Cyclopædia of Political Science, Political Economy, and the Political History of the United States
INTERNAL REVENUE OF THE UNITED STATES. Under the constitution congress has power to lay taxes, duties, imposts and excises. This provision includes every species of taxation, direct and indirect, specific and ad valorem; poll taxes, taxes on property, income, business, licenses, imports and tonnage. The only limitation placed upon this taxing power is that these taxes shall be uniform throughout the United States, and that direct taxes shall be apportioned among the several states which may be included within the Union, according to their respective numbers. In practice the national government has obtained its revenues from taxes on imports, and has resorted to internal imposts only when such have become necessary. The term "internal revenue" has been restricted in its meaning to such revenues only as are collected under the internal revenue bureau connected with the treasury department, and does not include all revenues that are, properly speaking, from internal sources, that is, from sources other than duties levied at the frontiers upon foreign commodities. Thus, moneys arising from the sale of public lands, from patent fees, or the revenues of the postal service, are not generally known as "internal revenue." As will be seen, a large number of taxes, direct and indirect, have been under the management of this bureau, which did not exist until 1862; so that no more exact definition of this branch of the public revenue system can be framed.
—At the close of the revolution, to raise money by any internal taxes was hardly thought of. It is true that the provision in the constitution shows that the possibility of having recourse to such taxes was not overlooked: but in the then existing temper of the people it would have been impolitic, if not impossible, to put in operation any system of excises. Hamilton, in No. XII of the "Federalist," writes: "The genius of the people will ill brook the inquisitive and peremptory spirit of excise laws. The pockets of the farmers, on the other hand, will reluctantly yield but scanty supplies, in the unwelcome shape of impositions on their houses and lands, and personal property is too precarious and invisible a fund to be laid hold of in any other way than by the imperceptible agency of taxes on consumption"; and again he writes: "It has been already intimated that excises, in their true signification, are too little in unison with the feelings of the people, to admit of great use being made of that mode of taxation"; and he goes on to show that the possessors of land would not, in all probability, bear the burdens of any internal taxes. So strong was the prejudice against excises, that it was twice moved, in the New York convention for adopting the constitution, that the power of laying excises be prohibited to congress. Nor can this feeling against such taxes be referred only to a prejudice inherited from England, for there was a sound economic reason which effectually prevented the application at that time of internal duties and taxes. An elaborate system of internal taxes supposes a country well advanced in manufactures and general wealth, and at the close of the revolution the economic condition of the people and of manufactures was not such as to invite taxation. The country was impoverished by the long war, trade was confined within narrow limits, and manufactures were few in number; and forced, as many of them were, into an unhealthy existence, they could ill endure any increased burdens in the shape of taxes. On the other hand, the resources of the country had been severely strained by the war, there was no central government, and when such a government did exist, one of its first acts was to bolster up these manufactures by tariff duties on imported manufactures.
—But an excise was soon proposed. In 1790 a measure for taxing distilled spirits of domestic manufacture was introduced into congress, but the opposition it at once aroused was sufficient to defeat its passage. The legislature of Pennsylvania instructed its representatives in congress to oppose the passing of an excise, "the horror of all free states"; and in a petition to congress the inhabitants of Westmoreland, Pa., claimed that to convert grain into spirits was as clear a natural right as to convert grain into flour. The proposed taxes would weigh heavily upon the farmers of the western counties of Pennsylvania. Owing to the distance of the markets and the great difficulty and expense of transporting such a bulky commodity as grain, the farmers were in the habit of converting their grain into whisky, and transporting it in that shape. Mr. Breckenridge, in his "History of the Western Insurrection," states that the still was the necessary appendage of every farm, where the farmer was able to procure it. And this petition from Westmoreland recites that "for these reasons we have found it necessary to introduce a number of small distilleries into our settlements, and in every circle of twenty or thirty neighbors one of these is generally erected for the accommodation of the neighborhood."
—In the following year, under the advice of Hamilton, a like measure was introduced, and, after a bitter contest, was passed, March 3, 1791. Under this act spirits distilled from foreign materials (molasses) were taxed at a somewhat higher rate than those from domestic materials (grain and fruit), the discrimination amounting to from two to five cents per gallon, according to proof. There was also a difference made in the taxes imposed upon spirits distilled in cities, towns or villages, (nine to twenty-five cents per gallon), and those distilled in other places, (at the option of the distiller he could pay a yearly tax of sixty cents per gallon upon the capacity of the still, or nine cents for each gallon distilled). Notwithstanding the low duties charged, the opposition to it was very determined. The tax bore with great severity upon the distillers in the western part of Pennsylvania, at that time very thinly populated, for with them money was very scarce, and as trade was carried on by barter, spirits served as money. The most determined opposition came from that quarter. In May, 1792, with the hope of allaying in some degree the discontent, the rate of excise was somewhat reduced, and a further concession was made by giving to the distiller the alternative of paying a monthly instead of a yearly rate, with liberty to take out a license for the precise time he intended to work, and to renew it for a further term.*30 And at the same time, with a view to possible resistance, measures were taken to provide for calling out the militia; thus curiously fulfilling a saying made sixty years before by an Englishman, "we know what a general excise is, and can not be ignorant that it hath an army in its belly." But the concessions made were not enough, and in September of the same year Washington issued a proclamation admonishing all persons to refrain from unlawful combinations tending to obstruct the operation of the excise laws; and it is worthy of note that he struck out from Hamilton's draft of this proclamation the sentence, "these laws were dictated by weighty reasons of public exigency and policy." But the open resistance to the measure (whisky insurrection, which forms an important chapter in the political history of this country) was soon put down. The general dislike, however, to the excise prevented an early and complete organization of the excise system. As late as 1795 the law had not extended to Kentucky and Tennessee, and the tax was but imperfectly collected in North Carolina; nor until that year was the system put in full operation in any part of Pennsylvania. However, the government had carried its point, and had not only established its right to impose an excise, but shown its power to enforce such a tax.
—In 1794, under a fear of renewed hostilities with England, but ostensibly to defray clerk hire in the department of state, a fee was charged for all patents issued for inventions and discoveries; and to provide means for paying the interest upon money borrowed to pay the expenses attending the intercourse of the United States with foreign nations, internal duties were laid upon carriages for the conveyance of persons; upon licenses for selling wines and foreign distilled liquors by retail; upon snuff (eight cents per pound) and refined sugar (two cents per pound) manufactured in the United States; and on sales at auction (¼ per cent. of the purchase money arising from the sale of any right, interest or estate, in lands, tenements or hereditaments, utensils in husbandry, farming stock, or ships and vessels; and ½ per cent. of the purchase money arising from the sales of any other goods, chattels, rights or credits). The proceeds of these taxes, together with what accrued from the postoffice, land sales, and dividends on bank stock, formed the only sources of the internal revenue of the government. Of these, the land sales, postage on letters, patent fees and taxes on distilled spirits were permanent taxes, or commensurate with the existence of the debt for the payment of the interest of which they were pledged; and the dividends from bank stock were commensurate with the duration of the property in the stock. The other taxes were only temporary taxes, and were to continue no longer than till the end of the session of congress next after the expiration of two years from the respective times of passing the laws which established them, though their operation was extended in 1795. It should be noted that the debate upon this measure assumed a sectional character. Thus it was claimed that the tax upon tobacco fell almost wholly upon the middle and southern states; and as to the carriage tax, it was stated that there was not a single vehicle in the state of Vermont, and but two in the whole state of Connecticut, which would be subject to that tax. In his report for 1795, Hamilton says of these taxes, when discussing the advisableness of extending their operation, which was done: "It is believed that there can not be devised objects of revenue more proper in themselves, or more generally acceptable to the people. Whatever interested parties may allege, it seems self-evident that there can hardly be a reasonable question, except as to the best mode of collection. The objection that part of them falls on manufactures, has no weight. The manufactures on which they fall are complete luxuries, and completely established; consequently fit objects of revenue. The increased duties on the rival foreign articles are a full protection to the manufacture. Whatever may be the appearances in the infancy of the tax, it is certain, in principle, that it will finally fall on the consumer, as generally as duties on imported commodities."
—Yet in spite of this able defense of his policy, the results of these taxes, when viewed in 1796, after an experience of from two to four years, did not prove their fitness to the circumstances or disposition of the people. The tax on spirits was openly resisted and secretly evaded; the tax on carriages produced but little on account of an uncertainty whether it was a direct or an indirect tax, a question which was finally settled by the supreme court of the United States; the drawback allowed upon exported snuff was so high as to act as a bounty, and so large were the quantities exported that the drawback paid exceeded the amount of collections, and this law was soon suspended. The sugar tax was productive, because, owing to the high import duty on sugar, the domestic manufacturers almost wholly supplied the home demand. Mr. Gallatin, in 1796, estimated the annual produce of all these internal taxes at $416,000.
—In 1797 congress laid duties on stamped vellum, parchment and paper. Of this tax Mr. Gibbs, in his "Administration of Washington and Adams," writes: "The stamp act, although a very necessary one, as a certain means of raising money, had the misfortune of being exceedingly unpopular; certain disagreeable associations being connected with the name, which gave a handle to the opposition to work upon those who did not understand the relations between taxation and representation. It also, curiously enough, furnished a cause of jealousy to the president, who, from some reason, supposed it to exalt the powers of the secretary of the treasury at his expense." These stamp duties were however continued, but only as a temporary expedient, and yielded a moderately large revenue.
—In the following year, when the relations between France and the United States were far from friendly, in order to put the country in a state of defense, a direct tax of $2,000,000, the first of its kind, was apportioned among the states. It was proposed that this tax should be assessed to individuals as follows: 1, on dwelling houses, which were distributed into nine classes according to the value, and taxed uniformly in each class; 2, on slaves, and 3, on lands, to be taxed at such rate ad valorem in each state as, with the sums assessed on houses and slaves, will produce the entire amount of the sums apportioned to the respective states; and, in anticipation of the amount of this tax, the president was authorized to borrow $2,000,000.
—But with the accession of Jefferson to the presidency, an attack was made upon the system of internal taxes, and on his recommendation the act of April 6, 1802, to repeal all internal taxes, was passed, with outstanding, uncollected duties amounting to nearly $700,000. This sacrificed a large portion of the revenues of the government, but from 1802 to 1813 no internal duties on articles grown or manufactured in the United States were imposed. These taxes were to be laid only in the last resort, and were classed with loans, as extraordinary resources, and during that interval when a larger revenue was needed, the duties on imports were increased. In 1808, when a war cloud was impending, Gallatin wrote that no internal taxes, either direct or indirect, were contemplated, even in the case of hostilities carried on against two great belligerent powers; and he only expressed the general feeling of the people, who were strongly prejudiced against internal duties.
—This early attempt to impose internal duties has thus been dwelt upon at length because it served as a model for later systems. The opposition that it engendered was not due so much to the taxes laid, for there could be no doubt that most of the subjects were eminently titled for taxation, as on account of a strong prejudice against the method of collecting. In order to prevent fraud and evasion of excises, a body of officials must be kept up, with powers of entering and searching the houses of those who deal in excisable commodities. The tax gatherer comes into direct contact with the tax payer, and in the strict performance of his duty creates a strong prejudice against himself, and renders himself odious to the people. Jefferson said, in his annual message of 1805, with his customary exaggeration, that the internal taxes covered the land with officers, and opened "our doors to their intrusions, beginning that process of domiciliary vexation, which, once entered, is scarcely to be restrained from reaching successively every article of produce and property." Herein is shown the true ground of popular dislike to internal or excise duties.
—The existing revenues of the national government were wholly inadequate to meet the increased expenditure occasioned by the war of 1812, and in order to meet the deficits of 1812 and 1813 recourse was had to loans and issue of treasury notes. But it was soon seen that the revenues, including these loans, would not prove sufficient, and early in 1813 the foundation of a system of internal revenue was laid, by imposing those taxes which had been recommended by the experience of a former period, and which included a direct tax as well as excises. Again were these taxes, known as "war taxes," regarded as temporary, and their operation was to cease one year after the termination of the war; but with the exception of the tax on refined sugar, and the stamp duties on bank notes, bills of exchange, and other notes, they were afterward extended and pledged to the payment of the interest and principal of the national debt, or until they might be replaced by other taxes equally productive. All of the old taxes were imposed, excepting a tax per gallon on distilled spirits, which was replaced by a license tax to distillers. It was estimated that these taxes would produce a revenue of $3,500,000 annually, but this could not be had until the year following the passage of the act, and the inconvenience thus occasioned was commented upon by the secretary of the treasury in his report for 1815. "It may, perhaps, be considered as a subject for regret, and it certainly furnishes a lesson of practical policy, that there existed no system by which the internal resources of the country could be brought at once into action, when the resources of its external commerce became incompetent to answer the exigencies of the time. The existence of such a system would probably have invigorated the early movements of the war; might have preserved the public credit unimpaired; and would have rendered the pecuniary contributions of the people more equal as well as more effective. But, owing to the want of such a system, a sudden and almost exclusive resort to the public credit was necessarily adopted, as the chief instrument of finance. The nature of the instrument employed was soon developed; and it was found that public credit could only be durably maintained upon the broad foundations of public revenue." But in spite of loans and taxes the public revenues were not adequate, and in the middle of 1814 the national government found itself seriously embarrassed, a situation which was rendered more precarious by a decrease, due to the war, in the product of duties, and by a sudden suspension of specie payments by the banks throughout the country, which was followed by all the evils of a variable currency. A special session of congress was called, and further loans authorized; the annual direct tax was doubled, and its operation extended to the District of Columbia; the duties on carriages, auctions, licenses and the rates of postage were increased; new taxes were imposed, and for the first time in the history of the nation taxes were laid upon domestic manufactures other than spirits, snuff and sugar. Specific taxes were laid on iron and candles; and ad valorem taxes on hats and caps, umbrellas, playing cards, leather and plate, beer, ale, harness and boots. Household furniture was taxed according to its value, and gold and silver watches paid duties. The necessity of the treasury being pressing, a loan was raised on the pledge of the direct tax and the excises on distilled spirits. With the return of peace steps were at once taken to revise the existing taxes. In 1821 the estimated deficiency, due in great part to unliquidated war claims, was only $3,500,000; and as the revenues were $4,000,000 in excess of the requirements of the government in a time of peace, it was thought that the country should not be burdened any longer than was absolutely necessary with war taxes. In 1816 the direct tax was reduced one-half, and in the following year every internal tax was repealed. From 1818 to 1861 no direct tax of any kind, duties of excise, or other internal tax, was in operation in the United States. Though it was at times proposed to lay such taxes, it was never actually done, and whatever resources were required were obtained by modifying the tariff, customs and land sales forming the permanent sources of revenue.
