Federal finances; or, The income of the United States

Preface

The object of the following pages is to set forth in a plain and concise manner the United States system of taxation. This book is not a work on political economy, and no attempt will be made to discuss the merits of any tax system. The story of how our government levies and collects the money necessary to pay the annual expenses of so great a nation will be the scope and aim of this work.

The reader will find in these pages what he could otherwise find only by long research, and by looking through a multitude of books, reports and magazines. The author has endeavored to explain, in a plain and practical way, the sources of federal income, and to set forth in a faithful manner the method of collecting the government taxes. In addition to this, some account has been given of the means used by unscrupulous people to avoid payment of government duties. The information given can be relied upon, and it is an elementary knowledge necessary to any one who hopes to have even a tolerable understanding of our national revenue system,

W. E, B,

Chapter I. Taxation — Ancient And Modern

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First accounts of taxation given in the Bible — Taxation before time of coined money — Tithes and tenths — Oriental methods — The revenue of ancient Greece — Customs duties 400 years before Christ — The Roman Republic — A simple and direct system of taxation — The Censors — Democratic way of assessing taxes — The field of Mars — The Censors favored their friends — The revenue of Rome from various sources — When Rome became an Empire — Taxation under Augustine — Rome imder Constantine the Great — The " indiction " method of levying taxes — Taxation in England — The Norman Kings and the Feudal system — Customs duties in Etherel's reign — The devices of the old kings — King John and the nobility — The result — The Magna Charter — Charles I. and his illegal exactions — The present tax system of Great Britain ,,.,,..,.. 21

Chapter II. History Of United States Taxes

Provisions of the Constitution — The first Congress — Steps taken toward devising a system of taxation — Extract from speech of James Madison — His plan adopted — The first tariff law — It was a simple measure — Did not bring in enough money to the Treasury — The second session of Congress — The internal revenue system — The Whisky Insurrection — The first bounty law— The direct tax of 1798 — War of 1814 and increase of taxation — Tariff of 1824 — Protection a prominent feature — (vii)

viii CONTENTS.

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Tariff law of 1828 — "Bill of Abominations " — Sectional interests — Nullification — The compromise — No charges until 1846 — The Civil War and the new tariff law of 1861 — The internal revenue — Twenty-five acts in five years — Customs duties close of the war — Reduction of taxes — Act of 1872 — Act of 1879 — The horizontal reduction — The revision of 1883 — The Mills Bill — The act of 1890 known as the " McKinley Bill " — Protection a feature — The excitement created — The measure now on trial before the American people 34

Chapter III. Sources Of Federal Income

Income of United States — Indirect taxation — No direct taxes at present time — Table showing amount received from each source for year ending June 30, 1890 — Statement of expenditures for the same time — The national income not wholly derived from taxation , 51

Chapter IV. Collection Districts And Custom Officers

Collection districts described — Congress declares what shall be — The Treasury Department — Secretary of the Treasury — His duties — Collectors — Their duties — Naval Officer and Surveyor — Their duties — Appraisers, inspectors, weighers and gaugers , 54

Chapter V. The Revenue Marine

The importance of the Revenue Marine — Established August 4, 1790 — Text of the first law — Life on a revenue cutter a century ago — Old methods of smuggling — Bold and piratical smuggling a thing of the past — The modern way — Revenue cutters of present time — How assigned to duty — Cruising

CONTENTS.

Page, grounds — Method of hailing vessels — The penant — The signal to "bring-to" — Firing a gun — Boarding a ship — Searching a vessel — Fastening the hatches — Arresting vessels . 63

Chapter VI. Clearance And Manifest

A foreign vessel an alien — Its only rights secured by treaty — Entry can only be made at ports established by law — Vessels arriving in port must " enter " within twenty-four hours thereafter — Delivering clearance and manifest papers — Vessels must not leave a port without making proper entry — Inspectors placed on board of incoming ship — Completing the entry — Clearance papers are passports, and are necessary credentials — The manifest, what it must contain — Merchandise from a foreign country can not be entered without a manifest , 71

Chapter VII. Warehouse And Bond System

Duties on merchandise formerly paid at time of entrance — The law of 1799 — Growth of the warehouse system— The present system of bonded warehouses — Government pubhc stores — Government warehouses — Private bonded warehouses — Who may operate private warehouses — Regulations governing bonded warehouses — How merchandise may be stored in warehouses — Bond to secure payment of duties — Goods may remain in bond three years — Removal of merchandise — Manufacturing bonded warehouses — Transportation in bond . 77

