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

The United States first collected a federal income tax in 1861 to fund the Civil War. Congress passed the Revenue Act of 1861, which taxed income above $800 per year at a rate of 3 percent. This was meant to be temporary — a way to pay for military expenses during the war.

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. It relied instead on tariffs (taxes on imported goods) and excise taxes (taxes on specific products like alcohol and tobacco).

In 1894, Congress tried to bring back an income tax without a constitutional amendment. The Supreme Court ruled in Pollock v. Farmers' Loan & Trust Co. that a direct income tax on property (including stocks and bonds) was unconstitutional without an amendment. This decision blocked the tax.

Key Takeaways

  • The first federal income tax ran from 1861 to 1872 and taxed only high earners at 3 percent to pay for Civil War expenses.
  • After 1872, there was no federal income tax for 16 years; the government funded itself through tariffs and excise taxes instead.
  • An 1894 attempt to reinstate income tax was struck down by the Supreme Court as unconstitutional without an amendment.
  • The 16th Amendment, ratified in 1913, gave Congress the permanent power to tax income directly without apportioning it among the states.
  • The modern income tax system has operated continuously since 1913, though rates and rules have changed many times.

The 16th Amendment made income tax permanent in 1913

After the Supreme Court blocked the 1894 income tax, Congress pursued a constitutional amendment. The 16th Amendment was ratified on February 3, 1913. It states: "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 constitutional barrier. Congress no longer needed to divide income tax revenue among states based on population. It could tax income directly and keep all the revenue for federal use.

Within weeks of ratification, Congress passed the Income Tax Act of 1913. This law created the income tax system that still exists today. The initial tax rate was 1 percent on income over $3,000 per year (roughly $100,000 in today's dollars). High earners paid a top rate of 7 percent.

Income tax rates changed dramatically during wars and recessions

The income tax rate was not fixed. Congress raised and lowered it based on government spending needs. During World War I (1917–1918), the top rate climbed to 77 percent. During the 1920s, it fell back to 25 percent. During the Great Depression and World War II, it rose again to 94 percent on the highest earners.

The tax also expanded to cover more people over time. In 1913, only about 3 percent of the population paid federal income tax because the threshold was so high. As the threshold stayed the same while wages rose, more workers owed tax. By World War II, income tax had become a mass tax paid by millions of ordinary workers, not just the wealthy.

The structure of the tax — how many tax brackets existed, what the rates were, and what deductions people could claim — has been rewritten dozens of times. Major rewrites happened in 1954, 1986, and 2017, but Congress adjusts the tax code nearly every year.

The IRS was created to collect the new tax

The federal government needed an agency to collect income tax from millions of people. The Internal Revenue Service (IRS) grew out of the Bureau of Internal Revenue, which had existed since 1862 to collect excise taxes. The IRS took its current name and structure in 1953.

Before computers, the IRS relied on paper forms and manual processing. The first Form 1040 (the main individual income tax return) was four pages long. Today it is still called Form 1040, though it has been simplified and expanded many times. The IRS now processes millions of returns electronically each year.

State income taxes came later and operate separately

The federal income tax was not the only income tax created in the early 1900s. Several states also began collecting income taxes around the same time. Wisconsin was the first state to pass an income tax, in 1911. Other states followed, but not all — nine states still have no state income tax.

State income taxes are separate from federal income tax. A worker in a state with income tax pays both the federal tax to the IRS and the state tax to their state revenue department. The two systems have different rules, rates, and deductions, though they often use similar forms and filing important date.

Payroll withholding made income tax automatic in 1943

In the early years of the income tax, workers paid their taxes once a year in a lump sum. During World War II, the government needed money faster and more reliably. In 1943, Congress created the payroll withholding system. Employers began deducting income tax from each paycheck and sending it to the IRS.

This system made income tax collection automatic and spread the payment across the year instead of requiring one large payment. It also made it easier for the government to predict tax revenue. Payroll withholding remains the main way most workers pay federal income tax today.

Frequently Asked Questions

Did everyone have to pay income tax when it started in 1861?

No. The 1861 tax only applied to income above $800 per year, which was a high threshold. Only wealthy people and business owners paid it. Most workers earned far less and owed nothing.

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

The Court ruled that a direct tax on income from property (stocks, bonds, and real estate) was unconstitutional without an amendment because it had to be divided among states based on population. This made it impractical to collect. The 16th Amendment removed this requirement.

What was the income tax rate when it started in 1913?

The initial rate was 1 percent on income over $3,000 per year, with a top rate of 7 percent for the highest earners. These rates were much lower than they became during World War II, when the top rate reached 94 percent.

How did people pay income tax before payroll withholding?

Workers calculated what they owed and paid it in one lump sum, usually in the spring after the tax year ended. This was inconvenient and made it hard for the government to collect reliably. Payroll withholding, introduced in 1943, spread payments across the year automatically.

Do all states have income tax like the federal government does?

No. Nine states have no state income tax at all. Others have income tax rates that vary widely. State income taxes operate separately from federal income tax, with their own rules and forms, though filing important date often align.