Financial History Issue 129 (Spring 2019) | Page 22
From Tariffs
to Taxes
By Michael A. Martorelli
From 1888 to 1913, the arguments for
and against tariffs and income taxes were
as heated as any in the country’s history.
The decision to shift from using tariffs
as the major source of federal revenue
to depending instead on income taxes
occupied two generations of lawmakers.
Achieving that goal required the interven-
tion of the Supreme Court and the passage
of an amendment to the US Constitution.
The Tariff Act of 1789 was the first major
piece of legislation passed by the members
of the first US Congress. Given their nega-
tive experiences with British taxation, it’s
no surprise those legislators turned to
tariffs as the prime source of the new coun-
try’s revenue. Taxing imported goods at an
average rate of about 15% did indeed raise
the prices of those products to American
consumers. But doing so also established a
pricing umbrella that gave nascent manu-
facturing industries an economic subsidy
as they began to establish themselves. The
legitimacy of using tariffs to finance the
government was not especially controver-
sial. But while the validity of tariffs was not
seriously challenged, they were never uni-
versally popular. Indeed, throughout the
next 100 years there was rarely an extended
period of time when the details over the
amount of the tariff and the range of goods
on which that levy was imposed were
not the subject of strenuous arguments
among government officials and the gen-
eral population. Even while waging those
arguments, however, successive adminis-
trations of both political parties were able
to maintain a certain level of protectionist
tariffs through periods of both peace and
war, as well as prosperity and panic.
The tariffs that were generating about
$50 million annually (80–90% of all fed-
eral receipts) in the late 1850s proved woe-
fully inadequate to finance the Union’s
$3.2 billion cost of prosecuting the Civil
War. In 1861, Treasury Secretary Salmon
Chase persuaded Congress to establish the
nation’s first income tax in order to bol-
ster the Union’s finances. During the four
years of fighting, Congress approved new
1893 Puck cartoon titled “Launched at Last –Good
Luck to Her!” showing a cherub labeled “1894”
smashing a bottle of champagne as he launches
a large ship under the banner “Tariff Reform” with
Grover Cleveland and members of his cabinet
standing on the bow waving their hats.
20 FINANCIAL HISTORY | Spring 2019 | www.MoAF.org