When Income Tax Started in the United States

The Federal Income Tax Began in 1861, Then Stopped, Then Returned in 1913

The United States first introduced a federal income tax in 1861 to fund the Civil War. This tax was temporary—it was meant to last only as long as the war did. The government collected income tax from individuals and businesses earning above a certain threshold, and when the war ended in 1865, the tax was allowed to expire. For the next 48 years, the federal government had no income tax at all.

In 1913, after the ratification of the 16th Amendment to the Constitution, Congress passed a new income tax law that has remained in place ever since. This second income tax was much smaller at first—only about 3 percent of Americans paid it, because it only applied to people earning above $3,000 a year, which was a substantial income in 1913. Over time, the tax base expanded, rates changed, and the income tax became the largest source of federal revenue.

Key Takeaways

• The first federal income tax in the United States ran from 1861 to 1865 and was created to pay for the Civil War.
• No federal income tax existed from 1865 until 1913, a gap of nearly 50 years.
• The 16th Amendment, ratified in 1913, gave Congress the power to collect income tax without apportioning it among the states.
• The income tax that started in 1913 initially affected only the wealthiest Americans but has since become the primary way the federal government collects revenue.

Why the Civil War Income Tax Was Temporary

The 1861 income tax was designed as a war measure. Congress needed money to pay soldiers, buy equipment, and supply the Union Army. Income tax was one of several new taxes introduced during the war—tariffs and excise taxes on goods like alcohol and tobacco also brought in revenue. The government expected the war to end, and when it did, lawmakers allowed the income tax to expire along with other temporary wartime measures.

Between 1865 and 1913, the federal government relied on tariffs (taxes on imported goods) and excise taxes as its main sources of revenue. These taxes were less direct than an income tax—they were built into the price of goods rather than collected directly from people's paychecks. This system worked for decades, but as the country grew and the government's expenses increased, lawmakers began to see income tax as a more stable and fairer way to raise money.

The 16th Amendment Made the Modern Income Tax Possible

Before 1913, there was a legal barrier to a permanent income tax. The Constitution, as originally written, required that any "direct tax" be apportioned among the states based on population. This rule made a national income tax impractical—it would have meant that a state with 10 percent of the population had to pay 10 percent of the total income tax collected, regardless of how much income was actually earned there. This created an impossible accounting problem.

In 1909, Congress proposed the 16th Amendment to remove this barrier. The amendment stated straightforward: "The Congress shall have power to collect taxes on incomes, from whatever source derived, without apportionment among the several States." The states ratified it in 1913, and Congress when ready passed the first permanent income tax law that same year. The amendment did not create the income tax—it removed the constitutional obstacle that had prevented one.

How the 1913 Income Tax Worked

The income tax that began in 1913 was modest by modern standards. It applied only to people earning more than $3,000 per year—equivalent to roughly $100,000 in today's money. Because of this high threshold, only about 3 percent of the population paid federal income tax in the first year. The tax rates were also low, ranging from 1 percent on the lowest incomes to 7 percent on the highest.

The tax was collected through a system of forms and declarations. Individuals and businesses had to report their income to the government, and the government calculated what they owed. This system is recognizable to anyone who files taxes today, though the forms and rules have become far more complex. In 1913, the process was simpler because fewer people paid the tax and the rules were less detailed.

How Income Tax Expanded Over Time

The income tax remained a tax on the wealthy for only a few decades. During World War I and World War II, the government needed much more revenue, so Congress lowered the income threshold and raised the tax rates. By the 1940s, income tax had become a mass tax affecting millions of Americans, not just the rich. The withholding system—where employers deduct taxes from paychecks—was introduced in 1943 to make collection easier.

Tax rates fluctuated throughout the 20th century depending on economic conditions and government spending. In the 1950s and 1960s, the top tax rate was over 90 percent. In the 1980s, it was cut to 50 percent and then lower. Today, the rates are set by Congress and change periodically through tax law changes. The income tax has remained the largest source of federal revenue for most of the past century.

Why the Income Tax Replaced Other Revenue Sources

Before the income tax became widespread, tariffs were the federal government's main source of revenue. Tariffs are taxes on imported goods, and they were politically popular in many parts of the country because they protected American manufacturers from foreign competition. However, tariffs have a drawback: they raise prices for consumers and can trigger trade disputes with other countries. As the economy grew and international trade became more important, relying solely on tariffs became less practical.

Income tax offered an alternative that seemed fairer to many people—it was based on ability to pay, and it could be adjusted to raise more or less money depending on government needs. Over the 20th century, income tax gradually became the dominant federal revenue source, though tariffs, excise taxes, and other taxes continue to exist. Today, individual income taxes and payroll taxes (which fund Social Security and Medicare) together account for the vast majority of federal revenue.

Frequently Asked Questions

Did people pay income tax before 1861?

No. The United States did not have a federal income tax before the Civil War. Some states collected income taxes, but the federal government did not. The 1861 income tax was the first time the federal government taxed people's income directly.

Why did the income tax start so high—over 90 percent in the 1950s?

The high tax rates of the 1950s were set by Congress to fund government spending after World War II and during the Cold War. The government needed money for defense, infrastructure, and social programs. High marginal tax rates (the rate on the highest earners) were seen as a way to fund these programs while keeping taxes lower on middle-income people. Tax rates are set by Congress and can change whenever lawmakers pass new tax laws.

Could the income tax be eliminated today?

Technically yes—Congress could repeal the income tax if it passed a law doing so. However, the income tax is now the largest source of federal revenue, so eliminating it would require either cutting government spending significantly or replacing the revenue with other taxes. This would be a major change to how the federal government operates, and no such proposal has come close to passing Congress in recent decades.

What was the income tax rate in 1913?

The income tax in 1913 ranged from 1 percent on the lowest incomes to 7 percent on the highest. These rates were much lower than they would become during and after World War I. The tax only affected people earning above $3,000 per year, so most Americans did not pay it.