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

The United States did not have a permanent federal income tax until 1913. Before that, the government funded itself through tariffs on imported goods and excise taxes on specific items like alcohol and tobacco. When the Civil War broke out in 1861, Congress needed money fast and passed the first federal income tax as an emergency measure. It was supposed to expire when the war ended.

That 1861 tax was steep by today's standards—it took 3 percent of income above $800 a year, which was a substantial amount at the time. It applied only to the wealthy, since most workers earned far less. The tax did expire in 1872, as planned, and the country returned to tariffs and excise taxes for the next forty years.

Key Takeaways

  • The first federal income tax appeared in 1861 during the Civil War and was meant to be temporary, expiring in 1872.
  • Congress tried to bring back an income tax in 1894, but the Supreme Court struck it down in 1895, ruling it was unconstitutional without a constitutional amendment.
  • The 16th Amendment, ratified in 1913, gave Congress the power to tax income directly and permanently.
  • The 1913 income tax started at just 1 percent on high earners and affected only about 3 percent of the population initially.
  • Tax rates and the number of people paying taxes grew dramatically after World War I and especially during World War II.

Congress tried to restore income tax in 1894 and lost in court

After the Civil War tax expired, the government relied on tariffs for decades. But tariffs were unpopular with farmers and workers who paid higher prices for goods, and by the 1890s there was political pressure to find another revenue source. In 1894, Congress passed a new income tax law—this time intended to be permanent.

The Supreme Court had other ideas. In 1895, in the case Pollock v. Farmers' Loan & Trust Co., the Court ruled that a direct tax on income was unconstitutional. The Constitution, as written at that time, required that direct taxes be apportioned among the states based on population. An income tax did not fit that requirement, the Court said, so Congress could not impose one without amending the Constitution.

This ruling blocked income taxation for eighteen years. It also made clear that if Congress wanted an income tax, it would have to change the Constitution itself.

The 16th Amendment made income tax permanent in 1913

The political movement for an income tax grew stronger in the early 1900s. Progressives argued that wealthy people should pay more in taxes, and that an income tax was fairer than tariffs that burdened ordinary consumers. In 1909, Congress proposed the 16th Amendment, which would give it the power to tax income without apportioning it among the states.

The amendment was ratified on February 3, 1913, becoming part of the Constitution. That same year, Congress passed the first permanent federal income tax under the new authority. The initial tax was modest: 1 percent on income above $3,000 a year, with higher rates—up to 7 percent—on very large incomes. Because $3,000 was roughly what a middle-class worker earned in a year, the tax initially affected only about 3 percent of the population, mostly the wealthy.

Income tax expanded dramatically during the world wars

For the first few years, the income tax remained a tax on the rich. But World War I changed that. As the United States prepared for and then entered the war, Congress raised tax rates and lowered the income threshold so more people had to pay. By 1918, the top rate had climbed to 77 percent on the highest incomes, and millions of middle-class workers were paying as well.

After the war, rates came down somewhat during the 1920s, but World War II brought another massive expansion. To fund the war effort, Congress again raised rates and lowered thresholds. The top rate hit 94 percent during the war years. More importantly, the income tax shifted from being a tax on the wealthy to a tax on the broad middle class. Withholding—where employers deduct taxes from paychecks—was introduced in 1943 to make collection easier.

By the end of World War II, the income tax had become the primary source of federal revenue, a role it still plays today.

Tax rates and brackets have changed many times since 1913

The income tax structure has never been stable. Congress has adjusted tax rates, added and removed deductions, changed the number of tax brackets, and altered which income levels fall into which brackets dozens of times since 1913. Some of these changes were temporary responses to wars or recessions; others reflected changing political views about how much the wealthy should pay.

The highest marginal tax rate—the rate paid on the last dollar of income for the richest earners—has ranged from 7 percent in 1913 to 94 percent during World War II to 37 percent in recent years. The number of people required to pay income tax has also fluctuated based on inflation and changes to the standard deduction, the amount of income you can earn before owing any tax.

State income taxes came later and developed separately

While the federal government was debating income tax in the 1800s, some states were moving ahead on their own. Wisconsin passed the first state income tax in 1911, two years before the federal tax became permanent. Other states followed, but not all—even today, nine states have no income tax at all.

State income taxes developed independently of the federal system and vary widely in structure, rates, and what they tax. Some states tax only wage income; others tax investment income as well. Some have flat rates; others use progressive brackets like the federal system. A person's total tax burden depends on both federal and state taxes, which is why tax rates vary so much depending on where you live.

How the income tax system works today

The modern income tax is a pay-as-you-earn system. Employers withhold taxes from paychecks throughout the year based on information you provide on Form W-4. At the end of the year, you file a tax return—either Form 1040 for federal taxes or your state's equivalent—to reconcile what was withheld with what you actually owe. If too much was withheld, you get a refund; if too little, you owe the difference.

The federal tax uses a progressive bracket system, meaning different portions of your income are taxed at different rates. The more you earn, the higher the rate on your top dollars, but not on your entire income. Self-employed people and those with investment income have additional reporting requirements and may owe quarterly estimated taxes.

Frequently Asked Questions

Did people have to pay income tax before 1913?

Yes, but only during the Civil War (1861–1872) and briefly in 1894–1895. The 1894 tax was struck down by the Supreme Court. For most of the 1800s, the federal government funded itself through tariffs and excise taxes instead.

Why did the Supreme Court say the 1894 income tax was unconstitutional?

The Court ruled that direct taxes had to be apportioned among states based on population, and an income tax could not be apportioned that way. The 16th Amendment changed the Constitution to allow Congress to tax income without that requirement.

What was the income tax rate when it started in 1913?

The initial federal rate was 1 percent on income above $3,000 a year, with higher rates up to 7 percent on very large incomes. Because $3,000 was roughly a middle-class annual wage, only about 3 percent of the population paid the tax initially.

When did most Americans start paying income tax?

During World War I and especially World War II, Congress lowered the income threshold and raised rates to fund the wars. By 1945, millions of middle-class workers were paying income tax, and it had become the government's main source of revenue.

Do all states have income tax?

No. Nine states have no income tax at all. The remaining states have income taxes that vary widely in structure and rates. State income taxes developed separately from the federal system and are not connected to it.