Tax Analysts®Tax Analysts®

Reconstruction to the Spanish-American War

1660-1712 1713-1755 1756-1776 1777-1815 1816-1860 1861-1865 1866-1900 1901-1932 1933-2005
1869 1872 1873 1874 1875 1879 1881 1883 1884 1887 1888 1890 1892 1893 1894 1895 1896 1897 1898 1899

The postbellum era saw the heyday of active party politics and electoral participation. Republicans and Democrats tended to avoid well-articulated national platforms that might backfire in heavily competitive local races. Democrats nominally stood for states’ rights and limited government, while Republicans trumpeted their war legacy and carried on the Whig tradition of government-sponsored economic development. As support for reconstruction (and protection of African American citizenship in the South) faded in the mid-1870s, however, Republicans tempered their overtly activist approach.

The locus of federal authority rested with the legislative branch rather than the executive, but the parties’ hold on the reigns of power was tenuous. Closely contested elections rendered stable congressional majorities a rarity ­ from 1877 to 1893, neither party controlled the House for two consecutive two-year terms.

In this context, the tariff issue had political resonance beyond the realm of revenue or protection. Increasingly in the 1870s and 1880s, both parties turned to the tariff to construct broader, stabler electoral coalitions. The other major issues in the Gilded Age — civil service reform, railroad regulation, temperance, immigration restrictions, and monetary reform — proved too volatile. Republicans extended their wartime tariff regime in the name of industrial prosperity, high wages, and a strong home market, while Democrats opposed high duties as instruments of high prices, inequity, and corruption.

Congressional politicians of both parties could afford to wield a broad rhetorical brush on the national stage, since rhetoric did not prevent them from structuring unwieldy tariff bills to cater to their constituents’ substantive interests. Votes in Congress often depended on the commodity in question, or the effect of the duty on a legislator's constituents. Producers of goods as varied as coal, hides, timber, wool, iron, steel, textiles and machine tools wanted protective duties enacted or extended. Manufacturers of finished goods lobbied for tariff protection for their products, but preferred low tariffs on raw materials. Farmers in the west and south, meanwhile, tended to oppose protective tariffs because they believed restrictive American markets only encouraged foreign nations to close their ports to American agricultural products. Duties also seemed to inflate the price of farm equipment and other manufactured goods they purchased.

The vicissitudes of postbellum politics were just one factor infusing taxation with broader political and cultural significance. The United States’ rapid growth and industrialization in the late 19th century altered the nation’s social order and induced painful economic dislocations. In this context, many Americans began to recast tariff and tax policies as potentially powerful instruments to promote lofty goals, from the expansion of global markets to the promotion of social justice.

1869 In Veazie Bank v. Fenno, the Supreme Court upheld the 10 percent federal tax on state bank notes instituted by the National Banking Act in 1864.

Republicans phased out unpopular war excise taxes throughout the late sixties and early seventies, except for sin taxes on alcohol, tobacco, and certain luxury items. Tobacco and alcohol excises were consistent moneymakers, providing nearly 50 percent of federal tax revenues by the 1890s.

GOP lawmakers also retained the high tariff structure as a permanent fixture of the postwar era. By the late 1860s, the average tariff duty was 47 percent, a rate generally maintained for the rest of the century ­ although many goods, like metals and metal products, cotton textiles, and woolen items often bore a rate of 100 percent. The tariff protected finished goods more than raw materials, ensuring that the margin of profit for manufacturers and industrialists was greater. This policy fostered higher rates of investment in the manufacturing sector, and was thus partially responsible for the economic/capital expansion in post-Civil War era. Customs duties also furnished the funds to redeem war bonds. Since tariffs taxed consumption regressively, the government essentially managed its debt by transferring wealth from lower income levels to bondholders.

In the latter half of the 19th century, tariff revenue and excise taxes underwrote the Republican regime’s state-building endeavors, funding such federally supported programs as southern reconstruction, western pacification, social insurance for Civil War veterans and their families, and internal improvements. These programs proved popular among the electorate and generated much support for the Republican party. They also encouraged the formation of interests groups ­ such as the Grand Army of the Republic ­ that lobbied for the institutionalization and extension of federal largesse. The distribution of benefits tended to be progressive, even if the system of taxation used to pay for them was regressive. So despite the various inequities of the Republican tax system, the popularity of the programs it funded and the war it had helped win made its retention politically viable.

