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

The United States first introduced an 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. The tax applied only to people earning over $800 a year, which was a substantial income at the time, so it affected relatively few households.

The tax expired in 1872, seven years after the Civil War ended. For the next 16 years, the federal government had no income tax at all. Instead, it relied on tariffs, excise taxes, and other indirect levies to fund operations.

Key Takeaways

  • The first federal income tax was introduced in 1861 during the Civil War and was designed to be temporary.
  • That original tax expired in 1872 and was not replaced for 16 years.
  • 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 permanent legal authority to collect income tax without apportioning it among the states.
  • The modern income tax system began in 1913 and has been the primary source of federal revenue ever since.

Why the first income tax was ruled unconstitutional

In 1894, Congress passed a new income tax during an economic depression. This time it was meant to be permanent. However, the Supreme Court ruled in 1895 that the tax was unconstitutional because the Constitution required direct taxes to be apportioned among the states based on population. An income tax could not meet that requirement without becoming unworkable.

This ruling left Congress unable to collect income tax for 18 years. The government continued to rely on tariffs and other indirect taxes, but these sources became increasingly unpopular and unreliable.

The 16th Amendment changed the rules

To fix the constitutional problem, Congress proposed the 16th Amendment in 1909. It stated straightforward: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States." This amendment removed the apportionment requirement that had killed the 1894 tax.

The states ratified the 16th Amendment on February 3, 1913. That same year, Congress passed the first permanent income tax under this new authority. The tax began with the 1913 tax year and has remained in place ever since.

What the 1913 income tax looked like

The 1913 tax was much narrower than today's system. It applied only to people earning over $3,000 a year—roughly equivalent to $100,000 today—so it affected only about 3 percent of the population. The tax rate started at 1 percent on income above that threshold and rose to 7 percent on very high incomes.

The tax was also much simpler to file. There were no withholding requirements, no employer involvement, and no complex forms. People who owed tax straightforward sent in a payment with a brief statement of their income.

How the income tax expanded over time

The income tax remained a tax on the wealthy until World War I. To fund the war effort, Congress lowered the income threshold and raised the rates dramatically. By 1918, the top rate had climbed to 77 percent, and the tax applied to millions of middle-class workers for the first time.

After World War I, rates came down somewhat, but the tax never returned to affecting only the wealthy. The Great Depression and World War II pushed rates even higher. By the 1950s, the top rate reached 91 percent, though few people actually paid that rate because of deductions and exemptions.

The modern income tax system—with withholding from paychecks, employer involvement, and detailed tax forms—developed gradually during the 20th century. Withholding itself did not begin until 1943, when the government needed to collect revenue faster to fund World War II.

Why the income tax became the main source of federal revenue

Before 1913, tariffs on imported goods were the largest source of federal income. Income tax was meant to supplement that system, not replace it. However, tariffs became less reliable as a revenue source, and they were politically controversial because they raised prices for consumers.

The income tax, by contrast, could be adjusted to raise as much revenue as Congress needed. Over the 20th century, it gradually became the dominant source of federal funding. Today, income tax accounts for roughly half of all federal revenue, with payroll taxes (Social Security and Medicare) making up most of the rest.

State income taxes came later

The federal income tax was not the first income tax in America. Wisconsin passed the first state income tax in 1911, two years before the federal tax began. However, most states did not adopt income taxes until much later. Some states still have no income tax today.

State income taxes operate independently of the federal system. A state income tax rate and the types of income it covers vary widely from state to state. Some states tax only wages, while others tax investment income and business income as well.

Frequently Asked Questions

Did everyone have to pay income tax in 1913?

No. The 1913 tax applied only to people earning over $3,000 a year, which was a high income at the time. It affected roughly 3 percent of the population. The threshold was much lower during World War I, which brought millions of middle-class workers into the tax system for the first time.

Why did the Supreme Court strike down the 1894 income tax?

The Constitution required direct taxes to be apportioned among the states based on population. The Court ruled that an income tax could not meet this requirement without becoming impractical. The 16th Amendment, ratified in 1913, removed this apportionment requirement and made income tax constitutional.

When did employers start withholding taxes from paychecks?

Withholding began in 1943 during World War II. Before that, people who owed income tax paid it in a lump sum, usually once a year. Withholding was introduced to speed up revenue collection for the war effort and has remained part of the system ever since.

Do all states have an income tax?

No. Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only investment income). State income taxes are separate from the federal system and vary widely in rates and what types of income they cover.