President Lincoln Imposes the First Federal Income Tax

Answer the following questions to check your understanding of the story.

What type of income tax was the federal government imposing?

a) A proportional income tax

b) A progressive income tax

c) A regressive income tax

d) A generational income tax

Wrong! - What is a proportional income tax, a regressive income tax, and a generational income tax? Was the federal income tax one of these?

That's Right! - A progressive income tax is one that taxes income at an average rate that increases as income increases.

The federal income tax levied was 0 percent on annual incomes below $800 and 3 percent tax on annual incomes exceeding $800.

Was this first federal income tax efficient?

a) Yes, because it increased the size of the economic pie.

b) Yes, because it ensured the economic pie was divided equally

c) Yes, because it increased the incentive to work.

d) No, because it reduced the size of the economic pie.

Wrong! - Does an income tax increase the incentive to work? Does it increase the size of the economic pie or necessarily divide the economic pie equally?

Correct! - Taxing laborers reduces their incentive to work. With fewer hours worked, the economic pie decreases, and the outcome is inefficient.

Was this first federal income tax fair?

The first federal income tax ____________.

a) was not fair because it created inefficiency

b) was not fair by the benefits principle because no one benefits from war

c) was not fair by either the benefits principle nor the ability-to-pay principle

d) was fair by the ability-to-pay principle

Wrong! - What is the ability-to-pay principle? What is the benefits principle? Can an outcome be fair but inefficient?

Well Done! - Taxing people with higher incomes is fair by the ability-to-pay principle because high-income earners can bear the tax burden easier than low-income earners.

Share this: