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. 等

ABSTRACT

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.

INTRODUCTION

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.

The income tax regulations in the 1862 law were revised to include the concept of "ability to pay." This was the first situation where progressive tax rates were employed by the Federal government. Personal incomes from $600 to $10,000 were taxed at the prior year's 3% rate. For taxpayers with incomes in excess of $10,000, the tax rate increased to 5% (Ibid). A rate of 7-1/2 % was initially included in the bill but was removed because many in Congress felt that rate to be excessive (Hill, 1894). Taxpayers were given a $600 standard deduction, which eliminated income tax for the typical laborer.

An additional feature of the 1862, and later the 1864 act, was based on the principle of "stoppage at the source." This new concept required employers to regularly withhold income taxes from employees who had income in excess of $600 per year. This concept was also extended to the payers of interest and dividends. By using this technique, the government was able to quickly extract taxes from the general public for use in the war effort. The 1862 act created the Office of the Commissioner of Internal Revenue in the Treasury Department (Parnell, 1980). This created the original organizational structure for our current Internal Revenue Service.

An interesting feature of the 1862 act was that income was calculated based on the calendar year. Initially the assessment was due by May 1st of the following year with payment due on or before June 30th (Hill, 1894). This created a significant problem for the government due to the amount of lag time before the taxpayers paid taxes. It was not until the Act of 1867 that assessments were due March 1st with payments expected on or before April 30th. During the Civil War period when funds were desperately needed for the war effort, it was poor administration to delay collections for such a lengthy period.

Another major problem resulting from this new form of taxation was the difficulty of determining the actual income of the taxpayer. The assessor and collector relied on taxpayer's written lists or returns, which would have been extremely difficult to verify and audit. If a taxpayer refused to make a list or return, the assessor was required to prepare one "according to the best information based on an examination of such person or his books or accounts or any other evidence" (Ibid). This process required the assessors to play the role of private investigator. A 50% penalty was assessed to any taxpayer who refused to prepare a list or return. If a fraudulent return was proven, the penalty increased to 100% of the tax due thereby doubling the tax liability (Ibid).

The 1862 revenue act created a foundation for additional legislation that would soon follow in 1864. During the first full year of collections under the 1862 law, about twenty million dollars of income taxes were raised. This, however, was less than the thirty million dollars collected as excise taxes on distilled spirits (Hill, 1894).

The most significant piece of income taxation during the Civil War was the National Tax Law approved on June 30, 1864. This legislation will be reviewed in detail and compared to the Confederate version enacted on April 24, 1863. Each of these tax laws contains major proposals intended to raise significant amounts of money for the war effort. At this point in the war, both sides realized the huge costs of funding their respective armies as they moved great distances across the country.

The 126 page National Tax Law included much more than an income tax. Its basic components, in addition to the income tax, included the following:

1. Taxes on Spirits, Ale, Beer, and Porter

2. License Fees for All Professions

3. Duties on Manufacturers and Products

4. Legacies and Distributive Shares Tax (An estate tax)

5. Stamp Duties (On a wide variety of products).

The Confederacy enacted their first tax legislation in 1861. It was simply a minor tariff act that raised only $3.5 million dollars over four years (Tax.org, 2000). Later that year, a small direct tax of 1/2% was introduced on real and personal property. The majority of funds raised by the Confederacy were through the issuance of bonds. A $15 million dollar bond issue sold out quickly the same year. However, a later $100 million dollar issue sold very slowly causing cash flow problems as the Confederacy increased its military operations.

During the first year of the war, the Confederate government raised only 2% of its revenues through taxes. The vast majority of funds were generated through the issuance of treasury notes (75%) and bonds (23%) (Ibid.). The Confederacy issued over $1.5 billion in paper money, which tended to depreciate quickly. At the same time, all of the southern states issued state, county, and city notes. These bills were often poorly printed and served to encourage counterfeiting. The extensive use of paper money, instead of internal taxation of the citizens, caused inflation that exceeded 9000% in the South by the end of the war (Ibid.)

By the beginning of 1863, the Confederate government realized that a major piece of tax legislation was required. Therefore, on April 24th, the act to "lay taxes for the common defense and carry on the Government of the Confederate States" was enacted. This was an extremely comprehensive package, which included an income tax, a business inventory tax, excise and license duties, taxes on wholesalers and retailers, and a tax-in-kind that applied to numerous agricultural products. The delay in the enactment of this type of revenue producing legislation negatively affected the ability of the Confederacy to promptly raise needed funds for military operations.

OVERVIEW OF UNION AND CONFEDERATE TAX LEGISLATION

The comparison of the Union and Confederate tax legislation will be completed utilizing a number of perspectives. First, a review of the basic requirements of each law will be completed. Second, details related to the individual income tax will be reviewed. Finally, the Confederate taxes-in-kind program will be studied. This unique type of tax was logical for the primarily agriculturally oriented South.

The appendix of this paper includes tables, which compare numerous tax regulations of each system. References included in this paper relate to the coding system found at the end of each table. In most cases, the section number of each piece of tax legislation serves as the supporting reference. As far as general tax information is concerned, the first consideration is to whom the tax applied.

