What Keeps Me up at Night

Once upon an early morning dreary, while I pondered weak and weary…What’s in a name?

At about 2:45 this morning, while I was writing a post on gross income (soon, my friends), the thought crossed my mind, what makes the Internal Revenue Service and the Internal Revenue Code internal? Why not simply the Revenue Service and the Revenue Code?

So, I thought to myself, what’s in a name: the “Internal” Revenue Service?

Back in the Day

Running a nation is expensive. Interstate highways do not build themselves, B-52 bombers do not grow on trees, and the Internal Revenue Code did not write itself. In 1791, George Washington and his new Congress realized, as angry as they were about the “Intolerable” Acts,” such as the stamp tax and the tax on tea (see, e.g., the Boston Tea Party), that taxes were a necessary evil.

Not wanting to raise the ire of the average American citizen, Congress passed a law setting external tariffs on certain imports and an internal excise tax on whiskey.  The latter internal tax did not sit well with the people, and it gave rise to the first set of tax protesters. Indeed, although the “Whiskey Rebellion” in the late 1700s was the first protest against internal taxation, it was the bloodiest.

Seventy or so years later, the Civil War was draining the nation’s fisc, and Abraham Lincoln signed into law the first internal income tax. It levied a 3% tax on incomes between $600 and $10,000 and a 5% tax on incomes of more than $10,000. Bowing to pressure after the war, Congress cut the tax rate, and until 1913, 90% of the federal government’s revenue came from excise taxes on alcohol and tobacco.

Between 1872 and 1913, the income tax was repealed, revived, and then struck down by the Supreme Court as unconstitutional. In 1909, President Taft recommended Congress propose a constitutional amendment that would give the government the power to tax incomes without apportioning the burden among the states in line with population. Congress also levied a 1% tax on net corporate incomes of more than $5,000.

With the threat of World War I looming, the 16^th amendment to the Constitution was ratified in 1913:

The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.

Congress got a bit cocky after the war, and it passed The Revenue Act of 1918, which imposed a progressive income-tax rate structure of up to 77%. A year later, Congress passed the Volstead Act, which gave the Commissioner of Internal Revenue the primary responsibility for enforcement of Prohibition. Eleven years later, the Department of Justice assumed primary prohibition enforcement duties.

When Prohibition was repealed in 1933, the IRS again assumed responsibility for alcohol taxation the following year and for administering the National Firearms Act. Later, tobacco tax enforcement was added. In 1953, President Eisenhower changed the name of the agency from the Bureau of Internal Revenue to the Internal Revenue Service. In 1972, the Alcohol, Tobacco and Firearms Division separated from the IRS to become the independent Bureau of Alcohol, Tobacco, and Firearms.

All Well and Good, but Why “Internal”

As discussed above, the various iterations of the revenue collection function of the federal government collected both internal taxes on income and excise taxes on various items, as well as external duties and tariffs on imported goods. All well and good, you say, but who collects external taxes?

Since its creation in 1789, the U.S. Customs Service, until recently a part of the Treasury Department, has been responsible for collecting duties and tariffs even as internal revenue collection emerged later in the 19th century. Customs duties and tariffs, thus, were left entirely under the Customs Service’s purview. The Customs Service remained the sole collector of tariffs and other external taxes until its responsibilities were transferred to the U.S. Customs and Border Protection in 2003 under the Department of Homeland Security.

What’s in a Name? Now You Know…and

Stated simply, the Internal Revenue Service administers domestic tax laws and collects taxes from sources generated within (or with ties to) the United States. The U.S. Customs and Border Protection arm of the Department of Homeland Security collects duties, tariffs, and other external taxes on imported goods to the United States. Why not call this wing of the CBP the “External” Revenue Service? Because my friends, that’d be too darn easy.

What’s in a name.

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