The United States Thrived Without a Federal Income Tax
Until It Didn’t
For over a century after its founding, the United States built a robust economy without taxing the income of its citizens. From 1789, when the U.S. Treasury was established under Alexander Hamilton, through the 19th century, the federal government funded itself primarily through tariffs on imports and excise taxes on goods like liquor and tobacco. These revenue streams powered a young nation through wars, westward expansion, and industrial growth. Financial panics occurred—see my editorial on the Panic of 1907 below for context—but none rivaled the scale of the Great Depression. The country’s financial strength, I argue, rested on a system that didn’t burden citizens directly, relying instead on trade-driven wealth. Then came 1913, a pivotal year that reshaped America’s fiscal landscape and, in my view, set the stage for unprecedented economic turmoil.
Let’s start with the facts. The U.S. Treasury, created on September 2, 1789, managed federal finances adeptly for decades, using tariffs as its backbone. Between 1868 and 1913, tariffs and excise taxes accounted for roughly 90% of federal revenue. No federal income tax existed because none was needed—trade kept the coffers full. But this changed with the ratification of the 16th Amendment on February 3, 1913, which gave Congress the power to tax incomes “from whatever source derived.” That same year, on December 23, the Federal Reserve Act established the Federal Reserve Bank, creating a central banking system to control the money supply. Shortly after, the Bureau of Internal Revenue—reorganized into the Internal Revenue Service (IRS) in 1953—began enforcing this new tax. These three pillars emerged almost simultaneously, and I contend their arrival marked the beginning of a financial unraveling.
Fast forward to October 1929: the stock market crashed, ushering in the Great Depression, a catastrophe unlike any before it. From 1929 to 1933, over 9,000 banks failed, unemployment soared to 25%, and GDP plummeted. Contrast this with earlier panics—none triggered such widespread devastation. What changed? The federal income tax and Federal Reserve were now in place, and tariffs, once the lifeblood of revenue, were waning. The Smoot-Hawley Tariff Act of 1930, often blamed for deepening the Depression, came too late—signed on June 17, 1930, well after the crash began. Tariffs weren’t the culprit; they’d been reduced in the early 1900s as income taxes took hold. I see a correlation: the shift from tariffs to taxing citizens, coupled with the Federal Reserve’s mismanagement, weakened America’s financial foundation.
The Federal Reserve’s role in the Great Depression is telling. Established in 1913 to stabilize the economy after the Panic of 1907, it instead tightened monetary policy in the late 1920s, raising interest rates and contracting the money supply just as the economy overheated. Historians debate its culpability, but many agree this exacerbated the crash. Meanwhile, the federal income tax, initially a modest 1% on incomes over $3,000, grew into a permanent fixture, siphoning wealth from citizens rather than trade. By 1932, the Revenue Act hiked rates to 63% on top earners, yet revenue still lagged—tariffs had been sidelined, and the Treasury leaned ever more on the IRS.
Before 1913, the U.S. weathered financial storms without a central bank or income tax. The Treasury managed debt through customs duties, and no “Great Depression” scarred the colonial or early republic eras. The 19th century saw booms and busts, but resilience prevailed. I argue that the Federal Reserve’s creation and the income tax’s rise—paired with declining tariffs—disrupted this balance, paving the way for the 1930s collapse. Today, federal income taxes remain high, yet deficits balloon. Why? The system is broken, rooted in institutions that prioritize control over prosperity.
Here’s my solution. First, dissolve the Federal Reserve. Its track record—from the Great Depression to the 2008 crisis—shows it amplifies rather than prevents financial tragedies. A decentralized banking system, as existed pre-1913, could restore market-driven stability. Second, reinstate robust tariffs on all imports. History proves they funded the government effectively; from 1790 to 1860, tariffs averaged 20-30% of GDP-adjusted revenue, dwarfing today’s customs intake. Third, redirect the IRS into an External Revenue Service, tasked solely with collecting taxes and tariffs from importers—not citizens. This shift would lighten the tax burden on Americans, letting the Treasury fund itself as it once did.
Imagine the payoff: budgets balanced by trade revenue, not personal income, with surpluses returned as annual dividends to citizens. In 2022, the Treasury collected $4.9 trillion, mostly from income taxes, yet spent $6.3 trillion. Contrast this with 1910, when tariff-driven revenue met needs without deficits. My plan isn’t nostalgia—it’s a proven model. The Great Depression wasn’t inevitable; it was a consequence of abandoning what worked. Dissolving the Federal Reserve, reviving tariffs, and reimagining the IRS could reclaim America’s financial independence—for good.