The Union act applied to "individuals, partnerships, firms, associations, and corporations" (Sec. 11). The Confederate plan was also extensive as it related to "every person, co-partnership, association or corporation" (TB Sec.1). The Union tax legislation was enacted to continue through 1870 (Sec. 119), while the Confederate law was only effective through 1865 (unless repealed sooner) (Sec. 18). Both versions of the tax legislation were enacted with a very short life expectancy. The Union and Confederate tax acts both included penalties for false returns. Similar to the negligence and fraud penalties that exist today, these laws contained very severe repercussions for violations. The Union plan imposed fines of up to $1,000 or imprisonment up to one year, or both (Sec. 15). The Confederate system stated if it is found "that the statement of estimate of income and profits rendered by the taxpayer does not contain more than 4/5 of the true and real amount of his taxable income and profits" the taxpayer can be liable for taxes due plus a penalty of an additional 10% (Sec. 8).

Each side also included penalties for nonpayment of tax. The Union act required a 10% additional tax penalty if the payment was from one to ten days late. The penalty increased after ten days as the tax collector charged a twenty-cent issue fee plus mileage of four cents per mile to the taxpayer's location in an attempt to settle the debt. The collector was a government agent who actually received the tax dollars and deposited them to the taxpayer's account with the government. The collector, within twenty days after receiving the annual collection list from the assessors, had to "give notice, by advertisement published in each county in his collection district in one newspaper printed in that county and in at least four public places in each county of the unpaid tax of each delinquent taxpayer" (Sec. 28). After an additional ten days, if the tax remained unpaid, the collector had the right to "seize property and sell the goods, chattels, or effects of the persons" owing the tax (Ibid.).

The Confederate legislation was evidently patterned after the Union act because it also included an additional 10% penalty for taxes paid after the due date. Within twenty days the collector was to inform individual taxpayers of their disregard to pay taxes. After an additional ten days, the collector for the Confederacy also had the right to seize property and sell it to pay the tax (AA Sec. 16). Both sides attempted to collect taxes due within a fairly short time utilizing the threat that the taxpayer's property could be seized and sold to make the required payment.

If personal property was sold at auction to pay the tax, both Union and Confederate acts utilized a similar procedure. The Union plan allowed the government to keep all proceeds that "cover the tax due, necessary and reasonable expenses of sale, and a 5% commission" (Sec. 28). Any additional amount raised above this figure was returned to the owner of the property. The Union legislation exempted the following property similar to the concept of a standard deduction today. The exempt property of the taxpayer included " tools of the trade, one cow, arms and provisions, household furniture and apparel for the family" (Ibid.). This, in effect, functioned as a list of assets necessary to provide the taxpayer and his family with the necessities of life.

The Confederate tax law also allowed the government to keep all proceeds to cover the tax due, necessary and reasonable expenses of sale, and a 5% commission. Any additional funds raised, similar to the Union plan, were returned to the taxpayer (AA Sec. 16). In many situations, the sale of personal property was not sufficient to eliminate the taxpayer's balance due, so the assets seized and sold next included pieces of real estate.

Both Union and Confederate laws allowed for the sale of real property if the taxpayer did not own sufficient personal property to eliminate the tax deficiency. The Union act allowed the government to sell the real property and keep funds equal to taxes due plus a 10% penalty and an officer's fee of $10. The Confederate system allowed an amount equal to the tax due plus an additional 20% penalty.

In the event that a taxpayer lost land and buildings in a tax sale, both plans allowed for the repurchase of the property within a limited time period. The Union plan permitted the taxpayer to redeem the land within one year of the tax sale. The price equaled the cost paid by the purchaser plus 20% interest (Sec.30). The Confederate plan called for the same 20% interest payment but allowed for a redemption period of two years following the date of the tax sale (AA Sec. 19). In effect, both governments considered the temporary financial situation of the taxpayer and allowed for redemption of property sold for taxes within a reasonable period of time.

Section 118 of the Union legislation described the "duty" of the taxpayers to make a "list or return under oath or affirmation" of the amount of his or her income. This list or return was sent to the assessor or assistant assessor in the area. Taxpayers were allowed, under oath or affirmation, to report to assessors that their income was less than $600 annually. These individuals would then be exempt from income duty. This section also provided for the appeal of a tax due decision made by the assistant assessor. The taxpayer would then present their case to the assessor in the district whose decision would be final. This is similar to the system employed today with taxpayers appealing from local to district IRS offices in an effort to resolve a tax dispute.

Both North and South utilized the positions of assessor and collector in the tax administration process. The taxpayer would self-report income or asset values and the assessor would calculate the amount of tax due. Thereafter, citizens would actually make payment of the tax due to the collector. This system was intended to separate the function of establishing the amount of the tax (authorization) and collecting the tax (custody). The actual summarization of income earned or assets owned (recordkeeping) was completed by the taxpayer. In effect, the basic internal control concept of segregation of duties was accomplished utilizing this procedure.

Finally, the last general topic relates to the filing date of the returns. Under the Union legislation, tax returns had to be filed on or before the first Monday of May following the end of the tax year (Sec. 11). Under the Confederate version, income and profits from the previous year were to be assessed and ascertained as of January 1st starting in 1864. Payment of tax was expected on that date. It is clear that the Confederate government was in desperate need of funds and attempted to collect revenues as soon as possible. The Union, on the other hand, did not require a filing and payment until four months later.

