The federal income tax began in 1861 as a temporary Civil War measure

The United States first collected a federal income tax in 1861 to fund the Civil War. Congress passed it as a temporary tax that was supposed to end when the war ended. It was the first time the federal government taxed individual income directly, and it worked differently than taxes do today — it only affected people who earned above a certain threshold, so most workers never paid it.

The tax was repealed in 1872, a few years after the war ended. For the next 25 years, the federal government had no income tax at all. This changed in 1894 when Congress tried to bring it back, but the Supreme Court ruled in 1895 that a federal income tax on individuals was unconstitutional without a constitutional amendment.

Key Takeaways

  • The federal income tax started in 1861 as a temporary Civil War tax and was repealed in 1872.
  • A second attempt at an income tax in 1894 was struck down by the Supreme Court in 1895 as unconstitutional.
  • The 16th Amendment, ratified in 1913, gave Congress the power to collect income tax without apportioning it among the states.
  • The modern federal income tax system began in 1913 and has been in place ever since, though tax rates and rules have changed many times.

The 16th Amendment made the income tax permanent in 1913

After the Supreme Court blocked the income tax in 1895, Congress pursued a constitutional amendment instead of trying again without one. The 16th Amendment was ratified on February 3, 1913, and it gave Congress the explicit power to collect income tax from individuals without apportioning the money among the states based on population.

That same year, Congress passed the first permanent federal income tax under the new amendment. The tax started small — the lowest rate was 1 percent on income above $3,000, which was a high threshold at the time. Only about 3 percent of the population paid federal income tax in 1913 because most workers earned less than that amount.

Tax rates and who paid changed dramatically during the world wars

The income tax remained a tax on the wealthy through the 1920s, but this shifted during World War I and especially during World War II. As the government needed more money to fund the wars, Congress raised tax rates and lowered the income threshold so that more people had to pay.

By the end of World War II, the federal income tax had become a mass tax that affected most working Americans, not just the rich. The top tax rate reached 94 percent during the war years. After the war ended, rates came down, but the income tax remained the federal government's largest source of revenue — a role it still holds today.

How the income tax system worked in its early years

The 1913 income tax was much simpler than the system today, but it still required people to file a return and calculate what they owed. There was no withholding from paychecks — workers paid their taxes in a lump sum, usually once a year. Employers did not deduct anything from wages.

The tax code was also much shorter. The original 1913 law was about 27 pages long. Today's tax code runs thousands of pages because Congress has added deductions, credits, and special rules for different types of income over the past 110 years. The basic structure — filing a return, calculating income, and paying tax on earnings — has remained the same since 1913.

Payroll withholding was added during World War II

For the first 28 years of the federal income tax, workers paid their taxes in one payment after the year ended. This changed in 1943 when Congress introduced payroll withholding — the system where employers deduct federal income tax from each paycheck and send it to the government.

Withholding was introduced because the government needed money faster to fund World War II, and it was easier to collect small amounts from millions of paychecks than to wait for millions of people to pay in a lump sum. After the war ended, withholding stayed in place. It remains the way most workers pay federal income tax today.

The tax code has been rewritten several times since 1913

Congress has overhauled the income tax system multiple times. Major rewrites happened in 1954, 1986, and 2017. Each time, lawmakers changed which types of income are taxed, what deductions people can take, and what the tax rates are. The basic structure — a tax on individual income collected through withholding and annual returns — has stayed the same, but almost everything else has changed.

Tax rates have gone up and down depending on what Congress thought the government needed. Deductions have been added for things like mortgage interest, charitable donations, and education expenses. Credits have been created for families with children, people saving for retirement, and other situations. The result is a tax code that is far more complex than the 1913 version, but it still serves the same purpose: funding the federal government.

State and local income taxes came later

The federal income tax was the first income tax in the United States, but it was not the only one. States began collecting their own income taxes starting in the early 1900s, though most states did not have an income tax until after World War II. Today, 41 states and the District of Columbia have a state income tax, while 9 states have no income tax at all.

Local income taxes are less common. Only a few cities and counties collect income tax from residents or workers. These are separate from federal and state taxes, and the rules vary widely depending on where you live and work.

Frequently Asked Questions

Did people have to pay federal income tax before 1913?

Yes, but only from 1861 to 1872. That tax was temporary and only affected higher earners. After it was repealed, there was no federal income tax for 25 years until 1894, when Congress tried again. The Supreme Court blocked that attempt in 1895, so no federal income tax was collected from 1895 until 1913.

Why did the Supreme Court strike down the income tax in 1895?

The Court ruled that a direct tax on income had to be apportioned among the states based on population, which would have made the tax impractical. The 16th Amendment changed the Constitution to allow Congress to collect income tax without this requirement, making the modern income tax system possible.

How much did people pay in federal income tax in 1913?

The lowest rate was 1 percent on income above $3,000. The highest rate was 7 percent on income above $500,000. Since $3,000 was a high income in 1913, only wealthy people paid the tax. Most workers earned less and owed nothing.

When did employers start taking taxes out of paychecks?

Payroll withholding began in 1943 during World War II. Before that, workers paid their federal income tax in one lump sum after the year ended. Withholding was introduced to speed up tax collection for the war effort and has remained the standard method since then.

Has the federal income tax always worked the same way?

The basic idea — a tax on individual income collected through returns and withholding — has stayed the same since 1913. But the tax rates, deductions, and rules have changed many times. Congress has rewritten major parts of the tax code in 1954, 1986, 2017, and other years.