The United States started collecting a federal income tax in 1861, when Congress passed the Revenue Act of 1861 to help pay for the Civil War. That original tax was repealed in 1872, and a later version was struck down by the Supreme Court, so the permanent income tax that exists today dates to the Sixteenth Amendment, ratified on February 3, 1913, and the Revenue Act Congress passed later that same year.1United States Senate. The Civil War: The Senate’s Story – Featured Document: The Revenue Act of 18612National Archives. 16th Amendment to the U.S. Constitution: Federal Income Tax
The First Income Tax: 1861
Before the Civil War, the federal government paid its bills almost entirely through customs duties and excise taxes. Military spending blew past what tariffs could cover, and Congress needed money quickly. The Revenue Act of 1861 imposed a flat 3 percent tax on individual incomes above $800. It had no real enforcement mechanism and brought in very little.1United States Senate. The Civil War: The Senate’s Story – Featured Document: The Revenue Act of 1861
Congress fixed those problems the next year. The Revenue Act of 1862 created the Office of Commissioner of Internal Revenue and introduced graduated rates: 3 percent on incomes between $600 and $10,000, and 5 percent above that.3Internal Revenue Service. Historical Highlights of the IRS Over the next decade, that structure produced hundreds of millions of dollars for the war and its aftermath. Once wartime pressure eased, Congress repealed the tax in 1872.2National Archives. 16th Amendment to the U.S. Constitution: Federal Income Tax
Why It Disappeared for Eighteen Years
Congress tried again with the Wilson-Gorman Tariff Act of 1894, which included a 2 percent tax on annual incomes above $4,000. The law was almost immediately challenged. In Pollock v. Farmers’ Loan & Trust Co., the Supreme Court ruled that taxes on income from property, such as rents and investment interest, were direct taxes. The Constitution required direct taxes to be apportioned among the states by population, and the 1894 law did not do that.4Justia U.S. Supreme Court Center. Pollock v. Farmers’ Loan and Trust Co.
On rehearing, the Court went further and concluded that a tax on a person’s entire income was effectively a direct tax on the underlying property. Because the provisions formed a single scheme, the justices invalidated all of them.5Justia U.S. Supreme Court Center. Pollock v. Farmers’ Loan and Trust Company, 158 U.S. 601 The ruling ended federal income taxation until the Constitution itself was changed. For the next eighteen years, the federal government ran on tariffs and excise taxes.
The Sixteenth Amendment and the Permanent Tax of 1913
In 1909, Congress proposed a constitutional amendment that would give the federal government the power to “lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”6Congress.gov. U.S. Constitution – Sixteenth Amendment That single sentence removed the apportionment rule that had killed the 1894 tax. Three-quarters of the state legislatures ratified it, and the Sixteenth Amendment became part of the Constitution on February 3, 1913.2National Archives. 16th Amendment to the U.S. Constitution: Federal Income Tax
Congress moved fast. The Revenue Act of 1913, also called the Underwood-Simmons Tariff, imposed a 1 percent “normal tax” on individual income above $3,000 for single filers and $4,000 for married couples.3Internal Revenue Service. Historical Highlights of the IRS7National Bureau of Economic Research. The Personal Exemptions in the Income Tax A graduated surtax sat on top of that, climbing to 6 percent on incomes above $500,000, for a combined maximum of 7 percent.
The government introduced Form 1040 to collect it. The original was four pages long with one page of instructions, and the filing deadline was March 1.8Internal Revenue Service. Form 1040 Income Tax 1913 Because the exemptions were so high, only about 358,000 people filed returns for tax year 1913.9Internal Revenue Service. 70th Year of Individual Income and Tax Statistics, 1913-1982 At its start, the permanent income tax reached only the wealthiest Americans.
From a Tax on the Rich to a Tax on Everyone
The 1913 rates lasted barely three years. The War Revenue Act of 1917 pushed the top marginal rate from 15 percent to 67 percent, and by 1918 it reached 77 percent on incomes above $1 million. Lower exemptions and new brackets pulled millions more Americans into filing. Congress cut rates through the 1920s, but the machinery for mass taxation was in place.
World War II completed the shift. In 1939, fewer than four million individual returns were filed, and only about 5 percent of American workers owed income tax. The Revenue Act of 1942, known as the Victory Tax, cut exemptions and imposed progressive rates that reached nearly 75 percent of American workers.10U.S. Department of Labor. The Revenue Act of 1942 By 1945, about 50 million returns were being filed each year.
Collecting that money from tens of millions of new taxpayers in one annual payment was unworkable. Starting in 1943, employers were required to withhold income tax from every paycheck and send it directly to the Treasury.10U.S. Department of Labor. The Revenue Act of 1942 That is still how most Americans pay federal income tax. What began in 1861 as a wartime experiment, and became permanent in 1913, is now the federal government’s largest single source of revenue.