The items discussed above provide the reader with an overview of both tax systems. It is interesting to note that many aspects of the Union and Confederate plans are nearly similar. Many of the details found in the Union 1862 tax act are reflected in the system proposed by the Confederacy in 1863. It appears that, rather than reinventing a complete tax system, the south assumed a tax policy that appeared to be working well for the enemy. The next portion of this paper reviews specific details of income tax legislation.

INDIVIDUAL INCOME TAX REGULATIONS

Both sides realized that duties and property taxes would not raise sufficient funds to finance the war effort. Therefore, the income tax became the "innovative" tax of the Civil War. This tax was applied by the Union to "all individuals residing in the United States or any citizens of the United States living abroad" (Sec. 116). This is similar to our current tax structure where U.S. citizens are taxed on their worldwide income regardless of their current residence. The Confederate income tax applied to "the income and profits derived by each person, joint stock company and corporation, employment or business whether registered or not" (Sec. 7). This very comprehensive statement was clearly meant to apply the income tax to all forms of business entities.

Both tax plans provided certain exemptions to the taxpayer. For example, the Union law exempted any taxpayer making less than $600 per year (Sec. 118). This included the vast majority of taxpayers during the Civil War period. Tax was due from only wealthy individuals who were typically professionals or officers in the military. Sec. 118 also exempted a taxpayer who had paid the tax due in another state or county prior to moving to his current location.

The Confederate system was more complicated. It was based upon exemptions for both income and property owned. For example, "no taxes shall be imposed by virtue of this act on the salary of any person receiving a salary not exceeding one thousand dollars per annum" (TB Sec. 6). The salaries of military and naval personnel were exempt from the income tax regardless of amount. For non-salaried wage earners, incomes not exceeding $500 were exempt. In addition to income considerations, the Confederate system allowed exemptions in its "tax in kind" program that is discussed later in this paper.

Tax rates imposed by both the Union and the Confederacy utilized a progressive structure, which was revolutionary. In earlier years, a flat tax system applied in cases of personal and real property taxes and duties. The Confederacy utilized one tax schedule for salaries and another for other incomes. Salaried taxpayers paid a 1% tax on income up to $1,500 and a 2% tax on salaries exceeding that amount. As mentioned earlier, if the salary was less than $1,000 no tax was due.

The Confederacy utilized another tax table for other sources of income apart from salaries. For other income, an exemption of $500 applied. Incomes in excess of the $500 exemption amount were taxed as follows:

Income Level Tax Rate

$501-$1,500 5%

$1,501-$3,000 5% on first $1,500 and 10% on excess

$3,001-$5,000 10%

$5,001-$10,000 12.5%

$10,001 & Above 15%

This was a very progressive tax rate schedule considering that the citizens had never experienced such a system. This tax table applied to all income other than salaries, rents, manufacturing, and sales of merchandise that utilized other specified rates.

The standard Union tax rate schedule applied to "any kind of property rents, interest, dividends, salaries, and income from any profession, trade, employment, or vocation" (Sec. 116).

The exemption amount was $600. The less progressive tax rate schedule for the Union included the following rates:

Income Level Tax Rate

$601-$5,000 5%

$5,001-$10,000 7.5%

$10,001 & Above 10%

There was a significant difference in the maximum tax rates of the Union and the Confederacy. The South employed a top marginal rate that was 50% above that of the North. With the much larger population, the Union decided to maintain a fairly conservative maximum tax rate. This, no doubt, created fewer complaints by top wage earners in the North compared to those in the South.

Another interesting feature of the income tax regulations is seen in the deductions allowed in the Union legislation. For example, all forms of federal, state, and municipal taxes, except for the Federal income tax, were allowed as deductions against income. The law also exempted salary or pay received for services in the "civil, military, naval, or other services of the United States, including senators, representatives, and delegates in Congress." The reason for this exemption is that Sec. 123 of the legislation requires the U.S. paymaster to withhold taxes when salaries were paid. Taxes were withheld at a rate of 5% on income that exceeded the $600 exemption.

Another deduction was allowed for dividends received from any "bank, trust company, savings institution, insurance, railroad, canal, turnpike, canal navigation, or slack-water company" (Sec. 117). The government encouraged the purchase of stock in these industries by allowing for tax-free dividend receipts. Finally, an exemption was allowed to a taxpayer for the "rent of the homestead used or occupied by himself or his family." This is an unusual feature considering our current system allows no deduction for rental payments. Each of these exemption/deductions was subtracted from total income in order to determine a taxable income figure.

An unusual feature of the Union law is the regulation on gains or losses on the sale of real property held for one year or less. If the real estate was sold at a gain, the taxpayer was required to add this profit to his or her taxable income. In the event of a loss on the sale of the property, a deduction was allowed against taxable income. If the real estate was held for more than one year, neither the gain nor loss on its sale affected the income of the taxpayer (Sec. 116). This provided an incentive for taxpayers to hold land and buildings for more than one year if they were appreciating in value.

The final page of the National Tax Law included Public Resolution No. 59. It was a special income duty that was to be levied, assessed and collected on October 1, 1864 (National Tax Law, 1864). This was in addition to the regular income tax discussed in the 1864 legislation. The special assessment was an additional 5% tax on income in excess of $600 for the previous year 1863. This created a total tax rate of 8% (3% regular rate for 1863 plus 5% special income duty) on incomes between $600 and $10,000. This rate increased to 10% on incomes in excess of $10,000 (5% regular rate for 1863 plus 5% special income duty). The serious need for cash to supply the war effort created a special "double" tax situation.