—Not until 1861 was an elaborate system of internal revenue imposed upon the country, for the two attempts we have just described were remarkably simple and included few articles. And again was a recourse to internal taxes an outcome of necessity, and was regarded as a temporary measure. With the outbreak of the rebellion, and the various expedients then taken to raise the necessary revenues, we enter upon one of the most curious, vast and complex experiments in taxation ever attempted, and one so burdensome in its results as to afford a most striking proof of the wonderful elasticity and vigor of the national resources, because it caused no permanent injury to the productive capacity of the nation. An enormous debt was created in a very few years, and its creation was accompanied by heroic measures to extinguish it. Loans, customs and internal taxes were made use of to an extent hitherto unknown in this or any other country, and this too while the country was engaged in a long and exhausting war. Internal taxes had remained unused for nearly half a century, and were known to the people only by tradition; in the changed conditions of the country there was little in past experience that could serve as a guide, and there was no opportunity afforded to study the systems of other countries; there was no existing machinery for assessing and collecting such taxes; and finally, in the excited condition of public opinion it was uncertain how such a system, if imposed, would be endured by the people, for it was feared that such a measure would only alienate from their allegiance to the central government the people of some states up to that time loyal. The first movements were made cautiously and tentatively. Money was required to carry on the operations of government and to support the charges of the war, but it was a very delicate matter to decide in what manner this money should be raised, for never before had the country stood in need of such resources. In the first years of the war almost entire reliance was placed upon loans to supply extraordinary demands, and it was not until 1863 that internal taxes were recognized as an essential part of the settled revenue policy of the government. But even before that year it had been clearly seen that some great alternations in the sources of government revenue were required. Import duties were largely increased, heavy loans authorized, and the "act to provide increased revenue from imports, to pay the interest on the public debt" included sections which contained the germs of the present internal revenue system. It provided for an annual direct tax of $20,000,000, to be apportioned among the states—a tax which was assessed and collected only in the first year after the passage of the act—and also for a tax of 3 per cent. upon the excess of all incomes over $800. It is a curious fact that these provisions should have been attached to an act providing in its title for an increase of customs duties only, and it can only he explained by supposing that it was from doubt on the manner in which a direct tax or an income tax as separate measures would be received, or to avoid any disputes on the income tax, that being essentially a direct tax, and would, under the constitution, have to be apportioned among the states as there directed. However, this incongruous measure was passed, but its practical enforcement was postponed until the following year, and it was seriously expected to employ state machinery in its collection, in this way avoiding any contact between a tax collector of the national government and the tax payer. The demands of the government rapidly increased, and it was soon seen that no half measures would prove sufficient. The act known as the internal revenue law was passed July 1, 1862, which is a complete code of taxation, and one of the most extraordinary which any country has ever seen. Under this law was organized the bureau of internal revenue, and provision was made for the machinery necessary to collect the taxes imposed by the act. To show the general scope of this law, it may be stated that it provided for taxation upon trades and occupations; upon sales, gross receipts and dividends; upon incomes of individuals, firms and corporations; taxes upon specific articles not consumed in the use; stamp duties; taxes upon various classes of manufactures; as well as taxation upon legacies, distributive shares and successions.
—The extent to which taxation was carried under this and subsequent acts can not be better expressed than by the words of Sydney Smith written forty years before. "Taxes upon every article which enters into the mouth, or covers the back, or is placed under the foot; taxes upon everything that is pleasant to see, hear, feel, smell, or taste; taxes upon warmth, light and locomotion; taxes on everything on earth, and the waters under the earth; on everything that comes from abroad, or is grown at home, taxes on raw material; taxes on every fresh value that is added to it by the industry of man; taxes on the sauce which pampers man's appetite, and the drug which restores him to health; on the ermine which decorates the judge, and the rope which hangs the criminal; on the poor man's salt, and the rich man's spice; on the brass nails of the coffin, and the ribands of the bride: at bed or board, couchant and levant, we must pay." This is no exaggeration of the system imposed by the act of 1862.
