Prior to the Civil War, the United States faced a financial depression subsequent to the
Panic of 1857, an event facilitated by over-expansion of the domestic economy and a European financial meltdown. In the three years preceding the Civil War, the Federal Government incurred a budget deficit exceeding $40 million. Coupled with the threat of secession, the Federal deficit placed the US government under considerable financial strain. In 1860, the US Treasury paid between 8 and 12 percent interest on government bonds in order to raise additional funds and meet public expenditures. In December 1861, the US Treasury attempted to sell five million dollars of interest-bearing notes at 12 percent but found itself able to dispose of only four million dollars' worth. In March 1861, President Lincoln began to explore the federal government's ability to wage war against the South from a logistical standpoint. He sent letters to cabinet members including
Edward Bates,
Salmon Chase, and
Gideon Welles inquiring whether the president had constitutional authority to collect duties ranging from an import tariff to a property tax. Documents housed at the Library of Congress indicate that Lincoln was concerned with the Federal government's ability to collect tariffs from ports along the Southeastern seaboard, noting the imminent threat of secession. On July 4, 1861, President Lincoln opened a special session of Congress with the explicit purpose of addressing the Civil War from a legislative standpoint. One of the primary concerns facing Congress was the question of funding: given a surfeit of volunteers, the
Union Army military incurred extraordinary expenditures as they trained and armed a martial force. President Lincoln noted that, "One of the greatest perplexities of the government, is to avoid receiving troops faster than it can provide for them. In a word, the people will save their government, if the government itself, will do its part" To raise revenue by approximately $50 million, legislators adopted a three-pronged approach consisting of an increase in certain import tariffs, a newly instituted property tax, and the first personal income tax. In Congress, the bill provoked considerable debate:
Thaddeus Stevens, chairman of the
House Committee of Ways and Means, declared that, "This bill is a most unpleasant one. But we perceive no way in which we can avoid it and sustain the government. The rebels, who are now destroying or attempting to destroy this Government, have thrust upon the country many disagreeable things." His sentiment reflected the view that the income and property taxes levied by the bill were necessary evils. The bill was eventually passed by Congress and signed into law by President Lincoln. Despite its sweeping reform, the ineffective enforcement mechanism coupled with a 3% flat tax rate failed to yield the desired revenue. ==Tax structure==