Both the Union and Confederate legislation incorporated numerous other types of tax in addition to the newly instituted income tax. These included numerous assessments for business licenses, business profits taxes, and duties. Also, the Confederate tax system utilized a special "taxes in kind" program.

CONFEDERATE TAXES IN KIND

Since the southern states were primarily agricultural, it was logical for the Confederate government to realize that cash held by its citizens may not be as abundant as meats, grains, and other crops. For this reason, their tax legislation included a "taxes in kind" program. This allowed residents of the South to pay their taxes in the form of animals and crops raised rather than in cash.

Since many residents had invested much of their cash in bonds, nothing but highly discounted Confederate treasury notes were available for the payment of debts. This tax in kind program, therefore, appeared to be a viable alternative for the government. The Confederate Army had to be fed and this type of tax provided a dependable supply of meats and produce to meet their needs. Section 10 of the tax legislation and an amendment dated December 28, 1863 provided the details of this program. One aspect of the program pertained to the minimal inventory of products that was allowed to each taxpayer to satisfy basic family needs. The law provided for a family reserve of either 50 bushels of sweet potatoes, or 50 bushels of Irish potatoes, or 100 bushels of corn, or 50 bushels of wheat, or 20 bushels of peas or beans. The idea behind this policy was to allow each family enough food so they were not left in a starvation situation.

The amount of "taxes in kind" due to the Confederacy amounted to one-tenth of the farmer's production of each crop or animal raised. The law stated that individuals "must pay and deliver to the government 1/10 of the wheat, corn, oats, rye, buckwheat, rice, sweet or Irish potatoes, or hay and fodder" produced during the year (Sec. 10). In addition, 1/10 of the sugar or molasses made was a required tax when the farmer produced more than 30 gallons. Also, 1/10 of any peas, beans, cotton, wool, and tobacco grown constituted the tax in kind (Ibid.). If a farmer slaughters hogs, the in kind tax was "an equivalent of 1/10 of the cured bacon calculated at the rate of 60 pounds of bacon for each 100 pounds of total pig weight" (Amendment 12/28/1863).

For the most impoverished of farmers, there were a number of exemptions from the tax in kind. This included a $500 net worth limitation (Sec. 10 I). For very small farms where its owner had assets worth less than this exemption amount, no in kind tax was required. This exemption increased by $100 for each minor child that the family head had living with him (Sec. 10 II). The $100 allowance was granted in situations where the family head had either lost or had disabled children due to military service. In situations where the family head was a widow "of any officer, soldier, or seaman", the net worth exemption was increased to $1,000. The intent was to provide some relief to women who now had to operate the farm without their husbands.

Two special exceptions were included in this law. First, if the taxpayer's crop was either "taken or destroyed by the enemy," the district collector made payment for the taxpayer of the tax due. This was included in an amendment dated February 13, 1864 due to many Union campaigns taking place in southern states. Another exception pertained only to 1863 due to the large crop of sweet potatoes. Taxpayers could elect to pay taxes due in cash rather than with 1/10 of their sweet potato crop. In most cases, the Confederate Army needed all types of meats and produce raised, but in this situation soldiers were receiving too may sweet potatoes. This is the only indication of a particular crop that was so abundant that the army could not utilize existing supplies.

With the exception of the Confederate "tax in kind," the income tax provisions of the North and South during the Civil War were very similar. The current income tax system in the United States contains a significant number of regulations that were originally introduced by this Civil War legislation. The final portion of this paper reviews the numerous provisions that continue to fund our governmental operations and the Iraqi war effort in 2005.

INFLUENCE ON THE CURRENT U.S. INCOME TAX SYSTEM

As a conclusion to this paper, the authors want to emphasize how significantly the tax legislation of the 1860's continues to influence our current Internal Revenue Code (IRC). The concepts of income inclusions, exclusions, deductions, penalties, and tax credits have served this country well in raising funds needed to operate the government and finance our current war efforts in Afghanistan and Iraq. The following tax regulations that were introduced by the Civil War tax legislation of the 1860's have proved valuable enough to be retained in our current system.

The critically important concepts of self-reporting and self-assessment were introduced during the Civil War and continue to be employed today. The Internal Revenue Act in 1862 required taxpayers "to make a list or return" of the items of income that were being taxed. Taxpayers today continue to self-report and determine the amount of their income and deductions. The principle of "voluntary compliance" was also introduced in the 1860's and continues in our current system as most taxpayers voluntarily file their returns.

Two other concepts that continue to be an integral part of our current tax system include progressive tax rates and the ability to pay principle. The tax legislation of 1862 considered the taxpayers ability to pay their taxes. With this in mind, income was taxed at a lower percentage rate for low income earners. This concept states that the amount of tax that a taxpayer can pay increases with the amount of their earnings. The 1862 law contains only 3 and 5% tax rates. These concepts continue to be utilized in 2005 with marginal tax brackets of 10%, 15%, 25%, 33%, and 35%. Married taxpayers earning more than $326,450 in 2005 find themselves in the top tax bracket of 35%. Congress has continued to believe that upper income taxpayers have the "ability to pay" tax at a higher rate than lower income individuals.