Chapter VIII. Appraisement And Payment

When duties become due — Liability for duties a personal debt — The Government holds a lien on imported goods until duties are paid — Appraising merchandise — Assessing duties — Dif&- xr CONTENTS,

Pane.

culties in the way of assessing duties — The rule the appraiser must follow — Some of the strange things that happen in classifying articles — Classifying beans under the tariff law of 1883 — Three decisions by the Treasury Department in reference to the duty on beans — Tariff law of 1890 in reference to wool — Elaborate distinctions — The difficulty of the appraisers — The sorting clause of paragraph 383 of the new tariff act — Wool growers want it construed in one way — Manufacturers think it means something else — Opinion of Treasury Department necessary to settle the difficulty — The new law in regard to appraisement 88

Chapter IX. How Duties Are Collected

The story of an importation — The foreign merchant must make out an invoice — Invoice sworn to before U. S. Consul — The " consular certificate " — The captain of a vessel and his " manifest " — When within four leagues of the shore — Incoming vessels meet revenue cutter — Stopping at quarantine — Meeting the "boarding vessel" — The captain makes entry — Delivers his manifest — Permit to unload — How obtained — Warehouse permit — Bonded carts — Where and how merchandise is appraised — Samples sent to the public store — Duties on passengers, baggage — The " declaration " — The depot on the pier — The inspectors — Searching baggage — Assessing duties — Seizure — Penalties — Immigrants — Collecting duties on immigrant's baggage 96

Chapter X. Discriminating Duties And Reciprocity

Early practice in the United States in reference to discriminating

duties — The law of 1817 — Power of the President to suspend

tonnage duties — The law of 1872 in regard to duties on goods

produced east of the Cape of Good Hope — Discriminating and

CONTENTS. xi

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Reciprocity act of 1864 — Meaning of reciprocity treaties under this act — Brief outline of reciprocity treaties with Austria, German Empire, Great Britain, Italy, Japan, Persia, Spain and other countries — The Hawaiian Reciprocity treaty of 1875 — Reciprocity act of 1890 — Treaties under this act 1 12

Chapter XI. Avoiding Duties

Methods of cheating the Government — Practices adopted by foreign manufacturers — Sending goods on consignment — The essential feature of the consignment plan — Silks undervalued by this system — The " dummy-package " and how the fraud is worked — The *' sample package" method of evading duties — The importer and /r^-y^r^a invoices — Allowances for damages under the tariff law of 1883 — Damage brokers — Securing excessive damages by fraudulent methods . . . , 126

Chapter XII. Smuggling

Smuggling defined — Avoiding duties is not smuggling — Some methods described — Wearing apparel — Decision of the Supreme Court in the Astor case — The effect of the decision — Organized system of smuggling in clothing — Cigar smuggling a profitable business — The method of procedure — Smuggling wine — An instance in the harbor of Philadelphia — Opium smuggling — A smuggling transaction that netted the operators one million dollars 135

Chapter XIII. The Atlantic And Gulf Coast

The Atlantic shore indented by many good harbors — -The Coast guarded by revenue cutters — The shore patrolled by policemen — Distance of watchman's beat — The watchmen meet and exchange tickets — The iron box and the post — Merchandise ni CONTENTS.

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importedby way of Atlantic coast— Table showing duties received from principal ports on the Atlantic coast— New York entitled to special mention — The harbor — The Custom House — Castle Garden— The Barge Office — The port of Charleston, S. C. — Key West, Florida, an important port — Table showing duties received from principal ports on the Gulf Coast — Tonnage duties exceed import duties at some ports — Reason for this — The port of New Orleans — The port of Galveston 143

