and collectors in the field.
Except for the local postmasters, this was the first time that the Federal government had employees located in all the states. By establishing this district system, the collectors and their assistants would be local people who knew the areas and would not be so feared by their neighbors. Knowing that 11 states already seceded, the Federal government thought it best to retain control of the system rather than having the states control a powerful and lucrative bureaucracy. But that was a distinction without a difference to most people. As one senator put it,"there is little difference whether the rope is put round his neck by the local sheriff or by the U.S. marshal."
After the Civil War, the income tax was repealed and eventually it was declared unconstitutional. The Supreme Court confirmed that the Constitution allowed the Federal government to assess taxes proportionately based on the population of each state, not directly on individuals.
However, as the United States transformed into a powerful and wealthy nation with a modern economy, the high tariffs and nuisance taxes that replaced the income tax hurt trade and productivity. And, because what replaced the income tax were regressive taxes, they hurt the poor by reducing the national standard of living. It took wars, the Spanish American War and World War I, for the income tax to reappear and be made permanent.
But wasn't the income tax declared unconstitutional? Yes, but it just took an amendment to rectify that. It was done with the 16th Amendment. It's the shortest amendment, just 30 words:
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
The form used to file, of course, is the Form 1040, named because it was the next government form issued after form 1039. The first returns were due March 1, 1914 when 350,000 were filed, with a 100% audit rate.
But not everyone paid taxes, even those who should have. Al Capone never filed an income tax return, and never owned anything in his own name. Al Capone was known to be involved in illegal gambling, prostitution rings, and murder. Because he usually killed the witnesses to these crimes, the government couldn't hold him on any charges until the 1927 Sullivan rule that said illegal profits are taxable income.
Eliot Ness was a famous investigator for Treasury's Bureau of Prohibition and had been trying to catch Al Capone for a long time. Although modern TV shows and movies make us think he eventually did, he didn't. It was an accountant named Frank Wilson.
Frank Wilson worked for the Bureau of Internal Revenue's Special Intelligence Unit. During another investigation, Wilson came across a ledger from a gambling house with a handwritten notation,"17% for Al." That and a few other facts were enough to convict Al Capone, not of murder, racketeering, or illegal gambling, but of five counts of tax evasion and failing to file tax returns.
In 1952, the Bureau of Internal Revenue got a new name, Internal Revenue Service. And, almost every year since then, Congress has changed tax laws in an effort to make the income tax law more fair. And the more fair they make them, the more complicated they become.
Oliver Wendell Holmes was a famous jurist and Supreme Court Justice whose life spanned the transformation of our country from rural to urban, from insular to international. He was wounded in the Civil War, and his grandfather fought in the Revolutionary War. He understood both tea and taxes. Holmes famously stated,"taxes are what we pay for a civilized society." He would have approved of protests and tea parties, as long as they remained civilized.