America's history with the flat tax
November 21st, 2011
02:32 PM ET
3 years ago

America's history with the flat tax

(CNN) – Current Republican presidential candidates Rick Perry, Herman Cain and Newt Gingrich all favor some form of one. Past presidential hopefuls like Steve Forbes and Jerry Brown have advocated one. Noted economists like Milton Friedman have championed the idea. A flat tax - one constant tax rate applied on all income. However, the flat tax was more than just an idea in America's distant past. It was a reality.

Listen:

Twice before in its history, the U.S. federal government enacted a flat tax. Both times, they were imposed to deal with a major crisis. However, these taxes share another common bond. In both cases, they never ended up being collected.

The country's first experiment with a flat tax came in 1861. The nation was mired in civil war, and President Abraham Lincoln's administration had to find a way to help raise money to wage the conflict. Keep in mind that up to this point, there was no form of income tax in place in the United States.

"You have to understand the revenue system prior to the Civil War," says Steven Bank, a law professor at UCLA and an expert on tax history. "It was primarily tariff revenues. Once the Civil War hits, that tariff revenue dropped considerably and expenses rose."

As a result of this, President Lincoln signed the Revenue Act of 1861 into law. America had its very first income tax - a 3% flat rate on income above $800.

However, that particular tax was never enforced. Bank credits opposition from the U.S. Treasury Secretary at the time, Salmon P. Chase, and points out there were no resources to gather up the revenue even if Chase had been a cheerleader for it.

"Remember, we had no internal revenue system at the time," Bank says. "There's nobody going around collecting taxes."

Congress attempted to address this the following year through passage of the Revenue Act of 1862. It repealed the previous year's flat rate income tax and replaced it with a progressive rate income tax. The rates were amended regularly before the income tax expired in 1872, when it and the resulting revenue were no longer deemed as urgent. Two decades would pass before Congress's second attempt at levying a flat tax. It was born out of what became known as the Panic of 1893.

The Panic was one of the greatest economic crises the nation would know before the Great Depression nearly 40 years later. The bankruptcy of the Philadelphia and Reading Railroad had a huge ripple effect, causing many banks and businesses reliant on it to go belly up. The stock market plunged. Revenue was needed, and it all prompted Congress to take a long, hard look at the tax code.

"Grover Cleveland came in as president on a tariff reform platform, and the income tax was dubbed the 'handmaiden of tariff reform' by newspapers," Bank says. "The theory was that we needed something to counterbalance the regressive effects of the tariffs. The view was that attaching customs duties to goods coming into this country raises prices, puts money into the pockets of the big domestic manufacturers and out of the pockets of the little guy."

The income tax was seen as a way of giving Congress a way to lower the tariff rates. In 1894, it enacted the Wilson-Gorman Tariff Act. This included another flat-rate tax - 2% on incomes above $4,000. In the end, the tariff rates themselves were only lowered slightly, prompting a disappointed President Cleveland to allow the act and the tax to become law without his signature.


Filed under: 2012 • CNN Radio • Herman Cain • Newt Gingrich • Rick Perry • Taxes
soundoff (14 Responses)
  1. REG in AZ

    The Republican / Tea Party is a sick joke today; a joke in the deception they seek to achieve and sick in the advantage they strive to take of those they deceive. They weren’t always this way but as their dependence on “the money” has grown so has their abandonment of responsibility to the people. Today they are owned and controlled by “the money”, by “the few” (1%) who strongly support them and who they concentrate on benefitting while, with the substantial power, influence and money of their supporters, they seek to just con the majority (99%) and manipulate public opinion. They target the Evangelistic Christian with appeals to “family values” while their actual actions are anything but true Christian: anyone only has to check their candidates’ history, the party’s performance and issues like GWBush being sold as a born-again-Christian when he is actually an obvious text-book sociopath without any true conscience. The Tea Party touts “ultra conservatism”, faulting taxes and government spending while supporting policies which liberally favor “the few”, those who always seek “more”, and that actually fed the current problems with a permissive government offering deregulation, weak oversight and lax enforcement that constantly result in run-away greed, gross dishonesty and self-indulgence by “the few”; all of it being apparent in the repeated cycles seen in savings-and-loans, banks, dot.coms, in the investment, finance and mortgage industries, as well as in corporate corruption (like Enron) where exploitation by “the few” and then the crashing and the costs to the majority are continually experienced.
    (continued)

    November 21, 2011 03:00 pm at 3:00 pm |
  2. REG in AZ

    (continuing)

    There neither is any honest Christian conscience / actions displayed, nor is there any real “socialism” that is the problem, ... rather they are stubbornly just perpetuating their con and insultingly taking the people for granted. They are emboldened by past successes which has made them disgustingly arrogant. One clear and costly proof is in the constantly growing gap between the majority, including the total middle-class, and the very wealthy, as we continually move closer to being a two-class society with “the few” competing in having it all and the majority struggling to survive. And any claim that it is a “level playing field” with everyone just needing to “step up” and “work at getting ahead” ridiculously ignores reality, as was made totally obvious with Bush-Cheney always completely catering to “the few”, while giving the majority only apathy, the costs and an abundance of subterfuge to rationalize and deceive, and as they clearly proved the “trickle down” theory is a total fraud just making the wealthy wealthier and soliciting political support.