Chapter XIV. Mexican Frontier And Pacific Coast

Peculiarities of the Mexican Frontier — The Zona Libra — A piece of strategy by the Mexican Government — United States Frontier adjoining Mexico — The mounted inspectors — Act as detective^s — Mexican Frontier poorly guarded — The contour of the country affords protection to smugglers — Running horses from Mexico into the United States — The Mexican smuggler is prepared to fight — Stock raiser on the boundary line — His plan of avoiding duties on cattle — The Rio Grande river goes dry in the summer time — The smuggler then reaps a harvest — Scenes at El Paso, Texas, during the dry season — The legitimate trade with Mexico — Nature of imposts from Mexico — Commercial importance of the Pacific coast — Beyond the Rocky mountains a new order of things set in — The port of San Francisco — Ships from all parts of the world — By way of Cape Horn — Vessels from China, Australia and the East Indies — Steel and iron from Europe — A great Chinese depot — The Pacific Coast guarded by revenue cutters — Table of tonnage and import duties received at the principal ports on the Pacific Coast , ♦ 154

CONTENTS, xiii.

Chapter XV. The Northern Frontier

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From Blaine in Washington to Pembina in North Dakota — Twelve hmidred miles of wild and mountainous country — No custom houses — Pembina and St. Vincent the outlets from Manitoba — Articles imported from Assiniboia and Manitoba

— Dense forests surrounding the Lake of the Woods and Rainy Lake river — These trackless forests need no protection

— The ports ofDuluth, Ashland and Milwaukee — The great port of Chicago — The peninsula of Michigan — The port of Detroit — Chief articles imported into the United States from Ontario — Smuggling on the Detroit river — Smuggling in the winter by means of sleighs — Many Chinese enter the United States at Detroit — The principal ports of entry on the lakes — The chief imports from Canada — Revenue cutters of the lakes — The frontier between the North Eastern States and Canada

is poorly protected — The line stores 163

CHAPTER XVL

THE INTERNAL REVENUE.

The internal revenue tax a prolific source of income to the government — The revenue tax an excise tax — Method of collecting the internal revenue tax — It belongs to the treasury department — Internal revenue districts are designated by the President — The revenue districts do not correspond with the customs districts — Number of revenue districts in a state — The revenue tax simple in operation — Stamps furnished to the collectors, who sell them to distillers and manufacturers of tobacco — The revenue stamp is a receipt — Reason for requiring articles subject to a revenue tax to be stamped — Table showing amounts received from the various internal revenue sources 171 xiv CONTENTS,

« CHAPTER XVII.

OFFICERS OF THE INTERNAL REVENUE.

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The commissioner of internal revenue appointed by the President

— He has the general superintendency of the assessments and collection of internal revenue taxes — Collectors of internal revenue — Collectors have the power to appoint their deputies

— Collectors must give their personal attention to their official duties — Must not leave their districts without leave of absence

— The work of the collectors and their deputies — The ganger and his duties — Storekeepers and their duties — Special agents and their duties 175

CHAPTER XVIII.

DISTILLERIES.

What constitutes a distillery — Stills and distilling apparatus must be registered — Penalty for not registering — Plans of a distillery must be placed on record — The distiller must give bond — Distilleries must be constructed according to the regulations of law — Doors and furnaces fastened with government locks — The fermenting- tub — The cistern-room — The warehouses — Storekeepers and ganger assigned to each warehouse — Duties of the storekeeper — Duties of the ganger — Table showing number of distilleries registered and operated during the year 1890 185

CHAPTER XIX.

REVENUE FROM DISTILLED SPIRITS.

Distilleries and breweries a prosy subject — But as the government derives a revenue from them the subject must be understood — The government not in partnership with distilleries but has a proprietary interest in every distillery and brewery — To protect its rights the government has an agent to watch every still tub — Government control of distilleries — When grain

CONTENTS. XV

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comes to the distillery it is weighed by the storekeeper — Watching the fermenting-tubs — The distilled spirits emptied into receiving cisterns — How spirits are guarded in the cistern-room — The gauger holds the keys — The owner of the distillery cannot draw off spirits except in the presence of the storekeeper and gauger — Testing the "proof" — Removing spirits from the warehouse — Buying the revenue stamps and paying the taxes , , , , , ,.,,,, • * • 193

CHAPTER XX.

REVENUE FRAUDS.

