The Federal Income Tax Began in 1913

The federal income tax as we know it started in 1913, when the 16th Amendment to the Constitution was ratified. This amendment gave Congress the power to collect income tax without apportioning it among the states based on population. Before 1913, the federal government had tried income taxes twice—once during the Civil War and once in 1894—but both were struck down by courts or repealed because they were considered unconstitutional.

The 1913 tax was modest at first. It applied only to the wealthiest Americans—those earning more than $3,000 a year, which was roughly equivalent to $100,000 in 2024 dollars. Most working people paid nothing. The tax rate on the highest earners was just 7 percent. Over the following decades, especially during World War II, the income tax expanded dramatically to cover millions of workers and fund the war effort.

Key Takeaways

  • The 16th Amendment, ratified in 1913, created the constitutional foundation for the federal income tax that exists today.
  • The first federal income tax in 1913 only affected wealthy Americans earning more than $3,000 per year and carried a top rate of 7 percent.
  • Two earlier attempts at federal income tax—during the Civil War and in 1894—were either repealed or ruled unconstitutional by courts.
  • Income tax expanded significantly during World War II to become the primary source of federal revenue and to cover millions of workers.

Why the Government Needed a New Tax Source

Before 1913, the federal government relied mainly on tariffs—taxes on imported goods—to fund its operations. As the country grew and government spending increased, tariffs alone could not generate enough revenue. Lawmakers began pushing for an income tax as a more stable and direct way to raise money.

The push for income tax also reflected growing debate about fairness. Supporters argued that people with higher incomes should pay more to support the government, while opponents worried about the government's power to tax personal earnings. The 16th Amendment settled the constitutional question in favor of income tax, and Congress passed the first income tax law that same year.

The Civil War Income Tax (1861–1872)

The first federal income tax in American history was temporary and tied to the Civil War. Congress passed it in 1861 to pay for the war effort and repealed it in 1872 after the war ended. This tax was never challenged in court because it was always understood to be a wartime measure, not a permanent part of the tax system.

The Civil War income tax applied to all income above a certain threshold and included a progressive structure—higher earners paid a higher percentage. The rates ranged from 3 percent on the lowest incomes to 10 percent on the highest. This temporary tax showed that an income tax could work, but it did not establish a permanent federal income tax system.

The 1894 Income Tax and the Supreme Court Ruling

Congress tried again in 1894, passing an income tax during a period of economic hardship. This tax was much smaller than the Civil War version and applied only to incomes above $4,000. However, the Supreme Court ruled in Pollock v. Farmers' Loan & Trust Co. (1895) that the income tax was unconstitutional because it was a "direct tax" that had not been apportioned among the states according to population.

The Court's ruling meant that any federal income tax would have to be divided among states based on how many people lived in each state—a system that made no practical sense for an income tax. This decision blocked income taxation for 18 years until the 16th Amendment reversed it. The amendment was a direct response to the Supreme Court's decision and gave Congress explicit power to tax income without apportionment.

How the 1913 Income Tax Worked

The income tax law passed in October 1913 was surprisingly straightforward compared to today's tax code. It had only seven tax brackets, with rates ranging from 1 percent on the lowest incomes to 7 percent on the highest. The law included a personal exemption—meaning you paid no tax unless your income exceeded a certain level—which kept most Americans off the tax rolls.

In the first year, only about 3 percent of the population paid federal income tax. The tax was collected by the Bureau of Internal Revenue, which later became the Internal Revenue Service (IRS). Taxpayers filed a single form and calculated their own tax liability. There was no withholding from paychecks; people paid their taxes in a lump sum, usually in March of the following year.

Expansion During World War II

The income tax remained a tax on the wealthy through the 1920s and 1930s. That changed dramatically after the United States entered World War II in 1941. The government needed massive amounts of money to fund the war, so Congress lowered the income threshold, increased tax rates, and introduced payroll withholding—the system where employers deduct taxes from each paycheck.

Withholding transformed income tax from a tax paid by the rich to a tax paid by ordinary workers. By the end of World War II, income tax had become the largest source of federal revenue and covered tens of millions of Americans. The top tax rate reached 94 percent during the war years. Although rates have fluctuated since then, income tax has remained the primary way the federal government funds its operations.

State Income Taxes Came Later

While the federal government created its income tax in 1913, most states did not adopt income taxes until much later. Wisconsin was the first state to pass an income tax in 1911, before the federal tax existed. However, most other states did not follow until the mid-20th century. Today, nine states have no income tax at all, while others tax only certain types of income like dividends or capital gains.

State income tax rates and structures vary widely. Some states use a flat rate—the same percentage for all income levels—while others use progressive brackets like the federal system. A few states tax only business income or investment income, not wages. The year a state adopted income tax and how it structured that tax depends on that state's own history and fiscal needs.

Frequently Asked Questions

Did Americans pay income tax before 1913?

Yes, but only during the Civil War (1861–1872). That temporary tax was repealed after the war ended. An attempt to create a permanent income tax in 1894 was struck down by the Supreme Court. The 1913 income tax was the first permanent federal income tax.

Why did the Supreme Court rule against the 1894 income tax?

The Court decided that income tax was a "direct tax" that had to be apportioned among states based on population, which made it impractical. The 16th Amendment, ratified in 1913, overturned this ruling and gave Congress the power to tax income without apportionment.

How much did people pay in income tax in 1913?

The top rate was 7 percent, but only the wealthiest Americans paid it. Most people paid nothing because the tax only applied to incomes above $3,000 per year. About 3 percent of the population filed income tax returns in the first year.

When did income tax start affecting ordinary workers?

Income tax remained a tax on the wealthy through the 1930s. During World War II, the government lowered the income threshold and introduced payroll withholding, which brought millions of ordinary workers into the income tax system for the first time.

Do all states have income tax?

No. Nine states currently have no income tax. Other states adopted income taxes at different times throughout the 20th century. State income tax rates and structures vary widely depending on each state's laws and fiscal needs.