1872 Lawmakers allowed the Civil War income tax to expire, bringing to a close the first national program to tax the population on a progressive basis. Congress had consistently reduced the tax rates and increased exemptions since 1867. The American public, and affluent citizens in particular, had accepted income and excise taxes only as emergency war measures; once the crisis passed, they expected the tax burden to dissipate. No tangible organized support for a permanent income tax emerged in the immediate postwar years. While a few congressional Republicans understood that the tax’s progressivity could serve to mitigate the regressive nature of the tariff (as it had during the war), most legislators were content to see it phased out, and even resented its redistributional nature.

A retail liquor dealer tax stamp, 1873. Source: Tax History Project Document Collection.Congress enacted a 10 percent across-the-board reduction in protective tariffs, and eliminated duties on coffee and tea whose sole purpose was revenue generation rather than protection. The call for tariff reform had come from Democrats, commercial and industrial groups, western agriculturists, and nonpartisan reformers alike who believed the time was ripe for revision. As the tariff system persisted, it grew more complex and arcane; discrepancies in duty schedules caused administrative difficulties and encouraged fraud. A large budget surplus and healthy economy, reformers argued, would cushion the impact of revision. The fact that Republicans controlled both houses of Congress and the presidency seemed to ensure that any alterations of the tariff schedule would not compromise the overall integrity of the system. Opting for a broad general reduction, Congress did not address particularly burdensome tariff rates on specific products.

President Ulysses S. Grant. Source: Brady-Handy Collection, Prints and Photographs Division, Library of CongressIn November, Ulysses S. Grant retained the presidency in a landslide, soundly defeating Horace Greeley, the Liberal Republican candidate. The Liberal Republican party was actually a collection of upper-middle class defectors from the GOP, who had grown frustrated with the scandal and political spoils of the Grant administration. They tended to advocate civil service reform and other means to remove government administration from the realm of partisan politics. Many Liberals were also advocates of tariff reduction — in part to discourage the corruption associated with a bloated tariff and bulging federal surplus. Their defeat and humble return to the Republican fold consolidated protectionist sentiment within the party.

1873-1877 One of the longest and most severe economic depressions in the nation’s history began with the Panic of 1873, precipitated by the bankruptcy of the Northern Pacific Railroad and its principle investor, Civil War bond salesman Jay Cooke. Unemployment soared, while falling prices and a paucity of circulating currency hurt small farmers and other debtors.

1874 The Republican party bore the brunt of voter frustration and backlash against the worsening Depression, the policies of southern reconstruction, and the scandals of the Grant Administration. For the first time since secession, the Democrats gained control of the House and Senate. Reversing an extended period of Republican hegemony, the next two decades would be marked by extremely competitive electoral politics.

1875 The tariff reduction of 1872 proved short-lived. Protectionists in Congress managed to repeal it three years later, citing the reduction in Customs revenue induced by the Panic of 1873. Because the initial reductions had been across the board, they were relatively simple to reverse. Since coffee and tea remained on the free list, however, the restoration of tariff rates made little public impact.

1879 Henry George, a San Francisco journalist, published Progress and Poverty. In the wake of unprecedented economic reversals, George’s book questioned why so many Americans seemed to be poor in a nation that abounded in wealth. His answer presented a radical, disturbing paradox: Poverty persists amidst plenty because progress causes poverty.

