The federal income tax began in 1913

The federal income tax as we know it today started in 1913, when the 16th Amendment to the Constitution was ratified. That amendment gave Congress the power to collect income tax without apportioning it among the states based on population. Before 1913, the federal government relied mainly on tariffs and excise taxes to fund itself.

The first federal income tax actually appeared much earlier — during the Civil War in 1861 — but it was temporary and ended in 1872. The 1913 tax was meant to be permanent, and it has been collected every year since, though the rates and rules have changed many times.

Key Takeaways

  • Federal income tax became permanent in 1913 after the 16th Amendment was ratified, allowing Congress to tax income directly.
  • A temporary income tax existed during the Civil War from 1861 to 1872, but the modern system began in 1913.
  • The first 1913 tax affected only the wealthiest Americans, with a top rate of 7 percent on incomes over $500,000.
  • Income tax rates have risen and fallen throughout American history, reaching as high as 94 percent during World War II.
  • Today, the federal income tax is the largest source of revenue for the U.S. government.

Why the 16th Amendment was necessary

Before 1913, the Supreme Court had ruled in 1895 that the federal government could not collect an income tax without apportioning the money among states based on their population. That rule made a national income tax impractical. Congress needed a constitutional amendment to change that rule and collect income tax the way it does today.

The 16th Amendment, ratified on February 3, 1913, removed that barrier. It straightforward stated that Congress could "collect taxes on incomes, from whatever source derived, without apportionment among the several States." Within months, Congress passed the first permanent income tax law.

The 1913 income tax was only for the wealthy

The original 1913 income tax affected very few Americans. It applied only to incomes above $3,000 per year — a threshold that excluded most working people. In 1913, the median household income was around $900 per year, so the tax hit only the top 3 percent of earners.

The tax rates were also low by modern standards. The lowest rate was 1 percent, and the highest was 7 percent on incomes over $500,000. The tax was designed to fund the federal government while placing the burden on the richest citizens.

How income tax rates changed over time

Income tax rates have shifted dramatically throughout the 20th and 21st centuries, depending on wars, recessions, and political decisions. During World War I, the top rate climbed to 77 percent. It fell during the 1920s, then rose again during the Great Depression and World War II.

The highest federal income tax rate ever recorded was 94 percent, imposed during World War II on the highest earners. After the war, rates came down but remained high through the 1950s and 1960s. The top rate was 70 percent in 1980 before falling to 50 percent in 1982. Today, the top federal rate is 37 percent, though it has been higher and lower in recent decades depending on which Congress was in power.

The income tax expanded to middle-class workers

For the first few decades, income tax remained a tax on the wealthy. That changed during World War II, when the government needed more revenue to fund the war effort. Congress lowered the income threshold so that middle-class workers had to pay income tax for the first time.

After the war ended in 1945, the income tax remained in place for ordinary workers. It never went back to being only a tax on the rich. Today, millions of Americans file income tax returns each year, and income tax is withheld from most paychecks.

How the income tax system works today

The federal income tax is now the largest source of revenue for the U.S. government. Most workers have income tax withheld from their paychecks by their employer, who sends that money to the Internal Revenue Service (IRS). At the end of each year, workers file a tax return to report their total income and calculate how much tax they owe.

The tax is progressive, meaning higher earners pay a higher percentage of their income in tax. The government uses tax brackets — ranges of income taxed at different rates — to determine how much each person owes. A person does not pay the top rate on all their income; they pay the lower rates on the lower portions and the higher rate only on income that falls into the highest bracket they reach.

State and local income taxes came later

The federal income tax was not the only income tax to develop. Many states and some cities also collect income tax, though they started later. Wisconsin was the first state to collect an income tax, in 1911, before the federal tax existed. Most other states added income taxes during the 20th century, though a few states still do not collect income tax today.

State and local income taxes are separate from the federal tax. A person may owe federal income tax, state income tax, and local income tax all at the same time, depending on where they live and work. The rates and rules for each are different.

Frequently Asked Questions

Did people pay income tax before 1913?

Yes, but only temporarily. The federal government collected income tax from 1861 to 1872 to fund the Civil War and its aftermath. That tax ended, and no federal income tax existed from 1872 until 1913. Some states collected income taxes before the federal government did.

Why did the income tax start in 1913 and not before?

The Supreme Court ruled in 1895 that the federal government could not collect income tax without apportioning it among states based on population, which was impractical. Congress needed the 16th Amendment to override that ruling. The amendment was ratified in 1913, and Congress when ready passed the first permanent income tax law.

Was the original income tax really only 1 to 7 percent?

Yes. The 1913 income tax had a bottom rate of 1 percent and a top rate of 7 percent. Those rates were much lower than today's rates, which range from 10 to 37 percent. Rates have risen and fallen many times since 1913 depending on the nation's needs and political decisions.

Do all states collect income tax?

No. Nine states do not collect income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only interest and dividends). All other states collect income tax, though the rates vary widely.