—In other countries the systems of excises and internal taxes have usually been the product of long experience, and have been frequently modified so as to be adapted to the economic condition of the country, its population and material prosperity. Being moreover of slow growth and of long standing, and, generally speaking, subject not to violent alteration but to gradual modification, they fall more equally upon the people, and are less burdensome than would be an entirely new system, ill-adapted to the condition of the people, and subject to frequent and violent alterations. For time is required to allow the conditions of an industry or occupation to adapt themselves to a tax; and in time it is the tendency of a tax to diffuse itself, and to bear with less weight upon the commodity or person primarily taxed. But at the time of the passage of the internal revenue law the necessities of the government were so pressing that no regard was paid to any of the principles of taxation, to the experience of other nations, or to the conditions of trade and industry and their consequent ability to bear a tax; and there is no knowledge of economic doctrines displayed in the debates in congress upon this and subsequent measures. The country, from being very lightly taxed, passed at once under a system of excessive and burdensome taxation. Processes were taxed as well as products of industry, taxes were laid upon all labor, upon all tools by which work was to be done, and upon all classes and conditions of men. Every branch of trade and industry, every kind of manufacture, raw materials and net results, alike bore the burden of taxation. "No other nation," said the London "Economist," "would have endured a system of excise duties so searching, so effective, so troublesome." System there was none. "The one necessity of the situation," writes Mr. Wells, "was revenue, and to obtain it speedily and in large amounts through taxation, the only principle recognized—if it can be called a principle—was akin to that recommended to the traditionary Irishman on his visit to Donnybrook Fair, 'wherever you see a head, hit it.' Wherever you find an article, a product, a trade, a profession, or a source of income, tax it!"
—A system of taxation so comprehensive and minute in its details, in which the exemption of any article from taxation was the exception rather than the rule, imposed with so little thought and discrimination, was naturally found to be unsuitable in many particulars to its purpose, and was subject to frequent alterations and modifications. At least one revenue bill was passed at every session of congress, and within the period 1861-7 more than twenty-five such bills became laws. The pendency of such a measure furnished frequent opportunities for numerous amendments, some of them not important in themselves, but by changing the language, rendered valueless many precedents and regulations of the bureau and well-considered decisions of the courts. For the first years after the passage of the internal revenue law the action of congress was directed to its increase, and new objects of taxation and additional sources of revenue were sought for; and not until the close of the war was there any movement looking to its decrease.
—These many changes in the internal revenue laws naturally produced great uncertainty in their application, and consequent injury to trade and industry, confusion in the revenues, and inequality of taxation, for an uncertain or arbitrary tax is an unequal tax. So that it was impossible to estimate with even a near approach to truth what these taxes would yield. Nor was there any stock of economic knowledge or accumulated experience to assist in framing such estimates. And in support of this statement the following incident may be noted. Secretary Chase, in his report for 1863, states that, with a view of determining his resources, he employed a very competent person, with the aid of practical men, to estimate the probable amount of revenue to be derived from each department of internal taxation for the previous year (1862). The estimate arrived at was $85,000,000, but the actual receipts were only $37,000,000.
—Among the effects of the practical application of this law may be mentioned the following: 1. Many industries found themselves too heavily burdened by the taxes imposed upon them, and were forced to choose between the alternative of producing at a loss, or of ceasing to produce. While the instances are few in which trades were actually taxed out of existence (for an example see article DISTILLED SPIRITS in this work), yet owing to the effects of the war, and the alterations in customs duties and internal taxes, the conditions of production were disturbed, and every branch of trade and industry was to some extent affected. In many branches there was a forced reduction in the production of from 30 to 75 per cent. One of the first recommendations of the revenue commission in 1866 was to entirely exempt the manufacturing industry of the United States from all direct taxation (distilled and fermented liquors, tobacco and possibly a few other articles, excepted). 