Railroad advertisement promising abundant land in the West. The reality was somewhat different, as Henry George discovered. Source: Huntington Library. The author derived his argument from his experiences in California following the Civil War. A Philadelphia native seduced by the lure of the West, George moved to a state described by boosters as a virtual utopia, only to discover that it was anything but. Rather than a community of independent yeoman, George discovered a landscape dominated by wealthy ranchers and land barons whose expansive estates were tilled by impoverished tenant farmers. Such a society hardly fulfilled the mythic promise of a democratic West. George concluded that progress tended to increase the value of land simply as a function of its resulting scarcity. Private control of this appreciating asset diverted a community’s wealth into the pockets of idle landlords. The price of land — its rent value — represented an "unearned increment," a profit derived not from productive labor, but by hoarding a scarce resource. George asserted that the producing classes could overcome mere subsistence living and regain access to the land by confiscating this unearned increment. His solution, the "single-tax," was a tax on rent designed to eliminate profits derived from speculation.

Single tax theorist Henry George. Source: Prints and Photographs Division, Library of Congress George’s writings inspired a diffuse "single-tax movement" that promoted social justice through tax reform. In an era in which both mainstream parties tended to defer to the interests of eastern capital, his ideas provided an alternative conception of taxation that appealed to diverse groups frustrated by the limitations of conventional politics. In a similar vein, a number of third-party movements in the second half of the 19th century coalesced in order to represent marginalized economic interests, culminating with the People’s (Populist) Party in the 1890s. Their agendas often included tax reform, including an income tax intended to confiscate the "unearned" profits of monopolistic trusts.

1881 In Springer v. U.S., the Supreme Court rejected the claim that the Income Tax of 1864 was unconstitutional. Springer, the plaintiff, had argued the income tax was direct, and thus subject to apportionment among the states. The justices, however, drew upon legislative precedent in concluding unanimously that direct taxes encompassed only real estate or slaves. By contrast, the income tax "fell within the category of an excise or duty." The Court deferred to congressional authority in determining the scope of the tax power.

President Chester A. Arthur. Source: Prints and Photographs Division, Library of Congress 1883 Even though Congress purportedly sought to lower duties somewhat, the 1883 Tariff Act preserved a high rate schedule. The act represented a rather half-hearted attempt on the part of pro-protection Republican legislators to accede to public sentiment for a more moderate, streamlined tariff system. In 1882, President Arthur called for a Tariff Commission, composed of independent experts, to study the issue and recommend policy revisions. Since the president controlled the appointments, however, the commission was dominated by protectionists. The commissioners called for rate reductions for raw materials that would benefit manufacturers at the expense of raw material producers. Realizing that such a tactic would alienate the latter, congressional Republicans largely ignored the advice of the experts. The resulting bill kept all rates high (except for wool products), reduced some internal sin taxes, and generally enacted a series of confusing provisions that led detractors to dub it "the Mongrel Tariff." No substantive change in policy emerged.

Cartoon depicting Grover Cleveland as a gladiator, challenging all comers in his battles over tariff and silver. 1884 Grover Cleveland became the first Democratic president of the post-Civil War era, and only the second Democrat since Buchanan. The former Buffalo mayor and New York governor made his reputation as an effective battler of corrupt machine politics, and saw in the tariff-fed surplus another source of graft in need of redress. Cleveland’s victory over James G. Blaine owed much to defecting Republicans who detested Blaine’s affiliation with political corruption. These dissidents, known as "Mugwumps," tended to be critics of the spoils system and advocates of tariff reform, just as the Liberal Republicans of 1872 had been.

Increasingly after 1885, Cleveland looked to the tariff as an issue to unite and define the Democratic party in opposition to the Republicans. The president and other Democratic leaders also hoped an emphasis on the tariff would diffuse the burgeoning agrarian discontent voiced by the southern and western wings of the Democratic Party. The general deflation of the last quarter of the 19th century was particularly detrimental to farmers — many faced debt and dislocation as the price of agricultural commodities like cotton continued to decline in the eighties and nineties. Since the rise of the Greenback party in the 1870s, agrarian interests had called for monetary reform as one method to redress falling prices and tight credit. One of the most popular solutions they came to embrace involved the unlimited coinage of silver — increasing the volume of specie backing federal dollars, they believed, would in turn increase the volume of currency, elevate prices, and free up available credit. To a sound money man like Cleveland, however, (as well as the eastern business interests of the party) any such policy was anathema. Tariff reduction seemed like a much more palatable platform.

