Federal income tax began in 1861 as a temporary Civil War measure, became permanent in 1913 after the 16th Amendment, and has been the largest source of federal revenue ever since

The federal government first collected income tax during the Civil War in 1861. Congress passed it as an emergency measure to fund the war effort, and it was always meant to end when the war did. The tax applied only to high earners — most working people paid nothing. When the war ended in 1865, the income tax was allowed to expire, and the government returned to collecting revenue mainly through tariffs on imported goods and excise taxes on specific items like alcohol and tobacco.

For the next 50 years, there was no federal income tax. In 1894, Congress tried to bring it back during an economic crisis, but the Supreme Court ruled in Pollock v. Farmers' Loan & Trust Co. that a direct tax on income was unconstitutional without apportionment among the states. This decision blocked any income tax until the Constitution itself was changed.

Key Takeaways

  • Federal income tax first appeared in 1861 as a temporary Civil War tax and ended in 1872 when the war was over.
  • The Supreme Court struck down an 1894 income tax attempt, ruling it unconstitutional without a constitutional amendment.
  • The 16th Amendment, ratified in 1913, gave Congress permanent power to collect income tax without apportionment.
  • The first permanent federal income tax was collected in 1913, and it has remained the government's largest revenue source since then.

The 16th Amendment made permanent income tax possible

In 1909, Congress proposed the 16th Amendment to overturn the Supreme Court's decision. The amendment stated straightforward: "The Congress shall have power to collect taxes on incomes, from whatever source derived, without apportionment among the several States." This gave Congress the power to tax income directly without dividing the tax burden among states based on population.

The states ratified the 16th Amendment on February 3, 1913. That same year, Congress passed the first permanent federal income tax as part of the Tariff Act of 1913. The tax was modest at first — it applied only to people earning more than $3,000 a year. Most workers were not affected.

Income tax expanded during wartime and never shrank back

When the United States entered World War I in 1917, Congress raised income tax rates sharply to pay for the war. The top tax rate climbed to 77 percent on the highest earners. After the war ended in 1918, rates came down somewhat, but they never returned to 1913 levels. Income tax had become the government's main source of revenue.

During the Great Depression and World War II, income tax expanded further. In the 1940s, Congress lowered the income threshold so that middle-class workers began paying federal income tax for the first time. By the end of World War II, income tax had become a mass tax affecting millions of ordinary workers, not just the wealthy. This shift happened because the government needed enormous sums to fund the war, and broadening the tax base was faster than raising rates on the rich even higher.

Withholding made income tax part of every paycheck

In 1943, during World War II, Congress introduced the payroll withholding system. Before this, workers paid their income tax once a year in a lump sum. Withholding meant the employer deducted tax from each paycheck and sent it to the government when ready. This system was supposed to be temporary — a wartime measure — but it became permanent because it made tax collection easier and faster.

Withholding changed how Americans experienced income tax. Instead of writing a large check once a year, workers saw tax taken from their pay throughout the year. This made the tax less visible but also more reliable for the government. The withholding system is still how federal income tax is collected today.

Tax rates and brackets have changed many times since 1913

The income tax rate structure has shifted dramatically over the past 110 years. In 1913, the top rate was 7 percent. By 1918, it had jumped to 77 percent. In the 1950s and 1960s, the top rate was over 90 percent. In 1981, it dropped to 50 percent. The Tax Cuts and Jobs Act of 2017 set the top rate at 37 percent, where it remains today.

The number of tax brackets — the income ranges that are taxed at different rates — has also changed. The current system has seven brackets. In some years, there have been as many as 50 or more. Congress adjusts tax rates and brackets whenever it passes new tax legislation, which happens irregularly. The last major overhaul was in 2017; before that, the last significant change was in 1986.

State income taxes came later and operate separately

Federal income tax is separate from state income tax. Most states also collect income tax, but they did not start until later. Wisconsin was the first state to collect an income tax, in 1911. Other states followed gradually, especially after the 16th Amendment made federal income tax permanent. Today, 41 states and the District of Columbia collect income tax. Nine states have no income tax at all.

State income tax rates and rules are set by each state independently. They do not depend on federal income tax, though some states use federal income as the starting point for calculating state tax. A person's federal income tax bill and state income tax bill are calculated separately, and both are withheld from paychecks in states that have income tax.

Frequently Asked Questions

Did everyone have to pay income tax when it started in 1913?

No. The 1913 income tax applied only to people earning more than $3,000 per year, which was a very high income at the time. Most workers earned far less and paid nothing. It was not until World War II that income tax became a mass tax affecting millions of ordinary workers.

Why did the government bring back income tax after it ended in 1872?

The Supreme Court had blocked it. An 1894 attempt to restore income tax was ruled unconstitutional. Congress had to pass the 16th Amendment in 1909 and wait for the states to ratify it in 1913 before it could collect income tax again. Without the amendment, income tax would still be illegal.

Is federal income tax the only tax the government collects?

No. The federal government also collects payroll taxes (Social Security and Medicare), excise taxes on specific goods, and tariffs on imports. However, federal income tax has been the largest source of federal revenue since the 1920s and remains so today.

Why does my employer take money out of my paycheck for taxes?

Payroll withholding began in 1943 as a wartime measure but became permanent. Instead of paying income tax once a year, your employer sends the government a portion of your pay with each paycheck. This system makes tax collection faster and more reliable for the government.