America’s first income tax was a disappointment, at least to the editors of Scientific American. In a January 9, 1864, opinion piece, the magazine reported that the levy was underperforming, yielding less revenue than anyone had expected. And the editors were certain they knew why: Federal tax officials were falling down on the job. And they were just as sure about the remedy: a crackdown on scofflaws and well-heeled chiselers.
It may seem odd to find commentary on fiscal policy in a journal devoted to science and technology. But the Scientific American of 1864 was different from the magazine published today. Describing itself as “The Advocate of Industry and Enterprise, and Journal of Mechanical and Other Improvements,” the publication took a broad view of its editorial ambit.
Founded in 1845 by Rufus Porter, scion of the New England Porter dynasty, Scientific American was more like a newspaper than a magazine during the Civil War. Published weekly as a broadsheet, it reported on a wide range of interests and concerns — including national politics.
Tax policy was never a primary focus for the magazine, even within its political coverage. But neither was the subject wholly absent. Articles reported regularly on decisions by the Bureau of Internal Revenue (BIR), especially when those decisions seemed likely to affect the conduct of scientific inquiry and industrial innovation. The editors took a special interest in the tax treatment of patent rights, for instance, as well as various excise levies on industrial and commercial goods.
If most of the magazine’s tax coverage was fairly narrow and specific, it also published occasional pieces on tax policy writ large. The Civil War had brought a sea change to American public finance. Under the press of a military emergency (and in the face of declining tariff revenues), lawmakers had imposed a national property tax, a wide array of consumer excise levies, and — most important — the first federal income tax.
The editors chronicled the arrival of income taxation on American shores, noting its long history in Great Britain. The magazine pondered the levy’s general character, but also the “Probable Influence of the Internal Revenue Laws Upon Invention.” The editors revealed no consistent bias, neither opposing nor embracing this fiscal innovation. But they turned a critical eye on its operation — and sometimes its fairness.
Early Problems
The income tax had first appeared, notionally, in the Revenue Act of 1861. But that initial levy was never actually collected, events having overtaken both fiscal needs and administrative capacities. In 1862 Congress tried again, reimposing an income tax and creating a new agency, the BIR, to administer it.
By late 1863, that second income tax had been operating long enough to render some judgments. And they were not happy ones.
On December 10 Treasury Secretary Salmon P. Chase offered some early data. And he did his best to put a positive spin on things:
The Secretary of the Treasury has much satisfaction in being able to say, in general, that the operations of the department intrusted to his charge have been attended, during the last fiscal year, by a greater measure of success than he ventured to anticipate at its beginning.
Happy talk notwithstanding, the numbers didn’t lie. Even Chase was forced to acknowledge as much. “While the receipts from other ordinary sources of revenue thus closely correspond with the estimates, or largely exceed them, the receipts from internal revenue have alone disappointed expectation.”
The “ordinary sources of revenue” that seemed to be performing well included tariffs, excises, property taxes, and money from land sales; each delivered as much as projected, sometimes more. (Accounting conventions made the property tax look like it was badly underperforming, but only because states were charged with collecting the tax and submitting it on behalf of their residents. Many states made these payments in the form of military supplies and services, which created the appearance, but not the economic reality, of an underperforming tax.)
The shortfall — and it was substantial — was coming from income taxes. The BIR had collected $37,640,787.95 in fiscal 1863, well short of the $85,456,303.73 that federal officials had projected the year before.
Chase insisted that the shortfall was a function of flawed projections rather than poor management. The Treasury Department had tried earnestly to get the numbers right. “The estimate, indeed, was made of the operation of a law recently enacted, and necessarily imperfectly executed,” Chase wrote defensively. “But such care had been taken to obtain correct premises, that it was hardly thought possible that the conclusion deduced from them could be wide of the truth.”
Indeed, Treasury put its finest mind to the task of developing its revenue projections. “Under the instructions of the Commissioner, at the instance of the Secretary, a very competent gentleman was for some time employed in ascertaining, with the aid of practical men, conversant with business, the probable amount of revenue from each object of taxation.” The results seemed plausible, and Treasury had submitted them to Congress in good faith.
But reality quickly intruded. “Experience has demonstrated its error,” Chase acknowledged on behalf of the department.
The secretary suggested that “part of the deficiency may be attributed to the imperfect execution of the law.” Congress, too, deserved some of the blame, having adjusted the tax after Treasury delivered its initial projection.
But neither explanation was adequate to explain the large shortfall. With the clarity of hindsight, Chase granted that it was fanciful to have thought that “revenue from this source would have exceeded half the estimated amount.”
Absent congressional action, Chase said, the income tax would continue to underperform, at least relative to its theoretical capacity. “It is clear that the law, unless materially amended, will not produce the revenue expected from it,” he wrote.
