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  • Print publication year: 2012
  • Online publication date: December 2012

1 - A Brief History of Federal Taxation

Summary

The modern federal tax system is based on income taxation. This tax system, and the size and role of government it supports, is largely a creation of the New Deal and World War II. Although the U.S. Constitution granted Congress authority to levy many types of taxes, the first federal tax measure was a tariff bill, and the tariff remained the principal source of federal revenue until World War I.

Partisan conflicts over federal taxing power quickly emerged in the 1790s as Federalists proceeded to raise tariff rates and levy new excise taxes (notably an unpopular tax on whiskey) and direct taxes on land and property. Jeffersonian Republicans, in turn, denounced these “internal taxes” and the spending regime that they supported. As president, Thomas Jefferson proceeded to repeal internal taxes while pursuing balanced budgets and debt reduction exclusively through spending cuts. The War of 1812 then temporarily reinstated internal taxes, but tariffs and revenues from the sale of public lands largely funded the federal government for the next several decades. While tariff rates and protectionism continued to fuel partisan and sectional disputes over this period, federal budgets remained small and usually balanced.

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