The tax legislation of 1862 and 1864 introduced another concept that has proven valuable enough to be retained. This is the practice of "stoppage at the source" where wage earners have income taxes withheld from their earnings prior to receiving their paychecks. These Civil War tax laws required taxes to be withheld by employers on employees with income in excess of $600. This allows taxpayers to "pay as they earn" and provides two benefits. First, the employee is not faced with a huge balance due at the end of the year since taxes are paid in small installments throughout the year. Second, the government receives the tax dollars on a timely basis and does not have to wait several months to collect the funds.

The general principle of collecting taxes on an annual basis was also introduced by the Civil War legislation. Taxpayers assessed their income during the calendar year and were required by the 1862 legislation to pay the balance due by June 30. This date proved to be too generous resulting in our current final payment date of April 15.

These early pieces of tax legislation also introduced the concept that the income tax must be paid by not only individuals but also any form of business. Section 11 of the National Tax Act required that taxes be paid by "Individuals, Partnerships, Firms, Associations, and Corporations." This continues to be true in our current tax system as individuals, proprietorships, partnerships, and corporations must pay taxes on their earnings.

The concept of "comprehensive income" was also introduced during the Civil War. This concept states that income tax is due on all types of earnings unless that item is specifically excluded. Section 116 of the National Tax Act required taxes on "Annual gains, profits, or income, whether derived from any kind of property, rents, interests, dividends, salaries, or from any profession, trade, employment, or vocation." The current IRC requires income to be paid on virtually any type of income with the exception of a few exclusions such as municipal interest income. Therefore, this policy continues to be valuable today as taxpayers report most types of receipts on their Form 1040.

Tax penalties were also included in the tax legislation of the 1860's. Section 15 of the National Tax Act included fines of up to $1,000 and one year in prison for filing a false return. In addition, fines for non-payment of tax resulted in a 10% late payment penalty. After thirty days, the National Tax Act contained a system for auctioning a taxpayer's personal and real property to satisfy the tax lien. These penalties and numerous others continue to be included in our current IRC. In particular, the negligence and fraud penalties have been expanded in an effort to collect overdue taxes. Finally, the current penalty on substantial understatement of tax was included in the Civil War legislation. Section 8 of the Confederate law stated that if the "taxpayer does not report more than 4/5 of their true and real income," the tax due on the understatement plus an additional 10% penalty was imposed. In the current IRC, this penalty of substantial understatement has been increase to 20%. Finally, the current IRC includes the most severe penalty when fraud is involved. If a fraudulent underpayment of tax can be proved by the IRS, an additional 75% of the underpaid taxes are owed as a fraud penalty. In summary, penalties continue to be an important component of our tax law.

Two key deductions continue to be included in our tax system that had their roots in the Civil War legislation. They include the standard deduction and personal exemptions. In particular, the National Tax Act included an exemption of $600 per working individual. This compares today to a standard deduction of approximately $5,000 (single) and a personal exemption of a little more than $3,000. This concept was introduced in the early legislation to insure that lower income individuals would owe no tax. This continues to be the case today for singles who earn less than $8,000 (the total of the standard deduction and personal exemption). No tax is due for these low income taxpayers.

A final income tax provision that the authors would like to review is the development of income deductions. Section 117 of the National Tax Act allowed a deduction for "all national, state, or municipal taxes other that the federal income tax." This continues to be important to taxpayers today who itemize their deductions. Our current Form 1040-Schedule A allows for the deduction of numerous taxes such as real estate and state income taxes. The National Tax Act was even more generous than current law as it allowed a deduction for "the amount paid for rent on a residence occupied by the taxpayer or his family."

The items reviewed above are but a few of the tax provisions that were initially introduced during the 1860's and continue to provide benefits in today's income tax system. In addition to income taxes, the National Tax Act imposed other taxes that continue currently. For example, this early legislation introduced the concept of "sin taxes." The Federal Government continues to collect significant taxes on the sale of alcoholic beverages. The 1864 law included a substantial tax on "spirits, ale, beer, and porter." The concept of taxing alcoholic beverages and tobacco products remains a major fund raiser for the government.

As stated earlier, there are an extremely large number of income tax provisions that were originally introduced in the 1860's and continue to be utilized today. The authors have only reviewed a small portion of the regulations that have proven valuable for nearly 150 years. It is without question that we can learn much from our history. The situation confronting the government during the Civil War is similar to our current war condition. Income tax funds continue to be desperately needed for both the Iraqi war effort and the hurricane disaster cleanup on the Gulf of Mexico coast.

CONCLUSION

One of the goals of this paper is to provide the reader with an overview of the very comprehensive tax legislation enacted by both the Union and the Confederacy during the Civil War. In an effort to raise sufficient funds to finance the war, both the Union and the Confederacy resorted to new forms of taxation such as the income tax. Income taxes were a very difficult concept for the bulk of 1860's taxpayers to understand. This situation continues today as the majority of U.S. taxpayers utilize a paid preparer to complete their tax returns.