1887 In his Annual Message, Cleveland advanced the tariff question as a defining issue for his party and presidency. His message to Congress indicted the tariff system as detrimental to laborers and a buttress to monopolistic business trusts. Lower tariff rates and the elimination of duties on raw materials, he argued, would result in lower consumer prices, a trend that would slow the development of combinations. Although reduced commodity prices were the last thing farmers desired, the president hoped the rhetoric of free trade, as well as his attack on concentrations of economic power, would appeal to them. The rhetorical link between the tariff and the trusts was a natural one for Democrats to draw. Since the time of Andrew Jackson, the party had railed against special privileges, monopolistic power, and corruption as corrosive to traditional liberties. Democrats often described the tariff as the "mother of trusts," since it subsidized American corporate dominance of the domestic market at the expense of farmers, middle class consumers and small business owners.

From a regional perspective, tariffs and excises funded special privileges that the South paid for but didn't enjoy, like Civil War pensions. The president did not shrink from taking on the Grand Army of the Republic. Republicans had traditionally reaped much political profit from pension distribution, and rarely missed an opportunity to expand the range of benefits to insure loyal voter turnout. Cleveland vetoed a bill extending veterans privileges in order to stem the tide of fraudulent pension claims. In effect, the president tied his reelection hopes and the fate of his party to his tariff stance.

Cartoon depicting Cleveland's efforts to trim tariff duties, amid complaints from American manufacturers. Source: Prints and Photographs Division, Library of Congress1888 Cleveland’s electoral strategy backfired. The Republicans portrayed him and the Democrats as advocates of "free trade" in the November elections. Their campaign emphasized the tariff’s role in fostering industrial prosperity, high wages (shielding working men from "pauper European labor"), and a prosperous home market for farmers. Such rhetoric had a nationalist appeal that often took on an anti-European tone; anglophobia, in particular, appealed to Irish-American laborers. Businessmen threw their political and financial support decisively behind the GOP; those who were not inveterate supporters of protection nonetheless feared the Democrats would reduce the tariff too drastically. As a result, Benjamin Harrison, the Republican candidate, captured the presidency.

1890 The Republican-controlled "Billion Dollar Congress" passed the McKinley Tariff, which pushed tariff rates to all-time high. (In an effort to placate farmers and debtors seeking more readily available currency, however, it also passed the Sherman Silver Purchase Act.)

Consequences of the McKinley Tarriff

James G. Blaine, Secretary of State. Source: Prints and Photographs Division, Library of Congress. Reciprocity. The Blaine-Harrison reciprocity provision of the McKinley Tariff enabled the President to reduce tariffs on foreign goods (especially raw materials) when other nations reduced their tariffs for U.S. products (especially industrial and staple agricultural goods). As a consequence, sugar, molasses, coffee, tea, and hides were placed on the duty free list. This bargaining measure theoretically granted the president certain discretionary power to manipulate rates in order to open foreign markets to American products. James G. Blaine, the Secretary of State, spearheaded the effort to establish the reciprocity principle. He was a fervent proponent of expanding trade with Latin America, organizing the first Pan American Congress of 1889, and saw tariff reciprocity as a tool to access Latin American markets and raw materials. Thus, the McKinley reciprocity provision represented one of the first efforts to utilize the tariff not simply as a means of to collect revenue or insure protection, but as a strategy for widening access to American trade.

Sugar. The previous 2 cent per pound duty on sugar had been a purely revenue duty, since 90 percent of all sugar consumed was imported (the other 10 percent came mostly from Louisiana). In fact, the sugar duty constituted the most important single item in the revenue from customs, amounting to $55 million per year in the years immediately preceding 1890. The duty caused political difficulties for Republicans at a time when the budget surplus was already embarrassingly high, without any mitigating benefits gained from commodity protection. The revenue lost by forgoing the duty amounted to $50 to $60 million, plus an $8 million remunerative bounty paid to U.S. sugar growers. A 0.5 cent duty on refined sugar was retained, however, to the benefit of the few large sugar refining companies that constituted a virtual monopoly in the United States.