2. Duplication of taxes. In imposing a general excise tax upon all manufactures, it necessarily entailed a system of duplication of taxes, for the finished product of one manufacture is the raw material of another, and is almost always itself an aggregate of several distinct and separate manufacturing processes. Some examples of this duplication of taxes may be cited. "It was formerly the practice of umbrella makers to manufacture the main constituents of their product as one business; but now the business of an umbrella manufacturer is rather to assemble the various constituents of an umbrella or parasol, which are made separately, and in different parts of the country. Thus, for example, the sticks, when of wood, are made in Philadelphia and in Connecticut, part of native and part of foreign wood, on which last a duty may have been paid. If the supporting rod is of iron or steel, it is the product of still another establishment. In like manner the handles of carved wood, bone or ivory, the brass runners, the tips, the elastic band, the rubber of which the band is composed, the silk tassels, the buttons, and the cover of silk gingham or alpaca, are all distinct products of manufacture; and each of these constituents, if of domestic production, pays a tax, when sold, of 6 per cent. ad valorem, or its equivalent. The umbrella manufacturer now aggregates all these constituent parts, previously taxed, into a finished product, and then pays 6 per cent. on the whole." And another example is found in the manufacture of books. Every separate item which entered into this manufacture—paper, cloth, boards, glue, thread, gold leaf, leather, and type material—paid from 3 to 6 per cent. in the first instance, and then 5 per cent. on the whole combined; and this not on the cost, but on the selling price. So that the finished book, and its constituent materials paid from twelve to fifteen distinct taxes before they reached the reader. This recalls what was said of Amsterdam, that in that city a dish of fish with its sauce, before it was served up to the table, paid excise "thirty several times." 3. As every tax is so much added to the cost of production, the cost to the consumer was greatly enhanced by this load of taxation, and to this is in part due the great rise in prices; for the government actually levied and collected from 8 to 15, and in some instances as much as 20, per cent., on the finished industrial product. 4. The frequent changes in the taxes created a spirit of speculation, and rendered uncertain the revenue from those sources to which these changes applied. On July 1, 1864, when the advance in the tax on distilled spirits, of from sixty cents to one dollar and fifty cents per gallon, took effect, there were in store, in anticipation of this advance, at least forty millions of gallons, or a quantity that was believed to be sufficient to supply the wants of the country for at least a year in advance. From July 1, 1864, to the time of the first report of the commission, the receipts of the government from distilled spirits were, from this cause, necessarily inconsiderable. Of cigars, in like manner, it was estimated that from seventy to eighty millions were manufactured and stored in the city of New York alone, in anticipation of the tax, while in the case of the insignificant article of matches, on which the tax was only one cent per bunch, the stock accumulated in anticipation of the tax was so large that it had not been entirely exhausted by January, 1866. So that from August, 1864, the date at which the match stamp tax was introduced, to January, 1866, the government failed to derive its legitimate revenue from that source. These variations in the taxes and their effects upon production, naturally disturbed and rendered uncertain the amount of revenue to be derived from each particular source. This will be made clear by a reference to the following table, which shows the collections in the same month for three years, the differences being caused by alterations in the tax law:
The table shows how uneven the production of taxable articles was; of some the production was stimulated, while of others it was retarded or perhaps altogether destroyed. 5. The vast system of internal revenue was imposed without reference to the existing tariff, or to the conditions imposed by the treaty of reciprocity with Canada, which was to expire in 1866. There was no equalization or adjustment between the tariff and internal taxes, and this resulted in frequent discriminations against the American producer and in favor of his foreign competitor. "In the case of the umbrella manufacture, the cover, as a constituent element of construction, represents from one-half to two-thirds the entire cost of the finished article. The silk, the alpaca, and the Scotch gingham, of which the covers are made, are all imported; the former paying a duty of 60 per cent., and the latter two about 50 per cent. ad valorem. The manufactured umbrella, covered with the same material, whose constituent parts are not taxed, either on the material used in their fabrication or on their sale, is, however, admitted under the present  tariff at a duty of 35 per cent. ad valorem, or at a discriminating duty, against the American and in favor of the foreign producer, of from 15 to 25 per cent. If we make allowance for the various United States internal revenue taxes, it is claimed by the American manufacturers that the discrimination in favor of the foreign producer is fully equal to 40 per cent." Other examples could readily be given. Under the reciprocity treaty the products of American industry subject to high rates of excise were injuriously brought into competition with similar products of provincial industry, which were subjected to little or no excise, and then admitted into the United States free of duty.
—In treating of the effects produced by the actual operation of this measure, no attempt has been made to maintain a chronological order, for in some cases the ultimate effects of a tax would not appear until the lapse of a certain length of time.
