The Great Tax Wars: Lincoln to Wilson--The Fierce Battles over Money and Power That Transformed the Nation

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9780684850689: The Great Tax Wars: Lincoln to Wilson--The Fierce Battles over Money and Power That Transformed the Nation

A major work of history, "The Great Tax Wars" is the gripping, epic story of six decades of often violent conflict over wealth, power, and fairness that gave America the income tax. It's the story of a tumultuous period of radical change, from Abraham Lincoln and the Civil War through the progressive era under Theodore Roosevelt and ending with Woodrow Wilson and World War I. During these years of upheaval, America was transformed from an agrarian society into a mighty industrial nation as great fortunes were amassed, militant farmers and workers rebelled against concentrations of vast wealth and power, class war was narrowly averted, and America emerged as a global power. Award-winning journalist Steven R. Weisman begins his narrative with the Civil War, when Lincoln imposed the nation's first income tax to pay the Union Army and dampen dangerous resentment against bankers, merchants, and factory owners who profited from the war. Repealed by Congress after the war, the tax was reenacted in 1894 to deal with the nation's worst economic collapse until that time. By reducing the government's heavy reliance on tariffs for revenue, the tax benefited farmers in the West and South who were rebelling against the high cost of imports and goods manufactured in the North and East. But a year later, the Supreme Court declared the income tax unconstitutional, plunging the court into one of the worst controversies it has endured and once again pitting region against region and workers and farmers against industrialists. The court's decision also handed populist congressman William Jennings Bryan of Nebraska, who was a champion of the tax, a major issue in his unsuccessful campaign forpresident in 1896. The turn of the century brought an outpouring of progressive reforms under President Roosevelt. Toward the end of his term, T.R. proposed an income tax to help break the excessive power of the wealthy and the trusts and banks they controlled, but it took a deal between President William Howard Taft and Congress in 1909, and then ratification of the Sixteenth Amendment to the Constitution, to finally get the tax enacted in 1913. The tax took effect just as Wilson entered the White House and in time to finance America's involvement in World War I. "The Great Tax Wars" features an extraordinary cast of characters, including the powerful men who built the nation's industries and the politicians and reformers who battled them -- from J. P. Morgan and Andrew Carnegie to Lincoln, T.R., Wilson, Bryan, and Eugene Debs. From their ferocious battles emerged a more flexible definition of democracy, economic justice, and free enterprise largely framed by a more progressive tax system. Drawing on their words and on newspaper and magazine accounts of the time, Weisman shows how the ever-controversial income tax transformed America and how today's debates about the tax echo those of the past.

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About the Author:

Steven R. Weisman has covered politics, economics, and international affairs for The New York Times for more than thirty years. Previously a deputy foreign editor at the Times, he now writes editorials for the paper about government, politics, and international subjects, including the battles over taxes in the last two presidential elections. He lives with his wife, Elisabeth Bumiller, and family in the Washington, D.C., area.

Excerpt. © Reprinted by permission. All rights reserved.:

Chapter One: "Circumstances Most Unpropitious and Forbidding"
The Civil War Begins

"Money!" Abraham Lincoln exclaimed. "I don't know anything about 'money.'"

The President was typically modest, evasive and adept at feigning ignorance when he did not want to be pinned down. At a meeting with a delegation of New York bankers and financiers well into the Civil War, Lincoln fully understood that the United States needed money to save the Union. So did Lincoln's anxious Treasury Secretary, Salmon P. Chase. From the conflict's outset, the Union had had to fight while nearly broke. Chase's initial estimate after the taking of Fort Sumter was that the war would cost $320 million. After all, most experts figured at the time, the war could not last long -- "two or three months at the furthest," the Chicago Tribune predicted -- so the Treasury Department's first proposal was for three-quarters of the money to be borrowed from banks. Once the war was over, the money would be repaid quickly, Chase and others thought. But after the first months passed, the optimistic predictions unraveled, leaving the Treasury only $2 million on hand in the summer of 1861. While Union soldiers reeled from defeat after defeat, the banks balked at the administration's demands for loans, especially at the federal requirement that loans be paid in gold and silver.

Lincoln and Chase had a basis for thinking that the Union's credit was good and its eventual prospects even better. The North's strengths in fighting the war derived from a two-to-one advantage over the South in population, income and wealth. The Union side also had a 300 percent advantage in railroad miles, a powerful industrial foundation and vast holdings of unoccupied public land, including the gold-producing regions of the West. But these were assets not easily transformed into the cash to equip and send armies into battle. For months the banks warned Lincoln and Chase that reliance on borrowing when the future was uncertain was risky and potentially inflationary. One such warning was delivered to the Treasury Secretary when he traveled to New York for a private meeting in 1861 with the barons of capitalism at the New York Customs House near Wall Street, where financiers gathered from across the Northeast region. The Secretary was there to discuss the sale of new twenty-year bonds, but the low interest rate of 7 percent and the request that the bonds be purchased in gold unsettled the bankers in the room. They felt that the Treasury Department was looking on them as some sort of bottomless reserve, when the banks' solvency was actually very precarious.