Formerly many frauds were committed — The present Internal Revenue System almost perfect — Whisky sold for $1.90 per gallon when the tax was $2.cx) per gallon — How it was done — The illicit stills during the civil war and shortly thereafter — The " whisky frauds " of 1875 — How the great conspiracy was broken up — " Moonshining" — In the forests of Vermont and New Hampshire — At present confined to the Southern States — The moonshining district extends from the Cumberland Mountains in Kentucky to the Ozark Mountains in Arkansas — The inhabitants of this district are peculiar — The history of these people has never been written — They are something of a mystery — Supposed to be descendants of the white penal slaves of the old Virginia plantation — Some authority for the statement that they are descendants of Turkish pirates — The "moonshiner" lives a soHtary and secluded life — They are melancholy and sullen — These traits make the Southern " moonshiner" a troublesome character to the government — The " moonshining " stills of the mountain ravines — The method employed by the government in enforcing the law against these outlaws — The great raid of 1889 on the Pea Ridge " moonshiners " of Kentucky 199 xvi CONTENTS,

CHAPTER XXI.

TOBACCO, SNUFF AND CIGARS.

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The tobacco manufacture — Must give a bond — Regulations governing tobacco factories — How tobacco must be put up — The notice required by law — Revenue stamps for paying the taxes on tobacco — Sold by the collectors to the manufacturers — Affixing these stamps to packages and canceling them — The minute provisions of the law — The exacting regulations governing the sale of cigars — Methods of evading the revenue tax on tobacco — Table showing income from the tobacco tax. 210

CHAPTER XXII.

OLEOMARGARINE AND OPIUM.

Act imposing internal revenue tax on oleomargarine — The same when imported from a foreign country — Special tax paid by manufacturer — Oleomargarine must be packed in wooden packages — Notice i'equired — Wholesale dealers must pay a - special tax — Retail dealers — Tax not evaded — But few manufactories — State laws in reference to oleomargarine — The tax on opium — Provisions of the new law — Manufacturer must give bond — How the tax is collected , . . w .' 2i8

CHAPTER XXIII.

SEIGNIORAGE.

Act providing for the coinage of gold, silver and copper — Silver dollar the unit of value — The denominations — The law of 1873 — The gold dollar the unit of value — The trade dollar — Seigniorage — Profits from coinage — Coining money for foreign countries — United States mints — Assay offices — Table showing profits on coinage 223

CONTENTS, xvii

CHAPTER XXIV.

PUBLIC LANDS.

tage.

Receipts from sale of lands not a revenue from taxation — First acquisitions of territory — The Territory of the Northwest — The Louisiana Purchase — Florida acquired — Annexation of Texas — Settlement of Oregon boundary question— The Gadsden purchase — Purchase of Alaska — Survey and sale of lands in the Northwest — Public survey — The township system

— The General Land Office — Land Districts — Public and private sale of land — The preemption right — The Homestead

— Method of selling public land — Table showing amounts received from sale of public lands 226

CHAPTER XXV.

MISCELLANEOUS REVENUES.

The first tax on banks — The act of 1864 — The tax on capital and deposits of national banks abolished — Tax on circulation — Tax'on national banfe for ten years — Patents and copyrights — Trade-marks — Fees, fines and penalties — Custom house fees — Consular fees — Pacific railroads — The charter of 1862 — Land grants and subsidies — The Thurman Bill — Minor Items — Seal fisheries — Soldiers Home fund — Indian lands — District of Columbia — Sale of Government property — Immigrant fund — Depredations on public lands '. 234

. CHAPTER XXVL

THE GRpAT CONTROVERSY.

Two ways to study political economy — The single tax theory — Restricting inheritances — A germ of truth — Action of Illinois State Bar Association — Economical systems of a nation — Changes should be made slowly — A nation like an individual — xviii CONTENTS,

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An imperfect growth — Imperfections in our Government — What can be done — What might have been, had a different system of taxation been adopted — The practical citizen and the present — The direct and indirect systems of taxation — A few definitions — What is claimed for indirect taxation — Objections to indirect taxation — The direct system of taxation and what is claimed for it — A mixed system of taxation the best for the United States — The concessions of practical men — Where the great controversy begins — Protectionists — Free Traders — Arguments for protection— Arguments against protection. , . . 247

ILLUSTRATIONS.

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Treasury Building Frontispiece.

The Signal to " Bring-to " ^ 62

Inspectors Boarding a Vessel 99

Smuggling Cigars in New York Harbor 134

The Policeman of the Shore 142

Custom House at El Paso, Texas 152

Smuggling Horses across the Rio Grande 155

A Mounted Inspector 156

Monument Marking Mexican Boundary 162

The Line Store 170

A Deserted Still-house 204

A Frontier Land Office 231

(xix)

FEDERAL FINANCES.

