Following the country’s founding in 1776, and the finalization of the Constitution in 1789, political structures, including tax policies, were formed with an eye to keeping the central government weak. Freedom could be protected only by limiting the power of the federal government.
Originally, the constitutional system was so construed that, while Congress could levy taxes, the task of collecting taxes was left to each state individually; this was understood as a mechanism of protecting people from the central government.
The taxes originally authorized by Congress were indirect rather than direct: tariffs on foreign trade and excise taxes on specific products. So structured, these taxes had little discernable impact on the average citizen.
The famous Whiskey Rebellion of 1794 was a group of producers who opposed a federal excise tax. It established two important precedents: first, that the central government would use force to collect taxes; second, that social opposition to taxes would be an important factor in American politics.
In the late 1790s, the federal government experimented with direct taxes - in this case, property taxes on land and buildings - to finance its defense against the belligerent government of the French Revolution. The 1802 election cycle, featuring Jefferson’s ascent to the presidency, was the end of this exploration, and the government returned to indirect taxation.
For the war of 1812, Congress again experimented with taxes, raising excise taxes and customs duties, and borrowing money by issuing bonds. By 1817, these measures were repealed.
Between 1817 and 1861, the federal government effectively imposed no internal revenue. Its income was derived from customs duties and the sale of public land. To be sure, it can be argued that customs duties ultimately have some effect on finances of the private citizen, even if very indirect.
Because the consumption of imports was elective and, for practical reasons, limited to a small segment of the population, the effects of tariffs, while real, were probably too small to be detectable.
The sale of public land as a model for generating revenue to the central government is obviously not infinitely sustainable, but for that time period, it not only relieved the ordinary citizen from being held captive to the tax system, it also placed more raw material and opportunities for production into the economy and thereby generated growth.
So for 44 years, the average citizen enjoyed a level of freedom arguably not seen since. Matt Kibbe writes:
This is a far cry from the way the founding fathers initially envisioned the system of taxation for their new country. For more than a hundred years after its founding, the United States government was funded purely with tariffs, excises, and receipts from the sale of federally owned landed. Direct taxes, such as the now-familiar income tax, were out of the question.
In the 1860s, the costs of the war drove Congress to experiment with income tax, licensing fees, and fees for legal documents. Although these taxes would be repealed at the war’s end, the dangerous precedent had been set. Matt Kibbe continues:
Sadly, this simpler state of affairs was not to last. The Civil War brought an unprecedented level of expenses, and new taxes were an easy way to collect revenue in a hurry. The Revenue Act of 1861 established the Internal Revenue Service and created the first incarnation of what we would recognize as the modern income tax.
Over a period of several years, the Civil War taxes were dismantled. By 1868, the main source of revenue for the federal government was excise taxation on alcohol and tobacco. By 1872, personal income tax had been abolished. From 1868 to 1913, almost 90% of the revenue to the federal government came from excise taxes and customs duties.
In the 1890s, the Supreme Court ruled that income taxes were unconstitutional because they fell disproportionate to the states. Under the leadership of Woodrow Wilson, the progressivist movement was eager for more revenue to enact its social experimentation. Although there was no pressing war or military need, the progressive movement lobbied for a constitutional amendment to ensure that income taxes would be levied.
Reflecting on the experimentation with income tax during the Civil War, Matt Kibbe reflects:
This was originally intended to be a “temporary” measure to finance the war, but history has shown that there are few things more difficult than ending a temporary government program. In 1913, Congress ratified the Sixteenth Amendment to the Constitution, making the individual income tax a permanent feature of the law. Then, the top tax rate was less than 1 percent, and the tax code totaled twenty-seven pages in length.
The sixteenth amendment did, however, more than unleash income taxes on citizens. The precedent created a constitutional relaxation of the limits on government. Previously held in check, the central government soon discovered that it could inflict not only income taxes, but a broad range of taxes and fees and assessments on the citizens.
Since 1913, not only have both the nominal and real amounts of revenue confiscated by the federal government grown rapidly, taking an ever larger percent of the nation’s wealth out of the economy, but the types and numbers of taxes have grown quickly as well.