The United States introduced income tax in 1861 as a temporary war measure, then made it permanent in 1913

The first federal income tax in the United States appeared in 1861, during the Civil War. Congress needed money to fund the war effort and created a temporary tax on individual incomes. This tax lasted until 1872, when it was repealed after the war ended. For the next 40 years, the federal government relied on tariffs and excise taxes instead.

In 1913, income tax returned permanently. The 16th Amendment, ratified that year, gave Congress the power to collect income tax without apportioning it among the states. The first permanent income tax was modest—it applied only to people earning above a certain threshold, which meant most working Americans did not pay it. Over time, the tax expanded to reach more people and generate more revenue, especially during World War II.

Key Takeaways

  • The first federal income tax began in 1861 as a temporary measure to fund the Civil War and was repealed in 1872.
  • Income tax returned permanently in 1913 after the 16th Amendment was ratified, giving Congress the authority to collect it.
  • The original 1913 income tax only affected high earners; most working people did not pay it initially.
  • World War II expanded income tax to millions of Americans as the government needed more revenue for military spending.
  • The structure of income tax—rates, deductions, and who pays—has changed many times since 1913 but the basic system remains the same.

Why the Civil War led to the first income tax

Before 1861, the federal government funded itself through tariffs on imported goods and excise taxes on specific items like alcohol and tobacco. These sources were steady but not enough to pay for a major war. When the Civil War began, Congress needed when ready revenue and turned to income tax as a new source.

The 1861 income tax was structured as a temporary emergency measure. It applied to incomes above $800 per year, which was a substantial sum at the time—the average worker earned far less. The tax rates were low by modern standards, ranging from 3 to 5 percent. Because it only touched the wealthy, it was politically easier to pass than a broad-based tax would have been.

After the Civil War ended in 1865, the tax remained in place for seven more years to help pay down war debt. Congress finally repealed it in 1872, and the federal government returned to relying on tariffs and excise taxes. This gap lasted four decades.

The 16th Amendment made income tax permanent and constitutional

In 1895, the Supreme Court ruled in Pollock v. Farmers' Loan & Trust Co. that a direct income tax on property was unconstitutional without apportionment among the states. This decision blocked Congress from collecting income tax the way it had during the Civil War. For 18 years, income tax remained off the table.

By 1909, the federal government faced a budget shortfall. Tariffs alone could not generate enough revenue, and Congress wanted a new source. Rather than fight the Supreme Court ruling, Congress proposed the 16th Amendment, which would explicitly allow income tax without apportionment. The amendment was ratified on February 3, 1913.

That same year, Congress passed the first permanent income tax law. The 1913 tax applied to incomes above $3,000 per year for individuals and $4,000 for married couples—amounts that excluded most workers. The tax rate started at 1 percent on income above the threshold and rose to 7 percent on very high incomes. Only about 3 percent of the population paid income tax in 1913.

How income tax expanded during the world wars

Income tax remained a tax on the wealthy through the 1920s and 1930s. The Great Depression actually increased the number of people paying income tax, because the government needed more revenue and lowered the income threshold. Still, the majority of Americans did not file returns.

World War II changed everything. The government needed enormous sums to fund military operations, and Congress lowered the income threshold dramatically. By 1943, income tax had become a mass tax affecting tens of millions of workers. To make collection easier, Congress introduced withholding—employers now deducted income tax directly from paychecks instead of workers paying a lump sum at year-end. This system, introduced as a temporary wartime measure, became permanent and remains the standard today.

The tax rates also climbed steeply during World War II. The top marginal rate—the rate paid on the highest portion of income—reached 94 percent in 1944. After the war ended, rates came down but remained much higher than they had been before 1941. Income tax had transformed from a tax on the wealthy into the primary source of federal revenue.

Income tax rates and brackets have changed many times since 1913

The structure of income tax—the rates, the brackets, and the deductions allowed—has been rewritten dozens of times. Major overhauls occurred in 1954, 1986, and 2017, but Congress adjusts the tax code nearly every year in smaller ways.

The top marginal tax rate has ranged from 7 percent in 1913 to 94 percent in 1944 to 37 percent today. The income threshold below which you owe no tax has also shifted constantly, adjusted for inflation and changed by law. Deductions—amounts you can subtract from income before calculating tax—have expanded and contracted. Some deductions that existed in 1913 no longer exist; others are newer.

Despite these changes, the basic system has remained the same: the federal government collects income tax from individuals and businesses, rates are progressive (higher earners pay a higher percentage), and employers withhold tax from paychecks. This foundation, built in 1913 and expanded during World War II, is still how income tax works today.

State income taxes developed separately from federal income tax

While the federal government was debating income tax in the 1800s, some states were already collecting their own income taxes. Wisconsin passed the first state income tax in 1911, two years before the federal government. Other states followed, especially after the 16th Amendment made federal income tax constitutional.

State income taxes operate independently of the federal system. Each state sets its own rates, brackets, and deductions. Some states have no income tax at all; others tax only certain types of income like wages or investment gains. When you file your federal return, you also file a state return (if your state has income tax), and the two are calculated separately.

Frequently Asked Questions

Did everyone have to pay income tax when it started in 1861?

No. The 1861 income tax only applied to people earning above $800 per year, which excluded most workers. It was designed as a tax on the wealthy to fund the Civil War. When income tax returned in 1913, it again applied only to high earners—about 3 percent of the population paid it that year.

Why did the Supreme Court rule against income tax in 1895?

The Court decided that a direct tax on income from property had to be apportioned among the states based on population, which made it impractical to collect. The 16th Amendment, ratified in 1913, overturned this ruling by explicitly allowing Congress to collect income tax without apportionment.

When did most Americans start paying income tax?

During World War II, when Congress lowered the income threshold to raise revenue for military spending. By 1943, tens of millions of workers were paying income tax for the first time. The introduction of payroll withholding that year made it the system we use today.

Is federal income tax the same as state income tax?

No. Federal income tax goes to the U.S. government and is collected by the IRS. State income tax goes to your state government and is collected by your state's tax agency. They are separate systems with different rates and rules, though some states have no income tax at all.

What was the highest income tax rate ever?

The top marginal tax rate reached 94 percent in 1944 during World War II. This meant that income above a certain threshold was taxed at that rate. After the war, rates came down but remained higher than pre-war levels. The current top rate is 37 percent.