History of Income Tax in America

History of Accounting > Tax History > Origin of Income Tax in America

The first income tax in the United States appears to have been imposed in the colony of Massachusetts Bay. There, the original land tax was extended into a tax on “estates both real and personal.”
The statute of 1646 provided that “for all such persons as by the advantage of their arts and trades are more enabled to help bear the publick charge of common labourers and workmen, as butchers, bakers, brokers, smiths, carpenters, tailors, shoemakers, joiners, barbers, millers, and masons, with all other manual persons and artists, such are to be rated for returns and gains, proportionable unto other men for the produce of their estates.” 1
In 1706, it was imposed on “incomes by any trade or faculty.” In 1738, also on incomes derived from “business or employment.” The Act of 1777, which is continued in the present Constitution, was extended so as to levy the tax on “incomes from any profession, faculty, handicraft, trade or employment.” The present law of Massachusetts is the same, except that the word
1 Colonial Records of Massachusetts Bay, II, 173; II, 213, m, 88. Cf. Charters and General Laws of Massachusetts Bay, Edition of 1814, p. 70.
“faculty ” was omitted in 1821, and in 1836, the word “handicraft,” so that it now reads “as tax upon incomes from any profession, trade, or employment.” 1
Other New England colonies seem to have at first followed the custom of Massachusetts, but it subsequently fell among them into desuetude.*
§ 3.—Income Taxes in the Several United States.
Among the individual United States, an income tax existed in Alabama, but was abolished in 1884. At the present time, such taxes are imposed in Massachusetts, Virginia, and North Carolina.
The Constitutions of Virginia, North Carolina, Tennessee, Texas, and California authorize an income tax. In Virginia, the tax is limited to such annual incomes as exceed $600. In North Carolina and Tennessee it cannot be imposed on incomes derived from taxed property.
1 16 and 17 Vic. c. 34.
* For a more full account of the Engbsh legislation upon this subject see the preface to Dowell’s Income Tax Laws.
s Seligman on the Income Tax, 9 Political Science Quarterly, 610, 614-616.
* On page 584. vol. xxvi., of The Congresional Record may be found a tabular account of income taxes in foreign countries, collected by Consuls for the State Department at the request of Congressman O’Brien of Nebraska.