Chapter I. Taxation — Ancient And Modern

A BRIEF review of the revenue systems of other countries and older civilizations may not be out of place in a work of this kind,, and will, in a measure, prepare the reader to better understand the financial system of our own country.

The first account we have in the Bible of anything in the way of general taxes is given in Numbers xviii. II, 20, where it speaks of tithes, first fruits and the redemption money of the first born. In early times the tithe or tenth was a general custom throughout Persia and Asia Minor. This was before the time of coined money, and taxes were paid by giving to the ruler the tenth of the products of the fields.

According to Herodotus, gold and silver was first coined in Lydia about Soo^j/^rs beforb Christ. It is not until after this time that we begin to hear of taxes being paid to governments as we understand taxes at the present time. The earlier systems of taxation which we read about were very crude, and in many instances very unjust. When an ancient ruler desired means with which to go to war, he set about securing it with little concern whether or not his method was fair and just. A favorite scheme of the ancient kings was to entrap some man of wealth into acting a part which displeased the reigning monarch, and then the unfortunate man would be banished and his property confiscated. Many an'Oriental merchant has saved his head by surrendering as a ransom all his property to the king. The more powerful of the Eastern monarchies derived the most of their revenues by making the conquered provinces pay an annual tribute.

The revenue of ancient Greece was derived from various sources. By confiscating the estates of criminals and aliens, and by conquest and long possession, the States of Greece became the holder of large landed estates. The lands were leased or farmed out and the rents accrued to the state. All the mines within the territory of Greece also belonged to the state, and these, too, were farmed out. Duties and tolls were levied on imports and exports. Foreign vessels were compelled to paytonnage for the privilege of entering a harbor. Imports and exports were subject to a duty of two per cent. As early as 400 years before Christ the Greeks had a regular system of collecting custom duties. The' value of the goods imported or exported was registered in the custom house at the port of entry or shipment, and the fiftieth (two per cent.) was not paid in kind, but in money. The duties were not collected by public officials, as is done in modern times, but by agents who paid the government for the privilege. The state would 6ffer the sole right to collect all the duties of a certain port to the highest bidder. The broker securing the right to collect these duties and tolls was called a farmer of the revenue.

A different and higher sdale of duties was usually laid upon exports and imports in the harbors of the countries which had been brought under the subjugation of Greece. At Byzantium a ten per cent, duty was collected on all merchandise exported to and imported from all countries on the Black Sea. A public building, what we now call a custom house, was built on the Bosphorus, in which to . store the tithes when the duty was not paid in money. Thirty revenue ships, well manned and under the command of two generals, hovered around the channel leading to the Black Sea, and whenever a trading vessel appeared in sight the revenue ships would pounce down upon it and demand the tenth before allowing the vessel to either enter or pass out of the sea. The annual income from all sources of the Athenian state, at the time of the breaking out of the Peloponnesian war, was about one thousand talents ($1,026,000). This does not seem like a very large amount, but it must be remembered that the purchasing power of money at that time was much greater than it is now. The public treasuries of Athens were kept in a cell attached to the back part of a temple of Minerva, in the citadel. The money kept here was consecrated to Minerva, but this did not prevent the Greeks from using the money in time of great need. The priests could usually prevail upon the fair goddess to part with her treasures when the welfare of Athens was at stake.

When Rome was a republic she had a simple and direct system of taxation. About two hundred years after the foundation of the city of Rome, the " census " was instituted. This was a method of numbering the people and valuing their fortunes. Two magistrates were appointed to do this work, and were called censors. They were clothed with almost unlimited power, and to be a censor was to , hold one of the highest offices in the Roman republic. The census was taken in the same open and democratic way in which all the business of the Roman government was conducted at that time. On the day appointed to take the census, heralds were sent through the city to summon the people to the field of Mars, where, seated in curule chairs and surrounded by a retinue of clerks, the censors enrolled the citizens, took an inventory of their property and declared each one's taxes. Unless a citizen gave a correct statement of his property he was subject to severe punishment should he be discovered in his attempt at concealment. The censors were sole judges of the amount of taxes each citizen should pay. The censors often favored their friends, and there was no equality or justice in the manner in which the burdens of the state were meted out to the taxpayers. Then, as now, the rich often escaped their just share of the public expenses. Some estates were arbitrarily assessed at a very high rate, while other estates were sometimes entirely exempt from taxes.