Chase comprehended their situation at one level, but he also viewed the banks' reluctance to buy the bonds as arrogant and unpatriotic. The Treasury Secretary knew about the dangers of inflation, but he did have a war to fight, and he would do what was needed. He warned that, if necessary, he was prepared to print money to pay for the war, even if the price of a breakfast rose to $1,000. The banks were sympathetic, but they wanted to know about the prospects of repayment. At one point, James Gallatin of National Bank of New York, the son of Thomas Jefferson's Treasury Secretary, spoke up. What if more military reverses occurred? What if Britain or France intervened on the side of the Confederacy? What if the war went on not for months but for years? Another banker threatened to stop doing business with the federal government altogether unless Washington did something to shore up federal finances. His comment came across to the Treasury Secretary as a threat.

"No!" Chase fired back. "It is not the business of the secretary of the Treasury to receive an ultimatum, but to declare one if necessary."

By the end of 1861, Chase and Lincoln pried $150 million from the banks at 7.3 percent interest, but at great cost to the solvency of both the banks and the nation. As the men at the Customs House had feared, their reserves were so far gone that they had to suspend payments in gold and silver to their own customers. Soon afterward, the federal government followed suit, unable to honor its own payments with gold. These were brutal blows to Union credit. Without revenues, the federal government would not be able to turn to the banks again for more loans. More revenues meant only one thing: more taxes. That requirement would mean a new kind of tax, with far-reaching impact on the nation's finances.

Within the next six months, on July 1, 1862, Lincoln signed the first federal income tax in United States history. It was a momentous piece of legislation, rivaling, in its way, the abolition of slavery, the Homestead Act, the establishment of a national currency and federal bank regulation. Enactment of an income tax ushered in a new era of thinking about who should pay, who should sacrifice and who should gain from the federal government at a time of war. It established what until then was considered a revolutionary principle: the idea of taxing rich people at a higher rate compared to the rate for people less well off. Yet once established, that principle became a permanent feature of the American political and economic landscape.


The story of how the financial crisis of the Civil War led to a progressive income tax is a story not simply of war but also of the tumultuous economic and political change brought on by a new industrial age. The tax was essential to saving the Union and freeing the slaves. And although the tax was repealed shortly after the war ended, it left a monumental legacy by redefining the relationship between wealth and fairness. The Civil War income tax was a benchmark for how much America had been transformed in the first half of the nineteenth century. It established a foundation for the changes to come in the century's second half and for the years after that.

The tax that was enacted during the heat of a national crisis resulted from many decades of growth and change. Before the Civil War, the United States was populated primarily east of Kansas and on the Pacific coast. It was dominated by small business and farmers dependent on staples and manufactured goods from abroad. Americans kept their investments in their communities, and they used local currencies issued by their own banks. Thousands of different paper currencies, some issued by banks and some simply bogus, circulated as money among Americans. The national government was tiny, with little power to oversee this chaos. The government delivered the mail, collected tariffs and oversaw foreign affairs, but did little else. The Army when Lincoln took office had about 16,000 men, barely enough to protect Americans from Indians. Such was Washington's complacency that in June of 1860, the House Ways and Means Committee eliminated $1 million from a naval appropriations bill to repair and equip vessels. "I am tired of appropriating money for the army and navy when, absolutely, they are of no use whatsoever," said one member of Congress.

Complacency was perhaps understandable. No serious external threat cast a shadow on the prosperity achieved by America in the first half of the nineteenth century. After 1815, nothing seemed to stand in the way as Americans conquered, settled, annexed and purchased new territory, quadrupling the nation's size and population. Exports grew nearly two-and-a-half times in 50 years, to $243 million. In the South, King Cotton dominated world markets, supplying the mills of New England and Europe and enriching shippers, lenders and other middlemen based in New York. From 1817 to 1837, the output of the textile industry in New England rose from 4 million yards of cotton cloth to 308 million. The system of interchangeable parts revolutionized the production of machinery and arms, enabling the United States to surpass Britain in industrial might. Factories required workers. Waves of immigrants joined with Americans from the farm regions to pour into the great American metropolises seeking the means to improve their lot. Crammed into sweat shops, mills, mines and factories, workers grew restive, demanding better wages and conditions and sometimes going on strike.

At the other end of the spectrum, the wealthy of America were no longer simply the owners of large plantations and estates. They were a new breed of businessmen called "merchant capitalists" and "industrialists," people whose wealth was in stocks and bonds rather than property. There were plenty of domestic tensions revolving around economic issues. Farmers and workers regarded the wealthy new class of bankers, lawyers, merchants and speculators as "capitalists" and "bloodsuckers." On the whole, however, Americans were a prosperous people, even though they endured many cycles of boom and bust. Their average income doubled in a half century, and they could afford to buy goods that once had been transported by small ships and flatboats and now arrived on large ships and by roads and rail. New canals and railways enabled farmers to produce and sell their food in what had become for the first time a national market for goods. A revolution in communications allowed news to travel by telegraph. Newspapers and magazines were read by a growing middle class.

