United We Tax: The 150th Anniversary of the Federal Income Tax

Imagine an America that boldly undertakes a major effort of unprecedented scale. Now imagine that no one knows how much it will cost or when it will end, only that it is imperative to act if we are to live consistent with our nation’s core values of freedom AND unity. Imagine now that this grand and unpredictable endeavor has to be financed with a surge in national debt and that securing such debt will require a new, reliable and substantial source of new revenue.

It goes without saying that this America bears little resemblance to the America of today which is marked by collective paralysis and partisan gridlock. It may or may not resemble the America of the future – that story is not yet written. No, this is the America of 1861 at the outset of the civil war, an effort which in retrospect was obviously an undertaking of enormous implications and unknown cost.

One hundred and fifty years ago this month Congress passed the Revenue Act of 1861 that established the nation’s first income tax. When it was originally enacted the tax was moderately progressive. It exempted the first $800 of income which excluded most wage-earners at the time and then applied a 3 percent tax rate to all income above the threshold. In 1862, before the tax could be levied, Congress made changes to the law so that when the tax was enacted the exemption level was $600 and there were graduated brackets. The act helped to reassure the financial community (65 percent of the Union’s war expenses were financed by bondholders) that the nation was capable of and committed to paying back its creditors.

This first income tax was later repealed and it wasn't until passage of the Sixteenth Amendment in 1913 that the federal income tax became firmly established. But the bold actions of our nation in 1861 to finance an undertaking of unprecedented scale with a major increase in indebtedness and taxes -- championed by America's first Republican president it should be noted -- stands in stark contrast to the current public debate about the role of government. Today’s America is not on the precipice of a civil war. However, in the past ten years we have in fact waged two wars without raising the revenue necessary to pay for them and instead have enacted massive tax cuts -- two major contributors to the deficit and debt challenges we face today.

Today we face an economy that needs more public investment not less, a looming environmental crisis that needs major and proactive public action and an array of other public challenges that demand action. But any discussion of the role that taxation plays in providing the resources America needs to address any of these issues seems like a feeble echo from another era.

Heading into an election year it is tempting to narrow our public dialogue to the hot topics of the moment. But if we are ever to overcome the paralysis that is hampering our ability to move forward, we must step back ask ourselves a much deeper question –- how can we once again become a nation that is empowered to address its current challenges and create a secure and vibrant future? And on this important anniversary, how can we remember that taxes matter?