Rome derived considerable revenue from the gold and silver mines which she captured from Spain. .

and held as property of the state. The natives of Spain were made captives and condemned to work in the mines. At one time the proceeds from these mines enriched the Roman coffers at the rate of four thousand dollars a day. Mention must also be made here of the revenue derived from salt mines. The Romans placed a high value on salt, and its scarcity made it valuable. In the early history of the republic any one could buy and sell this article. But after the conquest of Macedonia, a country famous for its salt productions, the government assumed control of the salt market. Importations of salt into Rome were forbidden, in order to give the government a monopoly of the salt business. ' A revenue tax was placed upon this commodity, and the salt wells of Macedonia became a profitable source of revenue to the republic.

When Rome became an empire (B. C. 31) a considerable change was made in the system of taxation. Personal taxes, an excise tax and real taxes were introduced. Legacies and inheritances were also required to pay a tax ; customs duties were regulated and extended.

In the reign of Augustus and his successors, duties were imposed on every kind of merchandise imported into Rome. The articles imported consisted mostly of aromatjcs, such as myrrh, pepper, ginger and cinnamon; a great variety of precious stones, leather from Babylonia, cotton, silks, ebony and ivory. The duty was much higher than the custom tolls of the Greeks, and ranged from two per cent, to twelve per cent. At one time Augustus, desiring to strengthen his military forces, devised a new method of enlarging his revenue. He suggested a tax of five per cent, on all legacies and inheritances. This tax was opposed by the wealthy citizens, but the senate levied the tax. The nobles took advantage of every legal device to avoid paying this excise to the government, and in many instances they ^cceeded.

In the time of Justinian many severe and unjust methods of collecting taxes were introduced. The most unpopular and intolerable of all was what was known as the sale of monopolies. The crown would grant the sole right to some company to sell or deal in a certain article of commerce. For this privilege the company would pay a stipulated amount to the general government. The company having the sole right to deal in a certain article would, of course, have a complete monopoly of the same.

The methods of taxation in the Roman Empire were about as we have just described, from B. C. 31 to A. D. 315. At that time, Constantine the Great moved the capital to Constantinople, and reconstructed the affairs of state. Constantine invented the " indiction " method of levying taxes. By this system, every fifteen years was made a period of taxation. The emperor, by a solemn edict, or indiction, which was published in every province and city, prescribed the measure of tribute to the general government, and set forth the terms of payment. This arbitrary and despotic method lasted, with little variation, until the downfall of the empire.

But little can be said on the subject of taxation during the early history of England. A country roust make some progress in civilization before it can have a system of taxation. Before that time, its rulers support themselves by conquest, confiscation and a piratical method of taking whatever they want. Therefore, it is not until the time of King Alfred, that England can be said to have had any regular system of taxation. This prince made some progress in establishing a regular revenue.

With the conquest of England by Norman kings, the feudal system was introduced. The custom of .the feudal law was, that when a king conquered a new country, he immediately divided it up among his generals, who held their lands under a sort of knight-service. The only debt they owed the king for the great landed estates that he bequeathed them, was to attend him, should he become involved in a war. The knights and generals in their turn, parceled out their estates to lesser chiefs and lords, on the same plan as they themselves had derived them from the king. This made a chain of union from the king down to the humblest peasant, and by means of this arrangement, a crude method of taxation was devised, which well served a warlike people. If the king's vassals did not wish to attend the king on a hostile expedition, they could pay a sum of money called a scutage. Sometimes the vassal was not allowed the privilege of personal service, but was required to pay the scutage. And not infrequently, the kings would pretend that they were going on a war expedition merely for an excuse to levy the scutage tax. The military tenants or holders of the large landed estates were not supposed to be taxed, but only to render aid and service in time of war. But in the course of time, the kings began to make exceptions to this rule, and to tax the barons under different pretenses. Finally, it became the practice to tax tillable land in every variety of form. These taxes were at times very burdensome. During the reign of William Rufus the taxes were so high that the farmers left their fields to seek for other work, and a famine was the result.