Few Americans doubted that these good times were the product of the hard work, industriousness and thrift of the most blessed new citizens of the world. But because there was now a national marketplace, the federal government stepped in to play a critical role by chartering the banks, licensing the corporations, digging the canals and sponsoring the railroads that laid a foundation upon which the nation could grow. To carry out these functions at the federal level required revenue. But on the eve of the Civil War, Americans were not used to paying anything to support their national government except indirectly, through the tariff. The federal excise tax on alcohol had been repealed in 1817. In the 1850s, the federal government obtained 92 percent of its revenues from customs duties imposed on goods imported from abroad. While protecting domestic industry from competing with cheap imports, the tariffs raised the price of nearly all goods consumed by Americans, from clothing to farm equipment. It was the tariff that paid America's way, which is why it was for so long so contentious an issue in American politics.

Tariffs were like a silent sales tax. Though regressive in nature, falling more onerously on the poor than on the rich, tariffs were accepted by Americans because they shared a broad assumption that everyone, producer and consumer alike, gained materially from the government's role in nurturing domestic industry and jobs. Indeed, without tariffs, the United States would have made a much slower transition from its status as a nation with an agrarian-based economy, rich in resources but lacking in capital investment, into the mighty industrial power it became after the Civil War. Debates about the tariff rose and fell throughout the nineteenth century, but without significant damage to the broad consensus in their favor. Democrats supported what Andrew Jackson termed a "judicious tariff," while Whigs, and later Republicans, pushed for higher tariffs to protect industries to fulfill their vision of development and enrich their political base. In the 1840s and 1850s, the anti-tariff forces managed to keep trade barriers reasonably low. Then came the Panic of 1857, a calamitous recession, after which Republicans succeeded in enacting the higher tariffs that they argued were needed to protect jobs and industry from foreign competition.

These were some of the economic conditions on the eve of the Civil War. By the end of the conflict, the Union demand for money to prosecute the war sent tariffs to record levels. American citizens paid higher prices for virtually everything they purchased. To persuade Americans that the wealthy citizens who were prospering from the war would bear more of its cost, Congress and the President turned in 1862 to the income tax, as well as taxes on corporations. Taxes, for the first time, were imposed on people's incomes, at graduated rates. A new bureaucracy was established to collect these charges, the Internal Revenue Bureau.

Taxpaying in wartime, when sacrifice is demanded from everyone, is shouldered more willingly than in times of peace. During the Civil War, it was borne to save the Union and free the slaves. And for the first time, taxation was also conceived and understood as an instrument that reduced inequality in a time of economic upheaval, when new fortunes were being made, in part out of war profits. As one lawmaker put it during a heated tax debate in the House, referring to two families that had grown rich during the war: "Go to the Astors and Stewarts and other rich men of the country and ask them if in the midst of a war [the income tax] is unreasonable. I could not advocate anything else in justice to the middle classes of the country."


To many visitors who traveled to Springfield after the 1860 election, Abraham Lincoln seemed overwhelmed.

The President-elect had an unsettling habit of pledging firmly to protect the Constitution and then throwing in a stream of jokes and homespun anecdotes. As the news arrived of one state after another seceding, he was noncommittal about what he planned to do. He had just won a precarious victory with less than 40 percent of the popular vote, and many people around him wondered whether he was up to the challenge of preserving the Union. At the beginning of this strange period of testing, Lincoln, perhaps reflecting some kind of private uncertainty about himself, surprised his friends by suddenly growing a beard.

For all his historic majesty, Lincoln in retrospect is a figure of puzzling contradictions. He was a man of action with doubts about the efficacy of action, a fatalist and an idealist, a farsighted thinker who could be slippery and reactive. We think of Lincoln as a great visionary, but he came across to many of his colleagues as pragmatic. "My policy is to have no policy," he said. The biographer David Herbert Donald attributes to Lincoln in action that quality defined by Keats as "negative capability," the ability to live with uncertainty, doubt, mystery and the avoidance of "any irritable reaching after fact and reason." Yet he could come to a sharp decision when history required.

Lincoln's economic views are more easily definable, but they, too, derived from a mixture of high principle, philosophy and practical politics, as well as from lessons that he had learned from his own life's varied experiences. Long before the war, starting at least when he was in his early twenties, these views embraced rugged individualism and aggressive government -- a belief that capitalism rested on both the dignity of labor and state intervention. As the biographer and historian Gabor S. Boritt notes, his image was tailor-made to represent the virtues of hard work in a free society. His nickname, "the Rail Splitter," harkened back to "Old Hickory" for Andrew Jackson and "Tippecanoe" for the war hero William Henry Harrison of the "Log Cabin" campaign of 1840. But it mainly helped Lincoln project himself as a classic self-made man, whose industry would be as good for the country as it had been good ...

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