In the summer of 1861, Secretary of the Treasury Salmon P. Chase approached Congress. He could clearly see that the Civil War was going to be expensive. He said he needed $320 million over the next year. He thought he could come up with $300 million through existing taxes and the sale of public lands and he left it to Congress to find the remaining twenty million.
The House Ways and Means Committee proposed a bill to tax personal and corporate incomes.
The details of the bill were hammered out over the next year, and on this date in 1862, President Abraham Lincoln signed the country’s first income tax into law. It called for a three percent tax on incomes between six hundred and ten thousand dollars per year, and a five percent tax on higher incomes.
The war was, as Chase predicted, hugely expensive. In 1864, the rates were adjusted: five percent on incomes from five to ten thousand dollars, and ten percent on anything higher.
While there were some complaints that the tax was unconstitutional, Article I, Section 8 of the Constitution gives Congress the power to impose and collect taxes.
The focus was, of course, on the states that remained in the Union. Citizens of Confederate states clearly wouldn’t be lining up to pay the new tax. But it was questionable whether the income tax would apply to people living in Dakota Territory.
On one hand, the tax law didn’t explicitly include territories. On the other hand, territories were subject to federal laws which would suggest the income tax could apply.
The federal government did appoint tax collectors in Dakota Territory, but being appointed and actually collecting taxes were two very different things. Collection was difficult due in large part to vast distances and remote geography. Towns were small and widely scattered. Settlers lived on isolated farms. Much of the territorial economy was based on barter.
Tax collection was hit-or-miss at best.
In the end, Chase was right about how expensive the Civil War would be. In the first year alone, federal spending increased by over two thousand percent.
Dakota Datebook written by Dr. Carole Butcher
Sources:
- American Battlefield Trust. “The First Income Tax.” https://www.battlefields.org/learn/articles/first-income-tax Accessed 7/14/2025.
- American History Central. “Salmon P. Chase.” https://www.americanhistorycentral.com/entries/salmon-portland-chase/ Accessed 7/14/2025.
- History. “Abraham Lincoln imposes first federal income tax.” https://www.history.com/this-day-in-history/august-5/lincoln-imposes-first-federal-income-tax Accessed 7/14/2025.
- Together We Serve. “The Civil War Resulted in America’s First Ever Income Tax.” Accessed 7/14/2025.
- Yale Law Journal. “The Origins of U.S. Territorial Taxation.” https://www.yalelawjournal.org/forum/the-origins-of-us-territorial-taxation-and-the-insular-cases Accessed 7/14/2025.
