The Union financed the Civil War through war bonds, selling federal lands and instituting an income tax. Passed in 1861, the legislation levied a 3 percent tax against incomes over $800, and was increased twice during the war. The Union's greater tax and industrial base was a major financial advantage.
The primary source of war revenue for the Union was war bonds. These were notes sold to individuals that promised repayment after a set period and interest paid in the interim. As much as 65 percent of the Union's war expenditures were funded by these bonds, although their value and the ease with which they could be sold varied along with the tide of the war. When Confederates attacked Union shipping and found success in the field, bond sales dropped, while Union victories helped increase revenue.
The first income tax was passed in order to reassure the financial community that the Union could repay its bonds. The Treasury Department had to cover a $20 million shortfall for the first fiscal year of the war, and the solution was the first income tax in American history. By 1864, the rates were 5 percent on incomes between $600 and $5,000, 7.5 percent for incomes between $5,000 and $10,000, and 10 percent for incomes above $10,000.