The authors also want to emphasize the large number of income tax principles and practices that were initially introduced during the Civil War era and continue to be included in our current Internal Revenue Code. The concepts of self-assessment, progressive tax rates, comprehensive income, deductions from income, and many other tax principles were introduced by the 1860's legislation. These practices continue to serve our country in the process of generating sufficient tax revenues to finance government operations that include both a war effort as well as major hurricane relief operations on the Gulf of Mexico coast.

APPENDIX--GENERAL INFORMATION

 Confederate States of
 National Tax Act (Union) America

Required to Pay Individuals, "Every person,
Taxes Partnerships, Firms, co-partnership,
 Associations, and association or
 Corporations (Sec. 11) corporation." (TB Sec 1)

Filing Date On or before the first January 1st starting in
 Monday of May (Sec. 11) 1864 (Sec. 7 VI)

Duration of Act Through 1870 (Sec. 119) Through 1865 unless
 repealed sooner (Sec. 18)

Penalty for Fine no greater than If it is found "that the
False Return $1,000 or imprisonment statement or estimate
 not more than one year, of income and profits
 or both (Sec. 15) rendered by the taxpayer
 does not contain more
 than 4/5 of the true and
 real amount of his
 taxable income and
 profits," the tax payer
 can be held liable for
 the taxes due as well as
 an additional 10% (Sec.8)

Penalty for A. If paid less than 10 A. Failure to pay taxes
Non-Payment days late: 10% additional when due is an additional
 upon tax due 10% upon the taxes
 already due

 B. If still not paid B. It is then the duty
 after ten days, the of the tax collector to
 collector must notify the notify the individual
 individual, adding a .20 within 20 days of the tax
 issuing fee, as well as payers" neglect to pay
 mileage and the 10%
 additional fee.

 C. After an additional C. If still not paid
 ten days the collector after an additional 10
 had the right to seize days, the collector has
 property to pay the tax. the right to seize
 (Sec. 28) property to pay the tax
 (AA Sec. 16)

Seizing All items sold at public All items sold at public
Property to Pay auction and government auction and government
Taxes--Personal has the right to keep all has the right to keep all
Property proceeds that cover the proceeds that cover the
 tax due, necessary and tax due, necessary and
 reasonable expenses of reasonable expenses of
 the sale, and a 5% the sale, and a 5%
 commission. Any remainder commission. Any remainder
 is returned to the owner is returned to the owner
 of the seized property. of the seized property.
 (AA Sec. 16)

 All individuals are
 exempt from the sale of
 tools of his trade, one
 cow, arms and provisions,
 household furniture kept
 for own use and the
 apparel of his family.
 (Sec. 28)

Seizing Real Authorized to sell Authorized to sell
Property to property if personal property if personal
pay taxes property is not property is not
 sufficient to cover sufficient to cover
 the taxes due. the taxes due.

 Sold at cost of taxes Sold at cost of taxes due
 due, 10% penalty, with an additional 20%.
 expenses associated with
 the sale, and an
 officer's fee of $10.

 Owner of seized property Owner has the right to
 has the right to redeem redeem the land within
 the land within one year two years by paying the
 after sale for the cost collector the cost plus
 paid by the purchaser 20% interest per year.
 plus 20% interest. (AA Sec. 19)
 (Sec. 30)

For purposes of this table the Confederate Acts will be cited
as follows:

1. Sec.--represents the Tax Act of April 24, 1863

2. TB--represents the Tax Bill

3. AA--represents the Assessment Acts

APPENDIX--INCOME TAXES

 Confederate States of
 National Tax Act (Union) America

Who must pay All individuals residing "The income and profits
 in the United States or derived by each person,
 any citizens of the joint stock company and
 United States living corporation from every
 abroad (Sec. 116) occupation, employment
 or business, whether
 registered or not."
 (Sec. 7)

Exemptions 1. Anyone making less 1. Property of each head
 than $600 per year. of household $500
 2. Anyone who can prove 2. Each minor $100
 he has already paid 3. Each son in the
 somewhere else military or who had
 (Sec. 118) been killed in the
 military, $500
 4. Property of any widow
 of anyone killed
 during military
 service or where there
 is no widow the family
 $1,000
 5. Property of officers,
 soldiers, etc.
 "actually engaged in
 the military" or have
 been disabled, $1,000
 None of these
 exemptions apply to
 anyone whose assessed
 property is greater
 than $1,000. (TB Sec.
 5, I, II, III)

What is taxed "Annual gains, profits, Tax of 1% due on all
and included or income, whether salaries not exceeding
in personal derived from any kind of $1,500, and a 2% tax on
income property, rents, the excess over that
 interests, dividends, amount. All salaries of
 salaries, or from any people in the military
 profession, trade, are exempt from the tax.
 employment, or vocation." No tax is due when salary
 (Sec. 116) is $1,000 or less.
 (Sec. 6)
 Included in personal
 income: Individuals will be taxed
 10% on all profits made
 1. Interest above all only in 1862 from the
 that paid on all purchase and sale of
 notes, bonds, and "flour, corn, bacon,
 mortgages etc. pork, oats, hay, rice,
 (Sec. 117) salt, or iron, or the
 2. "All income or gains manufactures of iron,
 derived from the sugar, molasses made of
 purchase and sale of cane, leather, woolen
 stocks or other cloths, shoes, boots,
 property, real or blankets and cotton
 personal, and the cloths." This tax does
 increased value of not apply to any
 livestock" (Sec. 117) purchases or sales from
 3. "Amount of sugar, "the regular course of
 wool, butter, cheese, business." (Sec. 9)
 pork, beef, mutton, or
 other meats, hay and Value of property real or
 grain, or other personal and mixed unless
 vegetable or other otherwise stated, 5%.
 production of the (TB Sec. 1, I)
 estate of such person
 sold." (Sec. 117)