Queen Liliuokalani of Hawaii, c. 1917. Source: Prints and Photographs Division, Library of Congress. Hawaii. Secretary of State Hamilton Fish sponsored a specific reciprocity treaty with Hawaii in 1875 that favored Hawaiian sugar, and by extension the white planters who owned 75 percent of the plantations. The island economy subsequently fell into a tailspin after the McKinley tariff placed sugar on the duty-free list. The economic crisis precipitated political war between the planters and native supporters of Queen Liliuokalani over the next two years. Whites gained the upper hand in 1893, but President Cleveland withdrew a pending annexation treaty — in part because he feared the consequences of absorbing a considerable population of nonwhites. Five years later, President McKinley would finalize annexation in the wake of the Spanish-American War.

Republican Party. A month after Congress approved the McKinley Tariff, voters seemed to rebuke its Republican sponsors at the polls. The GOP suffered devastating defeats in the Senate and House (especially the latter). In retrospect, local ethno-cultural issues played a significant role in the final tally of the election of 1890. But to contemporaries, the outcome suggested a resounding rejection of the Republican party’s policy of protection.

1892 The presidential election provided a rematch between Benjamin Harrison and Grover Cleveland. Both advanced the same positions on the tariff question that they had four years earlier. This time around, the voters elected Cleveland to his second nonconsecutive term, winning by the largest margin in two decades. This reversal of political fortunes raised expectations among advocates of tariff reform.

1893-1897 The economic dislocations of the most severe depression in the nation's history to date — stock market collapse, falling prices, violent labor strife, and the failure of hundreds of banks and businesses, including railroads — led numerous policymakers to conclude that capitalism had reached a crossroads. Many commentators pointed to expanded access to foreign markets as a potential cure for industrial overproduction. Frederick Jackson Turner’s famous address at the 1893 World Columbian Exposition in Chicago captured the prevailing intellectual climate. He argued that America's seemingly limitless western frontier had effectively "closed" — the 1890 census indicated that eastern migration outpaced western migration for the first time. In the absence of this "safety valve" to absorb excess labor from eastern urban areas, receptive overseas markets seemed all the more critical as a corrective for a glut of manufactured goods, deflation, and severe unemployment. For their part, Democratic advocates of lower tariffs, like the influential economist David Wells, had preached the importance of foreign markets for years. Republicans, on the other hand, looked to reciprocity agreements as the wedge to expand trade.

1894 Given the widespread expectation that the Democratic majority would orchestrate significant tariff reform, the Wilson-Gorman Tariff proved to be one of the great disappointments of the second Cleveland administration. Protectionist Democrats in the Senate dismantled the House’s more ambitious bill, restoring rates that had been marked for reduction. The resulting bill lowered duties slightly, but a myriad of concessions to protectionist interests neutralized its ambitious intent. A dejected President Cleveland allowed the bill to pass without his signature. Agrarian interests in the South and West viewed the compromised tariff as yet another betrayal by their party and president, to go along with Cleveland's hard money stance, his efforts to repeal the 1890 Silver Purchase Act, his brutal suppression of labor unrest, his seeming favoritism toward eastern capital interests, and his corresponding lack of empathy for the suffering of farmers and workers.

Consequences of the Wilson-Gorman Tariff

The Income Tax. The tariff bill’s one high note rested with a modest income tax provision (assessing a rate of 2 percent for incomes over $4,000). The measure represented the first federal income tax since the Civil War. Unlike its wartime counterpart, however, broad-based popular pressure drove the passage of the new income tax in Congress. Prolonged economic dislocation and the transformation of the industrial economy set the stage. Reform parties from the Greenbacks and Anti-Monopolists in the 1870s and 1880s to the Populists in the 1890s had called for a graduated income tax in their platforms. Democrats from the South and West introduced nearly 70 income tax bills between 1874 and 1893.

