Did the Income Tax Fund the Civil War?

lincolnCourtesy of Liberal and Proud of It, with over 8,000 likes and 4,000 shares.  This meme is a jab at Bush and other neocons about not paying for the Iraq War.  By bringing up the revered (and Republican) Lincoln, we’re supposed to be reminded of how our great and “responsible” leaders used to fund our wars.  Not by massive deficit spending like Bush, but by prudently taxing the population.  Is this narrative true?

The First Income Tax

It’s true that under Lincoln, the first federal income tax appeared.  The Revenue Act of 1861 was instituted as one way of funding the Civil War.  It initially imposed a 3% flat tax on incomes above $800/year, which at the time only affected 3% of the population.

Once it was clear the war wouldn’t end quickly (or cheaply), the government realized it would need much more funding, and thus The Revenue Act of 1862 was passed the following year.  This expanded the tax base by lowering the taxable income threshold to $600/year and created two brackets.  Earners of $600-10,000/year paid 3%, while $10,000+/year (equivalent to $220,000 in 2015 dollars) paid 5%.

By 1864, the rates increased again.  Incomes of $600-5,000 were taxed at 5%, with a 10% levy of anything over $5,000 (about $110,000 in today’s equivalent).  In addition, there were excise taxes and fees for an array of goods and services.  Everything from liquor, tobacco, gunpowder, hotels and even jugglers (“every person who performs by sleight of hand shall be regarded as a juggler under this act”) were sources of revenue for the cash-strapped government.  It wasn’t until 1872 that the Grant Administration repealed these “emergency” measures, and the income tax went dormant again.

How Much Did the Income Tax Raise?

According to the National Archives, the income tax raised $55 million during the Civil War.

How Much Did the War Cost?

It’s hard to pin down the costs of a war, but this academic paper from Princeton calculates the amount spent by the North directly on the Civil War at $1.8 billion.  This means the income tax only contributed to 3% of the Union’s war cost, hardly a dent.  If we look at the national debt before and after the war, the increase is staggering.  In 1860, the national debt was almost nonexistent, only $65 million.  To put it in perspective, this was less than when George Washington took office 70 years prior.  By 1865, the debt stood at $2.7 billion, a more than 40 fold increase!lincoln1How Did the Government Pay For the Civil War?

There are only 3 ways governments pay for wars.  Taxation, borrowing and inflation.  Most of the North’s Civil War funding came from borrowing, namely selling war bonds.  About 5% of the northern population bought war bonds from the US Treasury, which was remarkable considering only about 1% had bank accounts.  The Union raised over 65% of their funding by borrowing, which added to the debt.  The rest was from the moderate taxation avenues covered above, and from money printing.

The Greenback

The Greenback

Before the Civil War, money was either gold and silver coins, or bank notes redeemable in gold or silver.  This made it difficult to impossible for the government to create inflation, as they had to have the gold reserves to issue money.  To get around this, the Lincoln Administration came up with the “Greenback”, which was government-issued paper money not backed by gold.  Since no one would normally accept these bills, legal tender laws were passed to force parties into accepting these bills for payment.  About $450 million were printed during the war years, which caused prices to rise somewhat substantially, about 80% over that time frame.  While a significant silent tax on the North, their inflation was nowhere near the Confederate’s disastrous monetary policy, which resulted in a 9,000% increase over the war.

The real economic costs of the Civil War were significant, and not paid down until long after the war.  Lingering expenses, like Union soldier pensions, continued for decades, and were paid by subsequent generations.  Fortunately, the economic environment after the war was quite good, especially in the North, and led to the rapid growth of the Gilded Age.  This post-war growth, combined with a relatively small and frugal government, a return to sound money and no other major wars, allowed the US to lessen its debt burdens after the Civil War, even while abolishing the income tax in 1872.




Regardless of one’s view of the Civil War, it can’t be regarded as responsibly paid for.  It was initially funded primarily by borrowing and inflation, not by the income tax.  In addition, the income tax that was imposed at the time was much smaller than any in recent memory, including under Bush.  The reality is there has never been a major war that was paid for “honestly” or “responsibly”, by the US or any nation.  They are tremendously expensive, and the population would rarely consent to be taxed at the rate necessary to pay for them.  Therefore, governments use the only other means available; borrowing and money printing.  This is why post-war periods almost always have high deficits and inflation rates.  This meme is correct in one regard; wars aren’t free, and they need to be paid for.  However, it’s mistaken in thinking Lincoln was the model of fiscal responsibility.