The federal income tax began in 1861 as a temporary war measure

The United States first imposed a federal income tax in 1861 to fund the Civil War. It was meant to be temporary — a way to raise money quickly without raising tariffs on imports. The tax applied only to people earning more than $800 a year, which excluded most workers at the time. It expired in 1872, after the war ended.

Before 1861, the federal government relied almost entirely on tariffs and excise taxes. Income tax was not part of the American tax system. The idea existed in other countries — Britain had used it since 1799 — but the U.S. had never tried it on a national scale.

Key Takeaways

  • The federal income tax started in 1861 as a temporary tax to pay for the Civil War and ended in 1872.
  • The first income tax only affected people earning more than $800 per year, which was a high threshold at that time.
  • Income tax returned permanently in 1913 after the 16th Amendment was ratified, allowing Congress to tax income without apportioning it among states.
  • The 1913 tax rate started at 1 percent on income over $3,000 and rose to 7 percent on income over $500,000.
  • State income taxes developed separately and at different times — some states adopted them before the federal government did.

Why the Civil War forced a new kind of tax

The Civil War was expensive. The federal government needed to raise money fast, and tariffs alone could not cover the cost. Congress passed the first income tax law in August 1861, just four months after the war began. It was framed as a temporary measure that would end when the war ended.

The tax was progressive, meaning higher earners paid a higher percentage. A person earning $600 to $10,000 paid 3 percent. Someone earning over $10,000 paid 5 percent. But because the threshold was $800, most ordinary workers paid nothing. The tax brought in money, but not as much as tariffs did.

Income tax disappeared for 41 years

When the Civil War ended in 1865, the income tax did not disappear when ready. Congress kept it in place for seven more years, gradually lowering the rate. The last income tax from that era expired on December 31, 1872. For the next 41 years, the federal government had no income tax at all.

During those four decades, the government relied on tariffs, excise taxes, and customs duties. This system worked, but it created political tension. Tariffs protected some industries and raised prices for consumers. By the 1890s, there was growing pressure to find a different way to fund the government.

The Supreme Court blocked income tax in 1895

Congress tried to bring back income tax in 1894, during an economic depression. The law taxed income from property, stocks, and bonds. But the Supreme Court ruled in Pollock v. Farmers' Loan & Trust Co. that this tax was unconstitutional. The Court said a direct tax on income from property had to be apportioned among the states based on population, which made it impractical.

This ruling blocked any federal income tax for 18 years. Congress could not pass an income tax without changing the Constitution. That meant proposing an amendment, getting two-thirds approval in both the House and Senate, and then getting three-fourths of the states to ratify it.

The 16th Amendment made income tax permanent in 1913

The 16th Amendment was ratified on February 3, 1913. It gave Congress the power to "collect taxes on incomes, from whatever source derived, without apportioning among the several States." This removed the Supreme Court's obstacle. Congress could now tax income directly without dividing the tax among states by population.

The first permanent federal income tax took effect on March 1, 1913. It started at 1 percent on income over $3,000 and rose to 7 percent on income over $500,000. Like the 1861 tax, it affected only the wealthy. Most workers still paid nothing.

State income taxes developed on their own timeline

States did not wait for the federal government. Wisconsin became the first state to adopt an income tax in 1911, two years before the federal tax returned. Other states followed at different times. Some adopted income tax early in the 1900s; others did not add it until the 1930s or later. A few states still do not have an income tax.

State income taxes work separately from federal income tax. A person may owe both — one to their state and one to the federal government. The rates, thresholds, and rules differ by state. Some states tax only wages; others tax investment income too. This patchwork developed because each state made its own decision about how to fund itself.

Income tax rates changed dramatically after 1913

The 1913 income tax was small and affected few people. But as the federal government's expenses grew — especially during World War I and World War II — tax rates climbed. By 1918, the top rate reached 77 percent. During World War II, it hit 94 percent. The number of people paying income tax also expanded. What started as a tax on the wealthy became a tax on the middle class.

Tax rates have risen and fallen many times since then, depending on which party controlled Congress and what the government needed to fund. But the basic structure — a progressive federal income tax on wages, salaries, and investment income — has remained in place since 1913.

Frequently Asked Questions

Did people pay income tax before 1861?

No. The federal government did not have an income tax before the Civil War. It funded itself through tariffs on imports and excise taxes on goods like alcohol and tobacco. Some states had their own taxes, but there was no federal income tax.

Why did the first income tax only affect rich people?

The threshold of $800 per year was set high intentionally. In 1861, the average worker earned around $1 per day, or roughly $300 per year. A threshold of $800 meant only the top 5 percent of earners paid the tax. Congress wanted to raise money without burdening ordinary workers.

What is the 16th Amendment?

The 16th Amendment, ratified in 1913, gave Congress the power to tax income without apportioning the tax among states. Before this, the Supreme Court had ruled that income tax was unconstitutional unless divided by state population, which was impossible to do fairly. The amendment removed that barrier.

Do all states have income tax?

No. Nine states have no income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only investment income). Other states have income tax rates ranging from less than 1 percent to over 13 percent, depending on the state.

When did income tax start affecting most workers?

Income tax remained a tax on the wealthy until World War II. During the war, the government needed more money and lowered the threshold so middle-class workers had to pay. After the war, income tax stayed broad-based. Roughly 40 percent of U.S. workers pay federal income tax.