 "Value of gold and silver
 wares and plate, jewels,
 jewelry, and watches,
 10%." (TB Sec. 1 II)

 "Value of shares or
 interests held in any
 bank, banking company or
 association, canal,
 navigation, importing or
 exporting, insurance,
 manufacturing, telegraph,
 express, railroad, and
 dry dock companies, and
 all other joint stock
 companies, 5%."
 (TB Sec. 2)

 "Upon amount of all gold
 and silver coin, gold
 dust, gold or silver,"
 5%.

 "All monies held abroad
 or upon the amount of all
 bills of exchange," 5%.
 (TB Sec. 3 I)

 "Upon the amount of all
 solvent credits, and of
 all bank bill, and all
 other papers issued as
 currency, exclusive of
 non-interest bearing
 Confederate treasury
 notes, and not employed
 in a registered business,
 the income derived from
 which is taxed, 5%."
 (TB Sec. 3 II)

 Also, on the tax "on
 bonds of the Confederate
 States heretofore issued,
 shall in no case exceed
 the interest on the same,
 and such bonds, when held
 by or for minors or
 lunatics, shall be exempt
 from the tax in all cases
 where the interest on the
 same shall not exceed
 $1,000." (Sec. 8)

When is tax Levied May 1st and Due on January 1st
due? payable is due June 30th starting in 1864.
 until 1870. (Sec. 119) (Sec. 7 VI)

Tax brackets For all other occupations
 the tax is as follows:

 Income Tax % Income Tax %
 $0-600 none $0-500 none
 $601-5,000 5% $501-5,000 5%
 $5,001-10,000 7.5% $1,500-3,000 5% on
 $10,001+ 10% first
 $1,500
 The tax is determined in and 10%
 such a way that the first on
 $600 earned is not taxed, excess
 the excess over that $3,001-5,000 10%
 until $5,000 is taxed at $5,001-10,000 12.5%
 5%, the excess over that $10,001+ 10%
 until $10,000 is taxed
 at 7.5%, etc. (Sec. 7)

 Only one deduction of This bracket is used on
 $600 allowed for the all income other than
 combined income of all from salaries, rents,
 individuals in a manufacturing,
 household (Sec. 116) navigations,
 shipbuilding, and
 sales of merchandise.

Deductions 1. All national, state or
 municipal taxes other
 than the national
 income tax (Sec. 117)
 2. "Salary or pay
 received for services
 in the civil,
 military, navel, or
 other service of the
 United States,
 including senators,
 representative, and
 delegates in Congress
 above the rate of $600
 per year." (Sec. 117)
 3. Income from dividends
 on shares in any
 "bank, trust company,
 savings institution,
 insurance, railroad,
 canal, turnpike, canal
 navigation, or
 slack-water company"
 as well as the income
 from bonds in these
 companies. (Sec. 117)
 4. Amount paid for rent
 occupied by himself or
 his family (Sec. 117)

Real Estate Gains from sales of real
 estate within the year
 are added to income and
 losses are deducted from
 annual income. (Sec. 116)

Dividends Banks or company issuing "All joint stock
 the dividends in script companies and
 or money shall pay a corporations shall
 duty of 5%, which reserve 1/10 of the
 is deductible and annual earning, set
 withholdable from the apart for dividend and
 account holders. reserved fund, to be
 (Sec 120) paid to the collector
 of the Confederate tax,
 Any company who refuses and the dividend then
 to provide a list of the paid to the stockholder
 dividends payable will be shall not be estimated
 penalized with a fine of as a part of his income
 $1,000. (Sec. 120) for the purposes of this
 act." (Sec. 7 VI)

 In addition, when the
 annual earnings "shall
 give a profit of more
 than 10 and less than
 20%, 1/8 of said sum so
 set apart shall be paid
 as a tax, and in the case
 said sum so set apart
 shall give a profit of
 more than 20% on their
 capital stock paid in,
 1/6 thereof shall be
 reserved and paid."
 (Sec. 7, VI)

Salaries of Any salaries exceeding
government $600 to officers in the
employee military branches or
s--withholding members of Congress shall
 be levied a duty of 5%,
 which the government may
 deduct and withhold from
 the payment of the
 individual. (Sec. 123)

Special Income In addition to the income
Duty tax already levied and
 collected on October 1,
 1864 on the gains,
 profits, or income for
 the year ended December
 31, "next preceding the
 time herein named." The
 duty will be "5% on all
 sums exceeding $600." In
 addition, "in estimating
 the annual gains,
 profits, or income as
 aforesaid, for the
 foregoing special income
 duty, no deductions shall
 be made for dividends or
 interest received from
 any association,
 corporation, or company,
 nor shall any deduction
 be made for any salary or
 pay received." (Public
 Resolution No. 59)

