It was under Secretary of the Treasury Salmon P. Chase during the Lincoln administration that the Internal Revenue Service was formed. Chase reported to Congress his estimate of the cost of the war, which he put at $320 million for the year 1862.
As a result, Congress passed a law, part of the Revenue act of 1861, signed in 1862, that created a Commissioner of the Internal Revenue Service and set the country’s first income tax. The agency levied a three percent tax on income between $600 and $10,000 and a five percent tax on income over $10,000. The effort, obviously, was to create funding needed for the war efforts.
Members of Congress argued long and hard before finally passing the bill. They sought a fair and equitable solution. Many thought taxing real estate was not fair, but taxing income provided the fairest tax.
The first Commissioner of the IRS was George S. Boutwell, appointed by President Lincoln upon the highest recommendation of Chase. He became commission on July 17, 1862 and held office until March 4, 1863. Joseph Lewis was commissioner for the remainder of the Civil War. Boutwell had served as Governor of Massachusetts from 1851 to 1853. He also served on a military commission of the War Department investigating possible corruption in the quartermaster’s department of General John Fremont prior to his appointment as commissioner of the IRS. He held his job until he was elected as a member of the U.S. House of Representatives in 1863.
Critics complained that the tax collections should be controlled by the states rather than the federal government. They also contended that where honest people paid their taxes, those less scrupulous persons could avoid paying their taxes. The argument that the IRS soon became too large and unwieldly certainly could have also been made, as the agency employed over 4,000 by the war’s end, with all but sixty of those positions being agents in the field. The IRS quickly became the largest government agency in the land.
Taxpayers were required to file an annual tax return. Assessors would calculate their taxes due. If the taxpayer failed to file, the assessor could estimate what the taxpayer might owe and add on a fifty percent penalty. In fiscal year 1863 the IRS collected $2 million in income taxes. The following year, the number increased to $20 million. By 1864 that number had climbed to $32 million.
From its first day in existence, the Bureau was troubled by a high turnover rate of employees as the pay was very low — $3 to $5 per day. Commissioner Boutwell complained to Congress saying “It is of importance to the Government that the Assessor should be a man of intelligent business capacity and unfaltering integrity. The compensation provided by law is not adequate for the services of men who possess these qualifications.” But Congress did not raise the assessor’s pay.
If you are interested in the Civil War, please subscribe to my posts. Or “like” my articles on your Facebook/Twitter accounts.