What Is the Revenue Act of 1862?
The Revenue Act of 1862 was an expansion of the first U.S. income tax established under the previous Revenue Act of 1861. It was passed to raise additional federal revenue to fund the war against the Confederate States of America during the American Civil War. It is notable for introducing the first progressive income tax in the U.S. and for establishing a separate federal tax bureaucracy that would eventually become the modern Internal Revenue Service (IRS).
- The Revenue Act of 1862 was a U.S. federal law to fund the war against the Southern States.
- The Revenue Act of 1862 revised and expanded the previous Revenue Act of 1861 to raise additional revenue as it had become apparent that the war would last longer and cost more than initially hoped.
- This Act is notable for its dramatic expansion of goods and services subject to federal excise, the introduction of the first progressive income tax, and the establishment of a centralized federal tax bureaucracy.
Understanding the Revenue Act of 1862
As the American Civil War dragged into a second year in 1862, the U.S. federal government recognized a need to raise more revenue for additional troops, munitions, and other wartime expenditures. The Revenue Act of 1861, passed the previous year, had already introduced the first direct federal income tax to help fund the war. After a series of indecisive battles through 1861 and the first half of 1862, it had become clear that the war would last longer—and cost more—than President Lincoln had originally hoped.
The American Civil War commenced in 1861 with the secession of many southern states, referred to as the Confederate States of America. There had been economic issues in the years leading up to the war and the federal government was already in need of funding. After its first attempt to fund the war, economic conditions worsened in the North. The Revenue Act of 1861 had levied the first-ever income tax on American citizens. The act taxed imports, provided for a direct land tax, and imposed a tax of 3% on individual incomes over $800.
Against this background, Congress passed the Revenue Act of 1862 to expand federal tax revenue to support the war effort. The Act replaced the 3% tax on incomes above $800 under the 1861 Act (which had not even been collected yet) with a progressive tax of 3% on incomes between $600 and $10,000 and a 5% tax on incomes over $10,000. The new act also had hefty taxes on alcohol and tobacco products. The income tax rates of the Revenue Act of 1862 were later increased with the Revenue Act of 1864. More income tax brackets and higher tax rates were added in 1864. The income tax was later repealed in 1872 and reintroduced in 1913 with the ratification of the 16th Amendment.
The 1862 Act also dramatically expanded the range of goods subject to federal excise taxes, which had previously been restricted to mostly luxury and "sin" items. The new Act now levied federal excises on everything from jugglers to medicines and a wide range of goods and services in between, including manufactured goods; raw materials such as iron, feathers, and leather; and licenses for all kinds of professions. After the war, excise taxes were cut back to apply primarily to alcohol and tobacco sales.
The act created the Office of the Commissioner of Internal Revenue to administer and enforce the new federal taxes. The 1861 Act had given the president the authority to appoint one assessor and one collector for each state, but the U.S. government otherwise lacked a centralized federal bureaucracy to collect and administer the new taxes. The federal government left it up to the States to enforce the tax at their discretion. In order to standardize and enforce compliance with the new taxes, the Commissioner of Internal Revenue was empowered to publish regulations, forms, and instructions for the tax and to carry out other actions to put the act into effect. The Bureau of Internal Revenue is known today as the Internal Revenue Service (IRS). The name was changed to emphasize a greater focus on serving the public rather than merely collecting taxes.