Tuesday, December 14, 2010

The Great Tax Debate

Over the last month or so Congress and the White House have been debating over maintaining current tax cuts first enacted by President George W. Bush in 2001. The debate over are the tax breaks, right or wrong and to what capacity, can be left to another blog. It got me thinking however about where these taxes on our personal income started. More importantly why were they first enacted.

It happened to be during the Civil War where the first income tax in the United States was implemented. It was known as the Revenue Act of 1861 and it taxed a lot more than simply just people's take home pay. Up until this time the federal government collected the majority of their revenue from excise taxes especially from tobacco and liquor. However with the war starting to cost millions and a loss of revenue from the taxes once collected in the South, the Union had to figure out some means to sustain and pay for the war efforts. The Revenue Act of 1861 just that. With only about 5% of the Act actually addressing income taxes the majority focused on excise and property taxes. The income tax implemented was actually a flat amount of 3% on all income above $800. Near the end of 1861 and into 1862 it became very apparent that the civil conflict was not going to be over quick and more funds needed to be raised. In 1862, a new revenue act was established which superseded the previous one and gave our country a few features we are quite familiar with today. The first being a progressive rate income tax. Instead of a flat amount of 3% for people making over $800 it was changed to those making over $600 were to pay 3% and those making over $10,000 were to pay 5%. Although not nearly as complicated as it is today, it still increased the revenue of the government dramatically with top earners funding the largest majority of the revenue brought in to the government. The other familiar element we were given was a Commission of Internal Revenue, today we know them as the Internal Revenue Service or IRS. Both elements familiar to us today can directly be attributed to the need for revenue during the Civil War.

One feature of the Revenue Act of 1862 I find very interesting and rarely discussed is the temporary nature of it. The Revenue Act actually called for the entire measure to be terminated in 1866. Although it actually took until 1872 for the income tax to be repealed; the reality is that government officials believed at that time all revenue for the United States, during peace time, could be attained from excise taxes alone. The income tax actually remained dormant for nearly 20 years until the late nineteenth century when it was reintroduced.  

So how do we look at the revenue acts of the Civil War and place them into the context of today's government? Thomas Jefferson was quoted as saying: 
 "...a wise and frugal government, which shall restrain men from injuring one another, which shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government."
However is Jefferson's comment even relevant today or not? Do we look to the founders of our country for answers on handling this or do we forge our own future? Is our system of government working with the construct that they were in the 1790s or the 1860s? The governments of that time worked within the notion that federal government had responsibilities to make treaties, carry out diplomacy which involved trade agreements, make war and sustain defense, as well as build and/or maintain the infrastructure at home. Although exceptions can be found with presidents such as Jefferson, Jackson, and Polk who towed the line of Constitutionality, they rarely moved outside this construct. It has really only been over the last 75 years that our government has chosen to take "promote the general welfare" to a different level. Is this right or wrong? Well this debate is what truly differentiates the conservative view point from the liberal one that we see in politics today. It is from this perspective that one would view tax-cuts as a must or not necessary. This debate can be argued and discussed at length with truly no right or wrong answer in my opinion it comes down to ones principles. Truly knowing what you believe is the right path and knowing why you believe it. However whether you lean on the left side or right of the debate knowing where it all came from and why is important.

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