Where Did the US Get the Money for the Budget Before the Income Tax?

Where did the US get the money for the budget before the income tax?

Gregory Taylor

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Dear Mr. Taylor,

This is a necessarily oversimplified and generalized summary, but…

As originally adopted, the Constitution allowed a national legislature to impose tariffs and coin money while collecting excises and levying taxes—either directly on property or indirectly on imports, exports and consumption. In practice the federal treasury got by for the most part on tariff duties, supplemented by loans. Between 1790 and 1820, custom duties accounted for up to 90 percent of government income. At various points there were taxes on land, slaves, houses, whiskey and carriages, depending on circumstances (e.g., the need to build a U.S. Navy in 1798, the War of 1812, the Mexican War). The American Civil War brought on the first income tax in 1861 and the formation of the Bureau of Internal Revenue, under Commissioner George Boutwell, to enforce it—and it proved more effective in financing the war effort than the Confederacy’s reliance on voluntary state support and its issuance of more paper whose worth swiftly depreciated virtually as fast as the ink dried. The Gilded Age saw a reversion to tariffs as the primary source, but a growing inequity between the burden they put on every American—mostly not well-to-do—who bought anything compared to those making ,millions led to proposals of another progressive income tax in 1894 and its ultimate revival in 1916, as the prospect of American participation in World War I loomed. The emergence of the United States as a world power, especially in the wake of World War II, has kept the federal income tax in effect ever since.

Sincerely,