The act of 5 Aug. 1861 was primarily in tended to (temporarily) increase duties on im ports; though it also imposed a direct tax of $20,000,000, to be assessed on land and col lected for the government by the States. The law of 1 July 1862, however, which is entitled: "An act to provide Internal revenue for the sup port of the government and to pay interest on the public debt," was a conscious effort to establish a new system of Federal taxation. It created the office of Commissioner of Internal Revenue in the Treasury Department andpro vided for an organization of coil- tors and in spectors, which has been maintained sub stantially as first organized up to the present time. The tax on whisky was fixed by the Internal Revenue Law, as the act was called, at only 20 cents per proof gallon, probably fol lowing the .precedent of the law of 1813; but this tax was increased by three successive en actments in 1864, first to 60 cents, then to $1.50 and, finally, to $2 per gallon, where it remained until 1868. The newly developed oil industry received marked attention, for quite as heavy a tax was placed on illuminating and lubricating mineral oils (20 cents per gal lon) as was originally placed on whisky; more over, refiners of oil were subjected to all the provisions applicable to distillers of spirits with respect to special (license) taxes, bonds, re turns, assessments and removals to and with drawals from warehouses. All other illuminants then in common use, such as gas and candles, were likewise taxed, but this accorded with the general policy of the act to obtain revenue from everything in sight. It taxed bar, hoop and sheet iron, steel, wire, wood screws and cut nails; locomotives and marine engines and boilers; brass tubing and lead pipe, textile fab rics, clothing and trimmings, felt hats, silk hats and bonnets, hides, leather and factory made shoes, hoopskirts, diamonds, jewelry, watches and gooseberry wine; also sugar, ground spices, chocolate and dry mustard. The products of domestic agriculture, cotton ex cepted, went free and farmers were unlicensed; but special, or license, taxes were placed on practically all other occupations. The butcher, the baker and candlestick maker (this is a literal truth) had to pay, and so did the doctor and lawyer. The stamp taxes were expected to yield $20,000,000 a year, but they produced twice that amount. All legal documents, all kinds of commercial instruments, including checks and receipts, bonds, insurance policies, conveyances and mortgages had to be stamped; and, if un stamped, the law declared them void and for bade them being placed on record or used as evidence. The law also imposed dues on suc cessions and legacies, and a tax of from 3 to 5 per cent, graduated to their amount, on incomes. Most of these were, and so intended to be, war taxes. Reductions began to be made in 1866 by the first Congress that met after the restora tion of peace. Many of them were abolished in 1867 and 1868 and practically all of them, including the tax on incomes (but excluding the stamp taxes and the excises on whisky, to bacco and beer) were lifted by the law of 14 July 1870.
The Internal Revenue Act and its successful enforcement had demonstrated the wide scope of the taxing powers of the Federal govern ment. Its right to levy tax on incomes was not successfully assailed until 1914, when the Su preme Court declared the Income Tax Law passed that year to be unconstitutional. Most of the stamp dues were abolished in 1872, the long est to continue being those on checks, toilet arti cles, patent medicines and playing cards. The taxes on whisky, beer, manufactured tobacco and cigars became the enduring features of the Federal system of internal taxation; and they were the most productive. The largest amount collected under the Internal Revenue Law of 1862 in any year was in 1866, before any of the war taxes had been abolished, when $310,000, 000 was turned into the Treasury from this source. The total collections in the 30 years
1864, when the original act of 1862 obtained its final form, amounted to approxi mately $4,550,000,000, of which two-thirds was derived from whisky, beer and tobacco. By the act of 13 July 1M6, stamps were first re quired •to be affixed to beer kegs as evidence of payment of the tax on the contents. The result was so satisfactory, in this particular, that two years later tax-paid stamps were re quired to be affixed to the original packages of distilled spirits when taken out of bond, and to each box or other container of cigars and manufactured tobacco before the goods left the factory where they were made. As a sub stitute for, or as an additional check on, the elaborate systems of accounting employed to prevent frauds on the revenue, the tax-paid stamp has abundantly proved its usefulness. Its efficiency came into question in 1875, when the "Whisky Ring" ttials disclosed a jugglery with distillers' and rectifiers' stamps (which are not tax-paid but merely certify the contents' of the packages) whereby the government had been defrauded of many millions. The success of the frauds was due, however, to the corruption of revenue officers as well as to defects in the stamp laws. Since the introduction of new checks, suggested. by the experience with the "Whisky Ring," there have been no serious losses in the collections.. This is remarkable in view of the fact that the tax on distilled spirits, which was finally set at $1.10 per gallon, where it remained fixed for 40 years, amounted to about four times the first cost of the product. The internal revenue system be came one of the most productive taxing systems of the world. The collections steadily increased and in ratio to the growth of the nation in population and wealth; and for the fiscal year ended 30 June 1914, the last under normal conditions, they amounted to $305,491,548. This was exclusive of the new in come tax, for the laying of which authority had to be obtained amendment of the Con stitution. The collections from customs in the year mentioned amounted to $292,320,015 about $13,000,000 less than the internal revenue taxes. The administration of the Internal Re venue Law is complicated and requires the em ployment of a large field force of inspectors, gaugers, etc., besides the office forces at Wash ington and in the numerous collection districts. Nevertheless, the cost of administration or dinarily does not exceed per cent of the amount collected, which is about two-thirds of the cost of collecting the customs. The inter nal revenue system on all occasions has proved its adaptability to national emergencies. Dur ing the Spanish War the collections from this source were readily increased from the normal of $170,900,641, in 1898, to $273,437,161, in 1899, to $295,327,926, in 1900, and $307,180,683, in 1901. In the American fiscal system the inter nal revenues took the place occupied by the in come tax in the calculations of British budget makers. Though the increase of internal rev enue taxes is not as simple as the addition of a penny to the pound to the income tax rate, our system has been fairly elastic. It obtained its flexibility by the raising and lowering of the taxes on beer and tobacco, as occasion required, and the imposition and remission of stamp duties. The income tax has now become a permanent source of revenue for the Federal government, and this tax alone has the elas ticity necessary to meet a situation in which calls for hundreds of millons are superseded by calls for billions. Notwithstanding one may discern in the newly imposed taxes on war in dustries, excess profits, pleasure vehicles, amuse ments, jewelry and dispensable luxuries, and in the stamp dues, the old concepts of the originator of the system, though enlarged to a colossal scale.