A Review of Civil War Tax Legislation and Its Influence on the Current U.S. Income Tax System
King, Darwin L., Fischer, Michael J., Case, Carl J., Academy of Accounting and Financial Studies Journal
The purpose of this paper is to review and compare income tax legislation passed during the Civil War by both the Union and the Confederacy. The major tax act for the Confederacy was titled "An Act to lay taxes for the common defense and carry on the Government of the Confederate States." This legislation was passed on April 24, 1863 and represented the most comprehensive tax system employed by the Confederacy. The most significant Union tax law was termed the "National Tax Law as approved June 30, 1864." These two major pieces of legislation are compared and contrasted by examining the types of taxes introduced, rates of tax, and various deductions and exemptions allowed.
This paper reviews the many aspects of Civil War taxation legislation that remain in effect today. In particular, numerous income inclusions, exclusions, and deductions found in these 1860's acts continue to exist in our current Internal Revenue Code. These early pieces of tax legislation continue to provide guidance in generating tax receipts to fund our current war efforts in Afghanistan and Iraq.
The Civil War created a desperate financial situation for both the Union and Confederate governments. The mere reinstatement of excise taxes would not be sufficient to fund the war effort for either side. For this reason, new types of taxes, which were considered unnecessary in the past, were enacted into law. The major innovative tax of the period was the individual income tax. This tax was based on concepts that the typical taxpayer was not familiar with and did not readily understand including the principles of self-assessment and voluntary compliance. However, both the Union and Confederacy realized that a personal income tax was the only alternative that would produce the large amount of funds required to fund military operations.
The Union enacted tax legislation in 1861, 1862, and 1864 with each version becoming more comprehensive in nature. When the Civil War began, Congress passed the Revenue Act of 1861 on August 5, which proved to be a poor first attempt at tax legislation. The law reinstated excise taxes on various goods and also introduced a tax on personal incomes (U.S. Treasury Fact Sheet, OPC77). The income tax rate of 3% was applied to income in excess of $800 per year (the exemption amount). This exclusion eliminated tax for all but the wealthy. For example, a private in the U.S. Army, during most of the Civil War, earned only $13 per month or under $200 per year, so he would pay no income taxes (Revised Regulations for the Army of the United States, 1861).
Although the 1861 act committed the country to income taxation, there were no income taxes actually assessed under this law (Hill, 1894). The 1861 income tax was never enforced or collected and was replaced by new legislation on July 1, 1862. The first major Internal Revenue Act in 1862 required taxpayers "to make a list or return" of the items of income that were being taxed (Doris, 1963). An "Assistant Assessor," who had the right to increase the amount of tax due for the year, audited the taxpayer in an effort to add credence to the system. The concept of a graduated or progressive tax was also strange to taxpayers who were comfortable with fixed rate excise taxes.
The new concepts of voluntary compliance, self-assessment, and progressive tax rates created a system that the typical taxpayer found difficult to understand and comply with. During the spring of 1862, the Federal government's monetary needs were escalating as the public debt increased about two million dollars per day (Ibid). On July 1, 1862, the Revenue Act of 1862 was passed which included excise taxes on playing cards, gunpowder, feathers, telegrams, leather, pianos, yachts, billiard tables, perfumes, drugs, patent medicines, beer, and whiskey (U.S. Treasury Fact Sheet, OPC-77). This new act retained the personal income tax included in the 1861 law with some significant adjustments. …