Income tax began in the United States because the Civil War made it impossible for the federal government to pay its bills any other way. Tariffs and excise taxes, the revenue sources Washington had relied on since the founding, could not cover the cost of fielding a Union army, so Congress imposed a direct tax on personal earnings in 1861. That emergency measure was repealed after the war, blocked by the Supreme Court when Congress tried to revive it in 1894, and finally made permanent by the Sixteenth Amendment in 1913.
The Civil War Created the First Income Tax
Before 1861, the federal government funded itself almost entirely through tariffs on imported goods and excise taxes on products like whiskey. That worked in peacetime. It did not work once the Union had to mobilize hundreds of thousands of troops.
Congress passed the Revenue Act of 1861, which imposed a flat 3 percent tax on individual incomes over $800. It was the first time the federal government had ever directly taxed personal earnings.1United States Senate. The Civil War: The Senate’s Story The law was hastily drafted and raised nowhere near what was needed.
The Revenue Act of 1862 replaced the flat rate with the country’s first graduated income tax: 3 percent on incomes between $600 and $10,000, and 5 percent above that.2Internal Revenue Service. Historical Highlights of the IRS The same law created the Bureau of Internal Revenue and the position of Commissioner of Internal Revenue to actually collect the money, establishing a federal tax bureaucracy for the first time.3National Archives. Internal Revenue Service By 1864, Congress had raised rates again, taxing incomes between $600 and $5,000 at 5 percent and everything above $5,000 at 10 percent.4National Archives. Income Tax Records of the Civil War Years
Once the war ended and the most urgent debts were paid down, the political appetite for taxing personal earnings evaporated. Congress repealed the income tax in 1872.5National Archives. 16th Amendment to the U.S. Constitution: Federal Income Tax
The Supreme Court Blocked a Peacetime Revival
For two decades after repeal, the federal government went back to living on tariffs and excise taxes. Pressure to revive the income tax grew as industrialization created enormous new concentrations of wealth. In 1894, Congress passed the Wilson-Gorman Tariff Act, which included a 2 percent tax on incomes over $4,000. Wealthy taxpayers sued immediately.
In Pollock v. Farmers’ Loan & Trust Co., the Supreme Court ruled in 1895 that taxing income from property, like rents and investment interest, amounted to a “direct tax” under Article I of the Constitution.6Justia. Pollock v. Farmers’ Loan and Trust Company The Constitution required direct taxes to be apportioned among the states according to population, meaning a state with twice the population had to pay twice the tax regardless of how much income its residents actually earned.7Congress.gov. Constitution Annotated – ArtI.S9.C4.1 Overview of Direct Taxes Because the 1894 tax applied a flat rate without regard to state populations, the Court struck it down.
The practical effect was devastating. Any meaningful tax on earnings would be nearly impossible to administer if Congress had to divvy the total burden up by state population. The ruling locked the door on a federal income tax until the Constitution itself was changed.
Why Tariffs and Excise Taxes Could No Longer Carry the Load
The push to bring back the income tax was not only about fairness, though fairness was part of the argument. Tariffs raised prices on everyday products, and the burden fell hardest on ordinary consumers who spent most of their income on necessities. Critics argued that a tax based on earnings scaled better with a person’s ability to pay.
There was also a practical crisis looming. By the early 1900s, an estimated 30 to 40 percent of federal revenue came from excise taxes on alcohol. The growing prohibition movement threatened to eliminate that revenue entirely. Many historians argue that the Sixteenth Amendment and the Eighteenth Amendment (which banned alcohol) were deeply intertwined: without a replacement revenue source, Prohibition would have been financially impossible.
Income taxation also gave the government a more flexible fiscal tool. Tariff revenue fluctuated with trade volumes and could not easily be increased in an emergency. Income tax rates could be raised or lowered by statute. That flexibility would matter almost immediately.
The Sixteenth Amendment Made It Permanent
Changing the Constitution is deliberately difficult, and it took nearly two decades of political organizing. The Sixteenth Amendment was drafted with surgical precision to overrule Pollock. Its text granted Congress 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.”8Congress.gov. U.S. Constitution – Sixteenth Amendment Secretary of State Philander Knox certified ratification on February 25, 1913.5National Archives. 16th Amendment to the U.S. Constitution: Federal Income Tax
Congress moved the same year. The Revenue Act of 1913 (also called the Underwood Tariff Act) established the first permanent federal income tax. It imposed a 1 percent normal tax on income above $3,000 for single filers and $4,000 for married couples, with graduated surtaxes that brought the top marginal rate to 7 percent on income above $500,000.9Internal Revenue Service. Personal Exemptions and Individual Income Tax Rates, 1913-2002 The law required every person with net income of $3,000 or more to file an annual return with the Collector of Internal Revenue by March 1 of the following year.10Internal Revenue Service. Income Tax – Form 1040, 1913 The annual filing obligation, and the Form 1040 it produced, have survived in recognizable form ever since.
The 1913 exemption thresholds were high enough that fewer than 1 percent of Americans owed anything. The income tax started as a tax on the wealthy.
The World Wars Turned It Into a Mass Tax
It did not stay a wealth tax. The United States entered World War I in 1917, and Congress raised income tax rates sharply to pay for it. The War Revenue Act of 1917 pushed the top marginal rate to 67 percent on incomes above $2,000,000, and the Revenue Act of 1918 raised it to 77 percent on income above $1,000,000 while lifting the bottom bracket from 2 percent to 6 percent. By 1918, roughly 5 percent of the population paid federal income tax, and income taxes covered about one-third of the war’s cost. Rates came back down after the armistice but never returned to 1913 levels.
World War II finished the transformation. In 1939, only about 5 percent of American workers paid income tax. The Revenue Act of 1942, which introduced the “Victory Tax,” lowered exemptions so far that roughly 75 percent of workers suddenly owed federal income tax.11Internal Revenue Service. Lesson 5: The Wealth Tax of 1935 and the Victory Tax of 1942 Millions of new taxpayers made the old system of once-a-year checks unworkable, so Congress passed the Current Tax Payment Act of 1943, which required employers to withhold taxes from workers’ wages and send the money directly to the government.2Internal Revenue Service. Historical Highlights of the IRS Payroll withholding was designed as a wartime convenience and became permanent.
By 1945, about 90 percent of American workers filed income tax returns, and 60 percent actually owed tax.11Internal Revenue Service. Lesson 5: The Wealth Tax of 1935 and the Victory Tax of 1942 The federal government covered more than half its expenses with income tax revenue. The architecture of today’s system was in place: graduated rates, broad coverage, employer withholding, and annual filing on Form 1040. What began as a Civil War emergency had become the primary way the United States pays for itself.