As was the case during the Civil War, revenue generation did not constitute the primary justification for the income tax. Rather, Gilded-Age tax reformers were responding to economic inequities fostered by unprecedented concentrations of corporate wealth in the guise of trusts and business combinations. It seemed unfair that the bulk of national revenue flowed from regressive tariff rates that taxed ordinary Americans at the point of consumption, while the profits of giant enterprises like railroads, sugar refiners, and steel manufacturers went untapped. Private accumulations in the form of securities, bonds, and savings also remained out of bounds. The issue became one of fairness and ability to pay. Benton McMillin, Democrat from Tennessee and chairman of the Ways and Means Subcommittee on Internal Revenue, said as much when he introduced the income tax measure that would eventually be fused to the Wilson-Gorman Tariff Bill:

Benton McMillin of Tennessee, author of the post-Civil War income tax. "I ask of any reasonable person whether it is unjust to expect that a small percent of this enormous revenue shall be placed upon the accumulated wealth of the country instead of placing all upon the consumption of the people . . . . It is not a proposition to put an undue embargo upon wealth, but it is to make the wealth that is accumulated in this country pay some share of the expenses of government . . . My friends, are we going to put all of this burden on the things men eat and wear and leave out those vast accumulations of wealth?"

Opponents of the income tax, most of whom resided in eastern urban areas, derided it as "class legislation," some going so far as to label it communistic or the tool of socialist labor. David Wells, Democratic economist and well-known opponent of the tariff system, nonetheless condemned the income tax as "flagrant spoliation." He pointed to the excessively high exemption, which promised to exclude over 90 percent of all eligible taxpayers. Exemptions and graduated rates, Wells argued, violated the principle of equality before the law by penalizing the rich and favoring those below the exemption level. He added that the income tax had encouraged fraud and perjury during the Civil War, and currently threatened to encroach on state tax bases.

But many well-to-do proponents of the income tax, like E.R.A. Seligman, defended it as a moderate measure designed to "help round out the existing tax system in the direction of greater justice." The well-known lawyer and reformer viewed the progressive tax as decidedly preferable to more radical socialist prescriptions. He recognized the tax would help to correct the perception among many Americans that "our present tax system largely exempts those that are best able to pay," and criticized resistance from eastern urbanites as short-sighted.

A cartoon from the Ram's Horn, a social gospel magazine, depicting the workingman as burdened by both high taxes and a plutocrat, August 22, 1896.Despite the New York Tribune’s pronouncement that "the Democratic hen had hatched a Populist chicken," the income tax passed in 1894 more closely resembled Seligman’s modest corrective than the wedge against corporate power and corruption desired by disaffected agrarians. Seligman and the Populists did share a conviction that the state could be employed to moderate the inequities of the free market. But middle-class Progressive reformers like Seligman endorsed government as an instrument of minimal adjustment, designed to immunize capitalism against radical socialist revision. The Populist movement articulated a more expansive vision of the government’s role in promoting social justice and economic equity. Their goal was to transform a political economy dominated by eastern capital into a more democratic social order reminiscent of traditional republicanism. The party platform called for a number of reforms besides the income tax that implied a more active state, including monetary reform, regulation of transportation, antitrust legislation, and a sub-treasury to purchase agricultural surplus and extend credit to farmers.

Jacksonian Democrats in the antebellum era viewed a strong government as the font of corruption and privilege. In the 1890s, however, agrarian radicals turned to government as an instrument to redress these ills. The Cleveland administration abhorred such statist solutions. Cleveland’s response to the income tax was lukewarm at best. The official Democratic Party platform of 1892 had not even endorsed such a measure. Given Cleveland's devotion to laissez-faire principles, it is little wonder that a modest income tax (and frustrated efforts at tariff reform) was not enough to redeem his presidency in the eyes of his party's southern and western wings.

Sugar. Given the rise of the People’s Party and the popular sensitivity to the perils of monopoly, the Wilson-Gorman Tariff’s sugar provisions proved damaging to the Democrats, who nominally posed as the champions of the public against the trusts. Ironically, Congress actually lowered the 0.5 cent duty on refined sugar implemented in 1890. But the American Sugar Refining Company’s domination of the domestic sugar market had become the subject of greater publicity in the interim; any tariff aid to a monopolistic trust was bound to be viewed negatively. Even though the refined sugar duty under the Wilson-Gorman Tariff was actually lower than the McKinley rate, the refined sugar provision turned out to be one of the biggest disappointments among earnest tariff reformers.