—Yet owing to the enthusiasm and patriotism of the people this system was cheerfully welcomed and endured by them, and was successful in its main object. The revenues collected under it have never since been equaled, and judged from this standpoint it was most effective. Yet a more burdensome and diffuse system could hardly have been framed, as a simple calculation will show. In an early report Secretary Chase estimated that the internal revenue system would produce $50,000,000, and he thought that this sum was equal to about one-sixth of the surplus earnings of the country. In 1869 the special commissioner of the revenue made an extensive examination of the wealth and resources of the country, and was led to the conclusion that the annual increase of active capital in the United States, arising from the excess of production over expenditure, could not at that time be considered as in excess of 8 per cent. of the gross annual product, or $546,000,000 per annum. The collections from internal taxes, which were in 1863 but $43,000,000, rose rapidly to $117,000,000 in 1864, $211,000,000 in 1865, and culminated in 1866 with the enormous sum of $310,000,000; this last sum being equal to nearly 57 per cent. of the actual annual surplus wealth of the nation. Yet a large portion of the taxable property in this country escaped its proper charges through fraud or an imperfect administration of the laws. Under a perfect administration the revenues would have been much greater; for at that time the sources of national revenue were commensurate and co-extensive with every department or subdepartment of trade or industry in the country, as well as every form of fixed or circulating capital. For the purpose of placing in a clear light the burden of taxation, attention may be called to the following table, which shows the amount per capita, collected by various forms of direct and indirect taxation in the United States for 1865-6, and in several of the leading states of Europe for the year 1865, (the revenues from the public or crown lands, postoffice receipts, and colonial subsidies, being excluded from the estimate); also the amount of the public debt in the same countries per capita:
Nor, generally speaking, were manufactures at all depressed by this enormous burden of taxation. On the contrary, owing to the demand for most manufactured and agricultural products, and the great rise in the prices of commodities, the profits of the producer were actually enhanced by reason of the taxes to an extent considerably greater than they would have been had no taxes whatever been collected. Thus, in the case of distilled spirits, the advances in the tax were foreseen, and large quantities were manufactured before the increased tax took effect, in order to be sold at the higher price which followed the imposition of a higher tax. "In the case of raw cotton, which advanced mainly through conditions affecting its production or distribution, it was shown by actual calculation, in respect to one manufacturing corporation in New England, that if they had at the commencement of the war burnt their mills, lost their insurance, and sunk their capital, other than what was invested in cotton, and had subsequently sold their cotton at the highest prices obtainable, in place of manufacturing it, the result would have afforded to the stockholders a permanent annuity of at least 12 per cent. on their original investments."
—Mr. Mill admits that a tax upon profits may give a stimulus to inventions, and the use of them when made. This may produce a cheapening in the products of manufactures and so raise profits to such an extent as to make up for all that is taken from them by the tax. This seems to have been the condition of the United States, for it is known that few industries were permanently injured by the taxes, so great are the natural advantages and productive capacity of the country. The rapid increase of population, the great progress of agriculture and manufactures (though accompanied by no corresponding increase of commerce), and the large number of expensive undertakings entered upon with a return of peace, showed beyond question the resources of the country. In fact, the conclusion of Mr. J. R. M'Culloch in regard to the continental wars, 1775-1812, might almost be accepted as applicable to the condition of affairs at that time: "An increase of taxation has the same influence over nations that an increase of their families or of their unavoidable expenses has over individuals. The constantly increasing pressure of taxation during the American war, and the war begun in 1793, was felt by all classes, and gave a spur to industry, enterprise and invention, and generated a spirit of economy, which we should have in vain attempted to excite by any less powerful means. * * Man is not influenced solely by hope; he is also powerfully influenced by fear. Taxation brings the latter principle into the field."
—We have no more space for examining further into this most interesting chapter of the financial experience of this country, nor can we trace its ultimate effects upon prices, upon production and consumption, and upon foreign commerce. With the close of the war a reduction in taxation was demanded by the people, and was soon effected. Between Sept. 1, 1865, and July 1, 1869, taxes yielding, in the aggregate, upward of $200,000,000 per annum were abated or relinquished, chiefly on the recommendations of the revenue commissioner. When Mr. Fessenden assumed the office of secretary of the treasury in 1864, recognizing the incongruity and burdensome nature of the tax system, one of his first recommendations to congress was the formation of a commission to inquire into the most profitable sources of revenue, and to devise improvements in the modes of its collection; but his recommendation was not at that time adopted. In his annual report for that year he again returned to the subject, and in March, 1865, such a commission was appointed, and included David A. Wells, Stephen Colwell and S. S. Hayes. The creation of this commission was the first practical movement toward a careful examination of the business and resources of the country, with a view to the adoption of a judicious revenue system. The commission made a report in 1865-6, and as it showed how necessary such an examination had become, in 1866 the office of special commissioner of the revenue was created, to continue the labors of the commission, and Mr. David A. Wells was appointed to the office. It is in the reports of this able economist that we find the best and most thorough examination of the revenue system of the government, and we have depended chiefly upon them for our information on the practical effects of the act of 1862. The office was discontinued in 1870.
—Large reductions were made by the statutes of July 13 1866, ($63,000,000); March 2, 1867, ($40,000,000). Feb. 3, 1868, ($23,000,000); and March 31, and July 20, 1868. Under the act of March, 1868, which took off taxes from all manufactures of the country other than distilled spirits, fermented liquors and tobacco, no reduction in the prices of commodities followed, as would naturally be looked for. As it was an unexpected measure, it was thought to be but a temporary measure, to be soon replaced by other taxes; so that producers made no reduction in their prices. Many of the taxes had become unproductive, and hardly figured in the returns; for in 1869 upward of 90 per cent. of the internal revenue was collected from a few objects and sources, all of which might be classed as luxuries, or as the accumulated wealth of the country. The act of June, 1872, made important reductions by repealing the taxes on incomes, and gas, and abolishing all stamp taxes under schedule B (1864) except that of two cents on bank checks, drafts or orders.
