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

The United States first introduced a federal income tax in 1861 to fund the Civil War. It was meant to be temporary—a way to raise money quickly without raising tariffs on imported goods, which would have hurt Northern manufacturers. The tax applied only to people earning above a certain threshold, and rates were low by modern standards, usually between 3 and 5 percent.

This first income tax lasted until 1872, when Congress let it expire after the war ended. For the next 16 years, the federal government relied almost entirely on tariffs and excise taxes instead. But the country's growing need for revenue, combined with pressure to tax the wealthy more fairly, would bring income tax back.

Key Takeaways

  • Federal income tax started in 1861 as a temporary Civil War measure and was repealed in 1872.
  • Congress passed a new income tax in 1894, but the Supreme Court struck it down in 1895 as unconstitutional.
  • The 16th Amendment, ratified in 1913, gave Congress the power to tax income without apportioning it among the states.
  • The modern income tax system began in 1913 with the first permanent federal income tax under the new amendment.
  • Tax rates have changed dramatically over time, from less than 10 percent in 1913 to over 90 percent during World War II and the Cold War.

Why income tax disappeared after the Civil War

Once the Civil War ended in 1865, Congress had less urgent need for the revenue. The government also faced political pressure from wealthy citizens and businesses who disliked the tax. Without a constitutional amendment explicitly allowing it, Congress straightforward let the income tax law expire in 1872.

For the next two decades, the federal government funded itself through tariffs on imported goods and taxes on alcohol and tobacco. This system worked, but it meant that wealthy people who didn't buy many imported goods paid little in federal taxes, while working people paid indirectly through higher prices on goods.

The 1894 income tax and the Supreme Court's rejection

By the 1890s, the country was changing. Industrialization had created enormous wealth for some people while many workers struggled. There was growing pressure to tax the rich more fairly. In 1894, Congress passed a new income tax—this time intended to be permanent, not temporary.

The Supreme Court struck it down in 1895 in the case Pollock v. Farmers' Loan & Trust Co. The Court ruled that a direct tax on income from property (like stocks and bonds) had to be apportioned among the states based on population. This made an income tax impractical—a state with 5 percent of the population would have to pay 5 percent of the total tax, regardless of how much income its residents actually earned. Congress could not pass a workable income tax without changing the Constitution.

The 16th Amendment made permanent income tax possible

The solution was the 16th Amendment, ratified on February 3, 1913. It gave Congress the power to "collect taxes on incomes, from whatever source derived, without apportioning among the several States." This single sentence removed the Supreme Court's obstacle and opened the door to a permanent federal income tax.

The amendment passed because both progressive reformers (who wanted to tax the wealthy) and conservatives (who wanted to reduce tariffs) saw benefit in it. Progressives got the tool to redistribute wealth; conservatives got a way to lower tariffs without losing federal revenue.

The modern income tax began in 1913

That same year, Congress passed the first permanent federal income tax under the new amendment. The initial rates were modest: 1 percent on income above $3,000, with a top rate of 7 percent on income above $500,000. Most working people paid nothing because the threshold was so high.

The system was also simpler than today's. There were fewer deductions, fewer brackets, and the tax code itself was much shorter. The IRS (then called the Bureau of Internal Revenue) was a small agency with a handful of offices.

How tax rates changed over the next century

Income tax rates rose sharply during World War I, reaching a top rate of 77 percent by 1918. They fell in the 1920s, then rose again during the Great Depression and World War II. During the 1950s and 1960s, the top marginal rate was over 90 percent—meaning the wealthiest Americans paid 90 cents in federal tax on every dollar earned above the threshold.

Rates have fluctuated since then based on which party controlled Congress and the presidency. The Tax Cuts and Jobs Act of 2017 lowered the top rate to 37 percent, where it remains. The number of tax brackets, deductions, and credits has grown enormously, making the modern tax code far more complex than the 1913 version.

State income taxes came later than federal

While the federal government was debating income tax in the 1800s, some states were already collecting it. Wisconsin passed the first state income tax in 1911, two years before the federal tax. Other states followed at different times—some in the early 1900s, others much later. Today, 41 states have an income tax, while 9 states have none.

State income tax rates and rules vary widely. Some states tax only wage income, while others tax investment income too. Some have a single flat rate; others use multiple brackets like the federal system. A few states tax capital gains differently than ordinary income.

Frequently Asked Questions

Did people pay income tax before 1861?

No federal income tax existed before the Civil War. Some states collected property taxes and poll taxes, but there was no national income tax. The Constitution as originally written was interpreted to forbid a direct income tax without apportioning it among states, which made it impractical.

Why did the Supreme Court reject the 1894 income tax?

The Court ruled that income from property (stocks, bonds, rental property) was a "direct tax" that had to be apportioned among states based on population. This made the tax unworkable, so Congress had to amend the Constitution to fix the problem.

What did the 16th Amendment actually say?

It gave Congress power to "collect taxes on incomes, from whatever source derived, without apportioning among the several States." This removed the requirement to divide the tax burden by state population, making a practical income tax possible.

Were income tax rates always this complicated?

No. The 1913 tax had only a few brackets and almost no deductions. Over time, Congress added more brackets, deductions, and credits to encourage certain behaviors (like buying a home or saving for retirement). The tax code grew from about 400 pages in 1913 to over 70,000 pages today.

Do all states have income tax?

No. Nine states have no income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only investment income). The other 41 states and Washington, D.C. collect income tax, but rates and rules vary widely.