The Wilson-Gorman Tariff’s other sugar provisions had drastic consequences on the international front. The depression-induced decline in customs duties prompted Congress to removed sugar from the duty-free list. The rate increase subsequently wreaked havoc on the Cuban economy, which relied heavily on the American market for its sugar crop. In response to tariff-inflated prices, Cuban exports to the United States fell off 50 percent, exacerbating sociopolitical strife and fomenting a revolution that set the stage for the Spanish-American War in 1898.

Reciprocity. The Wilson-Gorman Tariff also repealed the 1890 McKinley reciprocity provisions.

1895 In one of the landmark cases in the history of constitutional law, Pollock v. Farm Loan and Trust Co., the Supreme Court declared the Income Tax of 1894 unconstitutional. The Court had never before invalidated a congressional tax measure; in four cases since 1868, including the most recent, Springer v. U.S. (1880), the justices had deferred to Congress and upheld income taxation, ruling it an excise or indirect tax, rather than a direct tax requiring apportionment among the states.

Cartoon commenting on the Supreme Court decision overturning the 1894 income tax law, 1895. Source: Prints and Photographs Division, Library of Congress.But in two separate Pollock rulings in April and May, the Court reversed its prior pronouncements. Speaking for the majority, Chief Justice Fuller focused on the specific sources of income subject to assessment. Since it had long been established that a tax on land was a direct tax, Fuller concluded that a tax on the income derived from land (rents or real estate sales) must also be considered a direct tax. Similarly, he dismissed any distinction between real and personal property; the direct tax clause circumscribed federal taxes on personal property and the income derived from it just as it did for real estate. The justices also agreed that Congress could not tax the income from state and municipal bonds. This decision had nothing to do with direct taxation; it struck the court, rather, as a violation of the principle of federalism ­ the national government had no power to tax the instrumentalities of the state. Since the elimination of these bases of taxation stood to alter the tenor of the original income tax law as passed by Congress, the Court proceeded to strike down the entire measure.

In coming to these conclusions, the justices concurred with the historical argument presented by the appellants ­ that the delegates at the Constitutional Convention had designed the direct tax clause to protect the sovereignty of the states by limiting the power of the national government in matters of taxation. (In fact, the delegates had proscribed the clause in the process of addressing slavery's impact on representation, not to protect state sovereignty.)

Dissenting Justices Harlan and White rued the majority's rejection of the Springer precedent. To proponents of income taxation, the ruling seemed a reactionary response on behalf of monied interests, or, as the Pulitzer's New York World characterized it, "another victory of greed over need." More conservative commentators, however, rejoiced at the decision. "Thanks to the Court," the New York Tribune effused, "our government is not to be dragged into a communistic warfare against the rights of property and the rewards of industry."

Cartoon commenting on the first of two Supreme Court decisions striking down the 1894 income tax law, 1895.Yet the Pollock decision did not signal the utter demise of the income tax. The justices did not go nearly as far as the plaintiffs desired. The Court did disqualify certain classes of property from federal income taxation (real and personal property, state and municipal bonds), and overturned the 1894 act. But the justices did not rule that all sources of income fell under the direct tax rubric. They conspicuously demurred on the status of salaries, gifts, inheritances, and corporate profits. Counsel for the appellants had hoped the Court would declare all categories of income subject to apportionment, and thus beyond the pale. Similarly, Joseph Choate, one of the attorneys for the plaintiffs, sought to convince the Court that income taxation violated the "uniformity clause" in Article I, section 8 of the Constitution. He attempted to expand the concept of uniformity beyond geography to gradations of wealth, rendering the Constitution, in effect, "wealth blind." If the Court had accepted this idea, the instruments of a progressive tax — exemptions, exceptions, graduated rates — would have been neutralized at both the state and federal levels. Justice Joseph Field applauded this line of argument; in his concurring opinion he criticized his colleagues for ignoring the matter of uniformity and failing to render such "class legislation" completely inoperable.

In short, the Pollock decision raised an institutional barrier to the implementation of a national income tax, but did not preclude its resurrection at a later date.