—The effect of this great reduction of taxation, accomplished in so short a period and with as little discrimination as was used in imposing these taxes, must have had some effect upon the industries of the country which had accommodated themselves to the burdens imposed upon them, though it would be difficult to determine to how great an extent they were injured or benefited. The theory has been advanced by a competent authority, Mr. Abram S. Hewitt, that the revulsion of 1873 was in great part due to this reduction of taxes. This could, however, have been but one out of many causes, and it would be a mistake to insist too strongly upon this as an active cause.
—The sources of internal revenue were now nearly reduced to what they are at the present day; so that a large number of intermediate measures, either reducing or abolishing taxes, regulating the machinery of collection, or providing against fraud, may be passed by. Nor need anything be said of the system of informers and spies, or of the great frauds perpetrated upon the government.
—The receipts for the fiscal year ending June 30, 1881, under internal revenue laws, were drawn from the following sources:
Thus it may easily be seen that the most objectionable features of the system have been gradually removed, and the taxes now included in it are such as weigh but lightly on the industry of the country, and for the most part fall ultimately upon those who of their own free will pay them. But as the revenues of the government are at the present time far in excess of its legitimate needs, justice and public policy alike demand a still further reduction. The stamp tax on matches, though small in amount and easily collected, is a very unequal tax, and on that ground should be condemned; the tax upon bankers and banks might be reduced or repealed, for the circumstances that existed when the tax was first imposed, and which rendered it a comparatively light tax, have changed, and it is claimed that the tax has now become very burdensome. In fact, the internal revenue taxes could be reduced to those on spirits, tobacco and fermented liquors, and the rates on these commodities could even be reduced. But no other changes could be defended on grounds of public policy or of sound economy. The cost of collection was for the year 1881 but 3.64 per cent. upon the amount collected.
—Yet a movement looking toward the repeal of the whole system of internal taxation has found great favor among the leaders of the protectionist party, for it would of necessity require a continuance of the present tariff. It is difficult to speak of such a proposition with any moderation. The objections that were urged against internal taxes in the last century will not apply at the present time, for the country is well advanced in wealth and material prosperity, and can easily bear such taxation. Moreover, as we have said, the present system of internal taxes falls, with some exceptions, only upon such articles of voluntary consumption as may be dispensed with and may be taken in excess, and therefore fulfills in the highest degree the requirements of just taxation. While valid objections may be urged against the stamp taxes and those on bankers and banks, no reason that will bear examination can be found for taking off the excises on tobacco and distilled spirits. To maintain that these last named taxes fall chiefly upon the poor affords no sound plea for their repeal. That the necessaries of life consumed by the poor should remain untaxed, is in accordance with the demands of humanity and sound economic doctrine, and on this ground the tariff needs revision. But when a man spends a part of his income on indulgences, as spirits and tobacco confessedly are, it is fit and proper that he be taxed; for the lower strata of society escape most other forms of taxation, and it is through indirect taxes alone that they may be reached and made to pay their quota to the expenses of the state; and there is no more just method of doing this than by taxes on their indulgences. In fact, the objections urged against the internal revenue system of the country are rather of a sentimental character, and are not based upon a careful survey of the resources of the country, the incidence of taxation, and the most fitting objects of taxation; and the various schemes looking to "free whisky and free tobacco" belong more to the doctrines of demagogues than to the principles of true statesmanship. They are vulgar appeals to the uneducated masses who do not know their own interests, and are thus misled into indorsing a scheme that will only serve to fasten upon the country a system of taxation by customs duties that is far more onerous and inequitable, and therefore more indefeasible, than the taxes now imposed as internal taxes.
—Following we give a table of receipts of the United States from internal revenue from March 4, 1792, to June 30, 1881, (by calendar years to 1843, and by fiscal years from that time):
In the intermediate years some outstanding amounts were collected, but they are not of sufficient importance to be given in this place. The total amount derived from internal revenue since the formation of the government is $2,807,357,366.28.
—AUTHORITIES. Reports of the Secretary of the Treasury and the Commissioner of Internal Revenue; Report of the Revenue Commission and of the Special Commissioner of the Revenue, David A. Wells, in the Cobden Club Essays; and also his article on DISTILLED SPIRITS in this work. Compilations of the revenue laws have from time to time been issued by the government. A great mass of information is contained in the Internal Revenue Record. (See
WORTHINGTON C. FORD.
Notes for this chapter
What good use was made of this alternative is shown by what Gallatin wrote in 1801; that, owing to improved methods of manufacture, distilleries had reduced the tax to three cents per gallon, and in a short time, by further improvements, would reduce it to three-fifths of one cent per gallon.
End of Notes
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