Just so that everyone is educated, see the following for information on the first American income tax. (now you know why I want a copy of the 1870 return). see http://www.nara.gov/publications/prologue/fox.html ********** or http://accountant.hypermart.net/history.html The Tax Act of 1862 was passed and signed by President Lincoln July 1 1862. The rates were 3% on income above $600 and 5% on income above $10,000. The rent or rental value of your home could be deducted from income in determining the tax liability. The Commissioner of Revenue stated "The people of this country have accepted it with cheerfulness, to meet a temporary exigency, and it has excited no serious complaint in its administration." This acceptance was primarily due to the need for revenue to finance the Civil War. Although the people cheerfully accepted the tax, compliance was not high. Figures released after the Civil War indicated that 276,661 people actually filed tax returns in 1870 (the year of the highest returns filed) when the country's population was approximately 38 million. With the end of the Civil War the public's accepted cheerfulness waned. The Tax Act of 1864 was modified after the war. The rates were changed to a flat 5 percent with the exemption amount raised to $1,000. Several attempts to make the tax permanent were tried but by 1869 "no businessman could pass the day without suffering from those burdens" From 1870 to 1872 the rate was a flat 2.5 percent and the exemption amount was raised to $2,000. *********** OR excerpts from the Tax History Museum http://www.tax.org/museum/default.htm The first federal income tax in American history actually preceded the Internal Revenue Act of 1862. Passed in August, 1861, it had helped assure the financial community that the government would have a reliable source of income to pay the interest on war bonds. Initially, Salmon Chase and Thaddeus Stevens, Chairman of the House Ways and Means Committee, wanted to implement an emergency property tax similar to the one adopted during the War of 1812. This way, the government could adapt the administrative system that state and local governments had developed for their own property taxes. But legislators understood such a property tax as a direct tax. Article 1, Section 9 of the Constitution required the federal government to apportion the burden among states on the basis of population rather than property values. Emphasizing population over property value would actually render the tax quite regressive. Residents of lower-density western states, border states, and poor northeastern states stood to bear a greater burden than those of highly-populated urban states, despite the latter's valued real estate. Their representatives also complained that a property tax would not touch substantial "intangible" property like stocks, bonds, mortgages, or cash. The first income tax was moderately progressive and ungraduated, imposing a 3% tax on annual incomes over $800 that exempted most wage earners. These taxes were not even collected until 1862, making alternative financing schemes like the Legal Tender Act critical in the interim. The Internal Revenue Act of 1862 expanded the progressive nature of the earlier act while adding graduations: it exempted the first $600, imposed a 3% rate on incomes between $600 and $10,000, and a 5% rate on those over $10,000. The Act exempted businesses worth less than $600 from value-added and receipts taxes. Taxes were withheld from the salaries of government employees as well as from dividends paid to corporations (the same method of collection later employed during World War II). In addition, the "sin" excise taxes imposed in the 1862 act were designed to fall most heavily on products purchased by the affluent. Thaddeus Stevens lauded the progressivity of the tax system: "While the rich and the thrifty will be obliged to contribute largely from the abundance of their means.no burdens have been imposed on the industrious laborer and mechanic. The food of the poor is untaxed; and no one will be affected by the provisions of this bill whose living depends solely on his manual labor." the war grew increasingly costly (topping $2 million per day in its latter stages) and difficult to finance. The government's ability to borrow fluctuated with battlefield fortunes. The Confederate navy harassed northern shipping, reducing customs receipts. And inevitable administrative problems reduced the expected receipts from income and excise tax collection. In response, Congress approved two new laws in 1864 that increased tax rates and expanded the progressivity of income taxation. The first bill passed in June upped inheritance, excise, license, and gross receipts business taxes, along with stamp duties and ad valorem manufacturing taxes. The same act proceeded to assess incomes between $600 and $5000 at 5%, those between $5,000 and $10,000 at 7.5%, and established a maximum rate of 10%. Despite protest by certain legislators regarding the unfairness of graduated rates, the 1864 Act affirmed this method of taxing income according to "ability to pay." An emergency income tax bill passed in July imposed an additional tax of 5% on all incomes in excess of $600, on top of the rates set by previous income tax bills. Congress had discovered that the income tax, in addition to its rhetorical value, also provided a flexible and lucrative source of revenue. Receipts increased from over $20 million in 1864 (when collections were made under the 1862 income tax) to almost $61 million in 1865 (when collections were made under the 1864 Act and emergency supplement).