Before the Income Tax: How the Federal Government Balanced the Budget before 1913: Yes, the U.S. Government Did at One Time Run Large Budget Surpluses, and the Revenue Was Generated without Resorting to an Income Tax

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This year--2013--marks the 100th anniversary of the modern income tax, a tax that dominates the revenue scheme of the federal government today. Individual income taxes accounted for about 45 percent of all federal tax revenue in 2012, along with 35 percent for Social Security and Medicare payroll taxes (which are also a tax on income), 10 percent for corporate income taxes, and only 10 percent for all other tax sources.

It wasn't always so. Prior to ratification of the 16th (income tax) Amendment in February 1913, the federal government manned its few constitutional responsibilities without an income tax, except during the Civil War period. During peacetime, it did so largely--or even entirely--on import taxes called "tariffs." Congress could afford to run the federal government on tariffs alone because federal responsibilities did not include welfare programs, agricultural subsidies, or social insurance programs like Social Security or Medicare. After the Civil War, tariff revenues sometimes suffered under a protectionist policy ushered in by the Republican Party that supplemented federal income via excises on alcohol, tobacco, and inheritances. But before the war, the need for tariff revenue to finance the federal government generally kept the tariff at reasonable levels. During wartime throughout early American history, the Founding Fathers were able to raise additional revenue employing a different method of direct taxation authorized by the U.S. Constitution prior to the 16th Amendment. These alternative taxing methods gave the young American nation embarrassing peacetime budget surpluses that several times came close to paying off the national debt.

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In one instance, the U.S. government paid off its entire national debt without the existence of an Internal Revenue Service. President Andrew Jackson boasted in his veto of the Maysville Road Bill in 1830 that God had blessed the nation with no taxes (except tariffs on imports) and no national debt:

  Through the favor of an overruling and indulgent
  Providence our country is blessed with a general
  prosperity and our citizens exempted from the pressure
  of taxation, which other less favored portions of the
  human family are obliged to bear. ... How gratifying
  the effect of presenting to the world the sublime spectacle
  of a Republic of more than 12,000,000 happy people, in
  the fifty-fourth year of her existence, after having passed
  through two protracted wars--one for the acquisition and the
  other for the maintenance of liberty--free from debt and
  all her immense resources unfettered!

In reality, Jackson had jumped the gun on his boast. The national debt would not be paid off for five more years, until the 1828 "Tariff of Abominations," which were high tariffs primarily on British manufactured goods meant to protect northern U.S. industries, and as the compromise tariffs of 1832 and 1833 had created several years of massive budget surpluses. But "Old Hickory" presided over a nation where Congress had abolished all federal internal taxes, and no citizen saw a tax collector of the United States unless that citizen was in the business of importing foreign goods. And while American consumers were occasionally manipulated by outrageously high protective tariffs, especially the above-mentioned "Tariff of Abominations," inside the United States a massive free market emerged over which the U.S. government had almost no influence. Even the Tariff of Abominations was not so high that it choked off revenue for imports from every industry.

By way of contrast, the advent of the income tax prompted some congressmen to note that this tax was designed not principally for revenue--the U.S. government had always had plenty of money from tariffs--but to manipulate the American people and their choices in the market. "The character of the argument which had been made," Massachusetts Rep. Samuel McCall argued in a speech before the U. …