    November 21, 2011 03:00 pm at 3:00 pm |
  3. James Miller

    Their rich backers LOVE the idea. They would pay even less under each flat tax proposed than they now pay. The devil is in the details.

    November 21, 2011 03:13 pm at 3:13 pm |
  4. The Greedy Old Pigs have declared class war on US!

    The flat tax would be more gravy for the 1% and more hardship for the rest of us. What a sleazy scam.

    November 21, 2011 03:16 pm at 3:16 pm |
  5. Rudy NYC

    The problem with the flat tax proposals being put forth by the Republican candidates are not applied equally to all types of income. The flat tax rates only apply to wages. Other forms of income are not taxed. In other words, if you work for a paycheck, then you will pay taxes on that income. If your income is from capital gains, then you will not no taxes on that income.

    Also, none of the candidate's proposals raise enough revenue as our current system. The most common response to that fact is that the government would not need as much revenue because they would eliminate many departments.

    November 21, 2011 03:19 pm at 3:19 pm |
  6. coy4one

    None of these candidates will get a flat tax into law. Big business does not like them and the wealthy will not support candidates that push them. It's all a bunch of hot air!

    November 21, 2011 03:25 pm at 3:25 pm |
  7. Phil in KC

    Did you notice that, in both instances, the tax was flat, above a certain amount? $4000 in 1894 would be equivalent to almost $100K today. Similarly, $800 in 1861 would be roughly equivalent to $19K today. The one that was actually implemented, in 1894,was a flat tax on those who were most able to pay it. Even the bill in 1861 would have only impacted those above poverty level. The Republicans don't want that. They want EVERYONE to pay that flat tax – whether they can afford it or not. And Herman Cain's national sales tax, by the way, is one of the most regressive taxes out there. So he's just adding insult to injury.

    November 21, 2011 03:45 pm at 3:45 pm |
  8. Rick McDaniel

    Flat taxes will not generate sufficient revenues to run the country. The wealthy have to pay more, to even sustain the country. The simplest feasible system is a 4 tiered system, of rates, with a low income rate, a low middle income rate, a high middle income rate, and an upper income rate.

    That is possible, without cutting revenue to the point where government cannot function.

    November 21, 2011 03:47 pm at 3:47 pm |
  9. Anonymous

    AS IF! As if an incoming president gets to choose our nation's taxing structure. Why are we even discussing this?

    November 21, 2011 03:55 pm at 3:55 pm |
  10. KGKAY

    AS IF! As if an incoming president gets to choose our nation's tax structure. Why do the candidates spend time on this subject?

    November 21, 2011 03:59 pm at 3:59 pm |
  11. lgny

    It is rather misleading to characterize the early taxes as "flat taxes". For example, The second one under Cleveland was levied only on those earning more than $4,000. Back in 1894, an income of $4,000 would be considered quite good.

    It's more equivalent to a proposal to levy a single tax rate for all workers not earning more than $70,000 per year. That is much narrower than the current proposals.

    November 21, 2011 04:02 pm at 4:02 pm |
  12. M-AZ Independent -

    Coy4one

    I totally agree with you; if the VERY wealthy, including corporations in this country like things just the way they are; complicated and full of loopholes that their tax accountants have already figured out.

    November 21, 2011 04:10 pm at 4:10 pm |
  13. S.B. Stein E.B. NJ

    The idea of the flat tax sounds nice, but there are plenty of problems with it. I believe that the major problem is that the poor may pay the same percentage but their money doesn't go as far as the wealthy because they don't have as much. The wealthy have more and can do more with what they have. I don't see them doing what they should be to help the country.

    November 21, 2011 04:17 pm at 4:17 pm |
  14. dciii

    As Phil in KC noted, "the tax was flat ABOVE a certain amount". Thadeus Stevens, the Chairman of the House Ways and Means Committee during the Civil War said, "While the rich and thrifty will be obliged to contribute largely from the abundance of their means...no burdens have been imposed on the industrious laborer...no one will be affected by the provisions of this bill whose living depends solely on his manual labor.(The Internal Revenue Act of 1862)

    November 21, 2011 04:20 pm at 4:20 pm |