1896 For the first time, the Democratic Party platform endorsed income taxation. A number of Democrats had already introduced constitutional amendments to allow for it, and found that rhetorical attacks on the Supreme Court resonated well with their constituents. The electoral campaign of William Jennings Bryant, however, focused extensively on the silver issue. The Republican platform made no mention of an income tax. The party’s nominee, William McKinley, campaigned on prosperity ("a full dinner pail"), "sound money," and high tariffs. In a watershed election, a victorious McKinley managed to retain Republican electoral strongholds while making inroads into urban areas (New York, Boston, and Chicago) formally known as Democratic bulwarks. Bryant ran strongly only in the South, the Populist West, and silver mining states. The watershed election of 1896 brought an end to an era of closely contested partisan elections, and inaugurated a period of political stability that would allow for a broader airing of issues on the national stage.

Cartoon parodying Republican tariff policy, c. 18971897 The strain of the Depression had forced the government to run a deficit since 1893. The need for revenue and the mandate of the election of 1896 prompted congressional Republicans to pass the Dingley Tariff, pushing rates to an all-time high. By request of President McKinley, the act also reinstated, redefined, and advanced the reciprocity principle. The tariff of 1897 enjoyed the most extended tenure of any general tariff act in U.S. history (the Walker Tariff of 1846 was second). Its longevity was attributable in part to the stability of the Republican regime in the wake of the political "realignment" following the 1896 elections, as well as the general prosperity that followed.

1898 The Spanish-American War proved too brief to inspire the array of financial innovations required to prosecute the Civil War. Congress, however, did not rely exclusively on tariffs or excises to fund the war effort; it turned instead to a national inheritance tax to meet the costs of combat.

The inheritance tax boasted several well-known proponents, the most surprising of whom may have been steel magnate Andrew Carnegie. In "The Gospel of Wealth," his renowned 1890 essay in the North American Review, Carnegie advocated a progressive federal inheritance tax designed to confiscate most of a decedent’s estate, leaving only a modest allowance for immediate heirs. Notable academic economists from Richard T. Ely to E.R.A. Seligman concurred with Carnegie.

Cartoon commenting on excise tax increases during the Spanish-American War, 1898.The bill passed by Congress in 1898 taxed legacies and inherited personal property on a graduated scale according to the size of the estate and the degree of relationship to the deceased (surviving husbands and wives received a general exemption). A maximum rate of 15 percent applied to bequests from estates valued over $1 million to distant relatives, nonrelatives, or "bodies politic or corporate." The bill also included an excise on receipts in excess of $200,000 assessed to firms in the petroleum and sugar refining industries. Overall, war-time inheritance taxation yielded about $22.5 million.

The inheritance tax endured a war revenue reduction bill in 1901, but Congress repealed it a year later. Several prominent southern legislators argued to retain the tax, since it reached citizens and classes of property untouched by other federal tax provisions, but a large Republican majority insured its demise.

The tax did survive judicial review. In Knowlton v. Moore (1900) the Supreme Court ruled inheritance taxation as an "indirect excise not subject to apportionment." More important, the justices found that the tax’s progressivity did not violate the Constitution’s uniformity clause.

Cartoon commenting on turn of the century tax policies, c. 1899-1900.1899-1900 Questions of trade gradually grew inseparable from questions of foreign policy. Secretary of State John Hay’s "Open Door Notes" to European powers called for territorial integrity (no scramble for European colonization) and equal commercial opportunity in China, the linchpin of the potentially lucrative Asian market. The "open door principle" became a foreign policy imperative, as internationalists continued to question the efficacy of high tariffs that discouraged free and market expansion. American officials called for an Open Door in Asia, where they had less influence relative to other established European nations. In the western hemisphere, where the United States stood as the dominant power, they supported a selective reduction of tariffs through reciprocity agreements. Rather than encourage hemispheric competition for certain commodities (like agricultural products), Americans preferred to reduce duties only on the specific goods they needed to import. Besides, many Latin American countries, as well as Canada, saw disadvantages to economic integration with a potentially hegemonic United States.