Editorial Outrage
If Chase was disappointed, the editors of Scientific American were outraged. The magazine was not antitax; the editors recognized the need for new revenue to fight the Civil War. And they were convinced that most citizens in the Union shared their willingness to pay up.
“The loyal people of the United States will cheerfully submit to such taxation as is necessary to sustain the government in maintaining its authority against armed treason,” the magazine wrote.
But a willingness to pay was rooted in two factors: responsive government and sound fiscal stewardship. Taxpayers expected federal authorities to fix the myriad problems plaguing the revenue system, and especially the new income tax. The editors agreed with Chase that income taxes needed an overhaul.
Still, the editors continued, the most serious problems facing the income tax were administrative. Many people were shirking their fiscal responsibilities, some through outright evasion and others by chiseling around the edges. And the BIR was letting them get away with it — a failure of governance that the magazine described as “intolerable.”
The editors were moved to outrage not by the heavy taxes they were dutifully paying but by the heavy taxes that others were not paying.
Everyone had a stake in fair and vigorous administration of the tax laws, the editors explained:
As this subject is one that appeals directly to the business and bosoms of all men, everyone is interested in seeing that the government is not defrauded out of its just due; for unless there is increased vigilance on the part of the people in this respect, there is no telling to what extent taxation will have to be increased.
Some people were simply determined to cheat. “Unfortunately all are not honestly disposed to meet the just demands which the government has upon them,” the magazine complained. “They shirk their duty in making their payments, and thereby throw heavier burdens upon those who honestly come forward and pay their taxes to the fullest extent of the lawful demand upon them.”
Enforcing the Law
Noncompliant taxpayers were the most serious problem afflicting the income tax, the editors contended. But tax administrators also deserved some of the blame. Better enforcement could save the income tax from its evident failures.
“We are among the number of those who think that if the officers of the law were vigilant in the discharge of their duties, and were strict to exact payment from all alike, the revenues of the government under the present law would be adequate to meet its wants,” the editors of Scientific American wrote.
The magazine insisted that many BIR officials were complicit in tax avoidance. They sketched a not-so-hypothetical scenario.
A merchant, required by law to report his annual income, might fail to file a return. Instead, “he calls on the assessor [an official post in the decentralized structure of the agency], bearing a good-natured face, and tells him that he cannot make out an accurate list of his last year’s income.”
This merchant might acknowledge that his income was significant, but he would plead ignorance about its actual size. He had made enough money to support his family, he might say, but insist that he had received “no positive dividend of profits.”
The undistributed profits of the firm were the key problem. “The actual fact is that some $50,000 more or less has been added to the capital stock of the firm,” the editors said of their hypothetical case. It was the nontaxation of these profits that was undermining the income tax.
And all because BIR officials were failing to do their jobs. “The assessor listens to these smooth words, a merely nominal assessment is made, and a small stingy tax is the result,” the magazine charged.
The editors insisted that this sort of hypothetical exchange occurred in actual fact with alarming regularity. “As a case in point, we saw, quite recently, in one of our exchanges, a list of the income tax received from certain towns in Massachusetts,” the editors reported. “A wealthy manufacturing town yielded only the paltry sum of $1,000 from income tax.”
Such a poor showing from such a rich town was implausible. “In the town to which we refer, there are in full tide of successful operation five large woolen factories,” the editors wrote. “And their owners have admitted to us within the past year, that their profits were much greater than at any former period.”
Clearly, the problem was one of ethics and morality. “Many men of large incomes and somewhat elastic consciences, have been allowed to pay a certain amount of tax on an imaginary income,” the editors wrote, “which would have made some difference in Uncle Sam’s favor if the assessor had pinned them down to a sworn statement of each and every item.”
If some returns were inaccurate, others were simply absent. “The law, as it now stands, requires of the assessor to notify persons to make returns of their incomes,” the magazine pointed out. When taxpayers failed to file, assessors were already expected to make their own determination of income and proceed to collect tax on it.
But the system was not working. “We are fully persuaded in our own minds that many who should pay escape entirely, for the reason that they were never called upon by the assessor,” the magazine wrote. “Cases of the kind have recently come under our notice; the parties have been overlooked by the assessor and are quite willing to escape his notice.”
The answer to this problem of nonfiling tax delinquents was obvious and simple: Follow the law. When a taxpayer failed to file, the assessor should determine the income and the taxes due on it. The assessor should “fix an amount, in such proportion as his judgment may dictate,” the magazine continued pointedly, “being sure to make it large enough to arrest the attention of the delinquent.”
The editors of Scientific American weren’t the only ones griping about poor tax enforcement during the Civil War. Even Treasury recognized that improvements were imperative.
But calls for reform were dampened the following year, thanks to a change in performance (or a change in estimating techniques; the interplay was complicated). In December 1864, a year after Chase gave Congress the bad news about income tax collections, his successor delivered a better report.
Projected to raise $77,599,713.59 in fiscal 1864, internal taxes had produced $109,741,134.10.
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