§ 4.—History of Federal Income, Taxes.
During the war of 1812, a Federal income tax was suggested by Dallas, the Secretary of the Treasury, and would probably have been adopted had it not been for the peace which immediately ensued.1 The Direct Property Tax Act of August 5, 1861, also imposed a tax of three per cent. on the excess of all incomes over $800, which, however, was never collected.2 These provisions of the Direct Property Tax Act were repealed by the Act of July 1, 1862,3 which imposed an income tax of three per cent. upon the excess of annual incomes between $600 and $10,000 at the rate of five per cent. on the excess when the income exceeded $10,000. The Act of June 30, 1864, increased the rate between $600 and $5,000 to five per cent. ; between $5,000 and $10,000 to seven and one half percent. ; and over $10,000 to ten per cent. upon the excess of income over $600 4 ‘The Joint Resolution of July 4, 1864, imposed a special tax upon the excess of incomes over $600 for the preceding year only.6
The Act of March 3,1865, amended the Act of June 30, 1864, and increased the rate to ten per cent. upon the excess of income over $5,000.6 The Act of March 2,1867, imposed five per cent. on the excess of income over $1,000 until 1870 ;7 and in 1870 the Act of July 14 reduced the tax to two and a half per cent. for that year and 1871, when the tax expired and was not re-enacted.8
The next was the income tax of two per cent. upon the excess of all incomes over $4,000 and upon the incomes of all corporations, companies, and associations other than
1 Seligman on the Income Tax. 9 Political Science Quarterly, 610, 613. » 12 Stat, at L., ch. 45, p. 309, sections 49-51. »12 Stat, at L., ch. 119, p. 473, sections 89-93. 4 13 Stat, at L., ch. 173, p. 281, sections 116-123. eTsTstat. at L., 417. «13 Stat, at L., ch. 78, p. 479, section 1. ’14 Stat, at L., ch. 169, p. 477. »16 Stat, at L., ch. 255, p. 257, sections 6-17.
partnerships, which was imposed hy the Act of August 28, 1894. This last is the subject of this work.
§ 5.—Legislative History of Present Income Tax.
Perhaps the first mention of the present income tax in the halls of Congress is contained in the President’s message, dated December 4th, 1893, and addressed to the Fifty-third Congress at the opening of its second session. President Cleveland said:
“I am satisfied that the reduced tariff duties provided for in the proposed legislation, added to existing internal revenue taxation, will, in the near future, though perhaps not immediately, produce sufficient revenue to meet the indebtedness of the government.
“The committee, after full consideration, and to provide against the temporary deficiency which may exist before the business of the country adjusts itself to the new tariff schedules, have wisely embraced in their plan a few additional internal revenue taxes, including a small tax upon incomes derived from certain corporate investments.
“These new assessments are not only absolutely just and easily borne, but they have the further merit of being such as can be remitted without unfavorable business disturbance whenever the necessity of their imposition no longer exists.” 1
The committee to which the President referred in his message was probably the House Committee of Ways and Means, though Senator Hill said in the debate on the income tax in the Senate that at the date of the message ” neither the full Committee of Ways and Means nor the Democratic members thereof had agreed upon any income tax or other internal taxation.”2 However that may be, subsequently on the 19th day of December, 1893, the Committee of Ways and Means presented to the House, which at the time was sitting as the Committee of the Whole House on the State of the
1 Congressional Record, vol. 26, p. 9. »Ibid., 4, p. 3558.
Union, a tariff bill with no reference to a tax on incomes. The Committee rose informally, and the House received the report, which embodied “a bill (House Kesolution 4864) to reduce the taxation, to provide revenue for the Government, and for other purposes.” The bill was read a first and second time, and with the accompanying report ordered printed and referred to the Committee of the Whole House on the State of the Union.1
On the 21st day of December, 1893, the minority of the Committee of Ways and Means presented a minority report in accordance with leave given them when the original bill was presented.2
On the 8th of January, 1894, the debate on the tariff bill began in an evening session of the House convened for that purpose only.3
In order to control the debate the House adopted the following resolution :4
“Resolved, That after the passage of this resolution, the House shall meet each legislative day at 11 o’clock A. M.: That beginning to-day, without intervening motion, except conference and reports from the Committee on Rules, the journal shall be read, business under Clause I. of Rule XXIV. shall be disposed of, the Speaker shall call the Committees for reports, and then the House shall resolve itself into the Committee of the Whole House on the State of the Union for the consideration of the bill (H. R. 4864) ‘to reduce taxation, to provide revenue for the government, and for other purposes.’
“The general debate on the said bill shall be limited to the. hour of adjournment on Saturday, the 13th of January; that on Monday, the 15th of January present, the said bill shall be read through, and shall from day to day be open to amendment in any part thereof.
“That on Monday, the 29th day of January, at the hour of 12 o’clock M., said bill with all amendments recommended by or that may be pending in the Committee of the Whole shall be reported to the House; that two hours’ debate be then
1 Congressional Record, vol. 26, p. 415. »Ibid., p. 479.
‘Ibid., p. 538. ‘Ibid., p. 572.
allowed, and then the previous question shall be considered ordered upon pending amendments and the bill to its passage; that without other motion the vote shall then be taken on pending amendments on the engrossment and third reading, on a motion to recommit with or without instructions should such motion be made, on the final passage of the bill and on a motion to reconsider and lay on the table.
“That beginning to-day at the hour of 5:30 o’clock each day, the House shall take a recess until 8 o’clock, the evening session to be devoted to general debate on said bill only. General leave to print remarks on said bill is hereby granted.”
On the 15th of January, in accordance with the special order, the bill was read at length, and amendments were offered. No income tax amendments, however, seem to have been submitted for a considerable time. For on the 22d the chairman reported to the Committee of the Whole that no such amendments had been received by him.1 On the 29th of January, however, Mr. McMillin of Tennessee presented an amendment containing provision for an income tax which is set forth in full in the Record at page 1594. The amendment differed in some important particulars from the act as finally adopted. It provided no period for the termination of the tax. Apart from that, the tax on personal incomes was substantially the same, but the tax on corporate incomes was quite different. It provided that there should be a tax not merely on net incomes,2 but on all dividends in scrip or money, and also upon all interest3 paid on indebtedness for which bonds had been issued. The method of collecting the tax was substantially like that now in existence. At the time of presenting his amendment. Mr. McMillin allowed himself to undergo a considerable cross-examination by the other members of the House as to the details of the bill.4
1 Congressional Record, vol. 26, p. 1193. » Section 59.
3 Section 61.
4 Mr. McMillin’s speech will be found in the Appendix to vol. 26, Part I, p. 411, et seq.
He stated that the bill was drawn with reference to the construction of the former acts. Mr. Hendricks asked him 1 the following question: “I would like to call the gentleman’s attention to lines 54 and 55, page 12 of this amendment, where there is a provision exempting from taxation, as I understand, under this amendment, the interest paid to depositors in saving banks.” Mr. McMillin replied, “There is such exemption. We have followed, so far as we could consistently, that line of policy which received judicial construction under the old law. Such deposits were exempted under the old law.”
The speaker referred to judicial construction, but the exemption of which he speaks was statutory.2
There was but slight debate on the tax amendment, and on the first of February, the Committee of the Whole reported the bill to the House together with two pending amendments.3 Three hours debate followed, and the amendments having been adopted, the Speaker put the question “Shall the Bill pass?”4 Thereupon the yeas and nays were taken and the bill was passed amidst great excitement on the Democratic side by a vote of 204 in its favor against 140 in opposition, 8 not voting.
On the 2d of February, the Bill came over from the House to the Senate.6 It was thereupon read twice and referred to the Committee on Finance.
On the 20th of March, Senator Voorhees, on behalf of the Committee of Finance, reported it back to the Senate with amendments. It was thereupon placed upon the calendar of the Senate;6 and the Senate entered upon its formal consideration in the Committee of the Whole. It was not until the 21st of June, however, that they reached the income tax provisions,7 although Senator Peffer of Kansas had offered the day before certain amendments thereto which provided for exemptions for mutual life insurance companies and building and loan associations, and other corporations of like character. At the same time he offered an amendment providing for a graduated tax; and Senator Hoar offered an amendment expressly excluding the salaries of Federal judges.1
1 Congressional Record, vol. 26, p. 419.
* See Cary v. San Francisco Savings Union, 22 Wall. 38 (1874).
* Congressional Record, vol. 26, p. 1780.
* Ibid., p. 1796. ‘Ibid., p. 1804.
* Ibid., pp. 3126, 3127. ‘Ibid., p. 6610.
Immediately upon the reading of the first section, Senator Hill strenuously questioned the propriety of such a tax. He was followed by one or two of the other Senators in short speeches to the same effect, but the Senate soon proceeded to the consideration of the provisions in detail. The first amendment that was proposed was that of the Committee limiting the operation of the tax until the first day of January, 1900,2 which was agreed to with but little debate.3 Countless amendments were thereafter submitted, their general effect being to mollify the rigor of the tax on corporations and to render less inquisitorial the methods of collection. The Senators devoted eight days to the consideration of the bill, and on the 28th of June concluded their discussion of it.4
On the 3d of July the Vice-President put the final question “Shall the Bill pass?”6 The question was answered in the affirmative by a vote of 39 in favor of
1 Congressional Record, vol. 36, pp. 6577, 6578.
* Ibid., p. 6631.