Payment Options "Secretary of the
 Treasury may prescribe
 regulations to enable any
 tax-payer to pay into the
 treasury, in advance such
 sum as he may choose on
 account of taxes to
 accrue against him, and
 to obtain therefore a
 certificate bearing
 interest at the rate of
 5% a year until his taxes
 are payable, but such
 certificate shall not be
 transferable."
 (AA Sec. 42)

 "When cotton or other
 property subject to
 taxation in money, shall
 have been burned or
 otherwise destroyed," the
 taxpayer may ask for the
 tax to be removed from
 what is due or refunded.
 (Amendment 2/13/1864)

Penalties Anything not received for Any person providing a
 an additional 10 days "false or fraudulent list
 after June 30th will be or statement, with intent
 assessed an additional to defeat or evade the
 10%. (Sec. 119) valuation" will be fined
 up to $500 as well as the
 cost of the trial.
 (AA Sec. 9)

For purposes of this table the Confederate Acts will be cited
as follows:

1. Sec.--represents the Tax Act of April 24, 1863

2. TB--represents the Tax Bill

3. AA--represents the Assessment Acts

APPENDIX--TAXES IN KIND

 Confederate States of
 National Tax Act (Union) America

Reserves 1. 50 bushels of sweet
Allowed potatoes
 2. 50 bushels of Irish
 potatoes
 3. 100 bushels of corn
 or 50 bushels of wheat
 4. 20 bushels of peas
 or beans in total
 (Sec. 10)

Taxes in Kind 1. Individuals "must pay
Due and deliver to the
 government 1/10 of the
 wheat, corn, oats,
 rye, buckwheat or
 rice, sweet and Irish
 potatoes, and of the
 cured hay and fodder."
 (Sec. 10)
 2. In addition 1/10 of
 the sugar, molasses
 made of cane or
 sorghum, when the
 farmer produces "more
 than 30 gallons,"
 cotton, wool, and
 tobacco. (Sec. 10)
 3. 1/10 of the peas,
 beans, and ground peas
 produced during the
 year. (Sec. 10)
 4. Any farmer that
 slaughters hogs will
 be charged a tax in
 kind "an equivalent
 for 1/10 of the same
 in cured bacon, at the
 rate of 60 pounds of
 bacon to the 100
 weight of pork."
 Government also has
 the authority to
 demand salt pork
 instead of the bacon
 (Amendment 12/28/1863)

Exemptions 1. Each family head not
 worth more than $500
 (Sec. 10 I)
 2. "Each family head with
 minor children, not
 worth more than $500
 for himself and $100
 for each minor living
 with him, and $500 in
 addition thereto, for
 each minor son he has
 living, or may have
 lost, or had disabled
 in the military."
 (Sec. 10 II)
 3. "Each officer,
 soldier, or seaman, in
 the army or nave, or
 who has been
 discharged therefrom
 for wounds, and is not
 worth more than $100."
 (Sec. 10 III)
 4. "Each widow of any
 officer, soldier, or
 seaman, not worth
 more than $1,000."
 (Sec. 10 IV)
 5. Farmers are also
 exempt if they do not
 produce more than 50
 bushels of Irish
 potatoes, 200 bushels
 of corn, 20 bushels of
 peas and beans, 10
 pounds of wool or more
 than 15 pounds of
 ginned cotton.
 (Sec. 10 IV)

Exceptions 1. Any time the crop to
 be paid is "taken or
 destroyed by the enemy
 the district collector
 may remit the tax."
 (Sec. 2, Amendment
 2/13/1864)
 2. For the year 1863,
 the producers of sweet
 potatoes may pay the
 tax in kind with cash
 (Amendment 12/28/1863)

Penalties If the farmer does not
 deliver the goods by the
 due day, "he shall be
 liable to pay five times
 the estimated value of
 the portion aforesaid."
 (Sec. 10 IV)

For purposes of this table the Confederate Acts will be cited
as follows:

1. Sec.--represents the Tax Act of April 24, 1863

2. TB--represents the Tax Bill

3. AA--represents the Assessment Acts

REFERENCES

Confederate States of America (1863). The Tax Act of 24th April, 1863, As Amended. Electronic Edition, Property of the University of North Carolina at Chapel Hill, available at the following site: http://docsouth.dsi.internet2.edu/taxasses/taxasses.html Call number 63 Conf. (Rare Books Collection, UNCCH).

Doris, Lillian (1963). The American Way In Taxation: Internal Revenue, 18621963. Englewood Cliffs, NJ: Prentice-Hall, Inc.

Hill, Joseph A. (1894). The Civil War Income Tax. The Quarterly Journal of Economics. Volume VIII, July 1894, p.416-452.

National Tax Law as Approved June 30, 1864 (1864), New York, NY: Beadle and Company.

Parnell, Archie (1980). Congress and the IRS: Improving the Relationship. Fund for Public Policy Research, Washington, D.C.

Revised Regulations For The Army Of The United States, 1861 (1861). Philadelphia, PA: J.G.L. Brown, Printer.

Tax.org--Tax Information Worldwide, retrieved from http://tax.org/, tax history museum section - 1861 to 1865.

United States Treasury, "Fact Sheet OPC-77 - History of the Tax System in the United States", retrieved from http://www.ustreas.gov/opc/opc0077.html

Darwin L. King, St. Bonaventure University

Michael J. Fischer, St. Bonaventure University

Carl J. Case, St. Bonaventure University