3 Ibid., p. 6632.
4 Ibid., p. 6934. For the convenience of those who wish to consult the debate in the Senate, the following table will show the pages of the Congressional Record at which the discussion each day begins:
June 21st, 1894 Page 6610.

the bill, 34 against, and 12 not voting. A motion was thereupon made that the Senate insist upon its amendments and ask a conference with the House of Representatives upon the disagreeing votes of the two Houses, and that the Chair appoint seven managers of the conference on the part of the Senate. The motion was agreed to and the Chairman appointed Senators Voorhees, Harris, Vest, Jones of Arkansas, Sherman, Allison and Aldrich. On the 6th of July 1 the bill with its Senate amendments was laid before the House and referred to the Committee of Ways and Means, who reported it back to the House the next day 2 with the recommendation that the House non-concur in the amendments. The House voted to non-concur and to agree to the conference asked by the Senate. The following were the conferees representing the House: Representatives Wilson, McMillin, Turner, Montgomery, Reed, Burrows and Payne. On the 19th the conferees reported to the House,3 that after final, free, and full conference the conference committee had failed to agree, and the House sent a message to the Senate asking for a further conference by the same conferees.4 After considerable discussion by the Senate, on the 27th of July, the Senate insisted upon its amendments and agreed to the conference asked by the House.6 The same conferees represented the Senate in the second conference. Finally the House receded from its position. On the 13th of August the House voted6 that the order theretofore made, requesting a conference with the Senate, be rescinded, that the conferees on the part of the House be discharged, and that the House agree to the Senate amendments. Two days thereafter, August 15th, the Committee on Enrolled Bills reported that the bill was correctly enrolled, whereupon the Speaker
1 Congressional Record, vol. 26, p. 7161. * Ibid., p. 7189.
»Ibid., p. 7711. * Ibid., pp. 7714, 7678.
•Ibid., p. 7930. > Ibid., p. 8482. ‘Ibid., p. 8530.
of the House signed it.7 The bill as enrolled was thereupon carried to the Senate, and on the same day signed by the Vice-President. On the 28th of August the bill, which had been presented to the President, was reported to the House as having become a law without his approval.1
1 Congressional Record, vol. 26, p. 8666.

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