The History of Federal Income Tax in America

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

The federal government first collected income tax during the Civil War in 1861. It was meant to be temporary — a way to fund the war effort. That tax expired in 1872, and for the next 40 years, the federal government had no income tax at all. In 1894, Congress tried to bring it back, but the Supreme Court ruled it unconstitutional in 1895 because the Constitution did not explicitly allow it.

The 16th Amendment, ratified in 1913, changed that. It gave Congress the power to collect income tax without apportioning it among the states. That same year, the first permanent federal income tax went into effect. Since then, income tax has been the largest source of federal revenue. The tax has been collected continuously, though rates, brackets, and rules have changed many times.

Key Takeaways

• The first federal income tax ran from 1861 to 1872 to pay for the Civil War, then was repealed.
• A second income tax in 1894 was struck down by the Supreme Court as unconstitutional in 1895.
• The 16th Amendment, ratified in 1913, gave Congress permanent authority to collect income tax.
• Federal income tax has been collected every year since 1913 and remains the government's largest revenue source.

Why the first income tax ended after the Civil War

The 1861 income tax was always described as a war measure. Congress set it to expire when the war ended, and it did — the tax was repealed in 1872, four years after the Civil War ended. At that time, the federal government relied on tariffs (taxes on imported goods) and excise taxes (taxes on specific products like alcohol and tobacco) for most of its revenue.

For 22 years, there was no federal income tax. The government's revenue came almost entirely from tariffs. This worked during peacetime, but it meant the federal government had limited resources and could not easily fund large programs or respond to crises without raising tariff rates, which were already controversial.

The 1894 income tax and why it failed

In 1894, Congress passed a new income tax to raise revenue during an economic depression. This tax applied only to high earners — people making over $4,000 a year, which was roughly equivalent to $130,000 in today's money. Most Americans did not earn that much, so the tax affected only the wealthy.

The Supreme Court struck it down in 1895 in the case Pollock v. Farmers' Loan & Trust Co. The Court ruled that a direct tax on income was unconstitutional unless it was apportioned among the states based on population. This made an income tax impractical — it would have required each state to collect a different tax rate, which was unworkable.

After this ruling, income tax was off the table. Congress could not pass one without changing the Constitution. For 18 years, the federal government again relied on tariffs and excise taxes.

The 16th Amendment and permanent income tax

By 1909, support for an income tax had grown. Progressive reformers argued that tariffs hurt working people by raising prices on goods, and that a tax on income would be fairer. In 1909, Congress proposed the 16th Amendment, which would explicitly allow Congress to collect income tax without apportioning it among states.

The amendment was ratified on February 3, 1913. That same year, Congress passed the first permanent income tax law. The initial rates were low — the tax started at 1 percent on income over $3,000 (roughly $95,000 today) and topped out at 7 percent on income over $500,000. Most Americans still did not pay federal income tax because the threshold was high.

Over the following decades, especially during World War I and World War II, income tax rates rose sharply and the threshold for paying tax dropped. By the 1940s, income tax had become a mass tax that affected millions of Americans, not just the wealthy. It has remained the federal government's primary source of revenue ever since.

How income tax changed after 1913

The income tax that began in 1913 was very different from the one collected today. In 1913, only about 3 percent of Americans paid federal income tax. The tax was collected once a year, and most people paid in a lump sum. There was no withholding from paychecks.

Withholding — the system where your employer deducts tax from each paycheck — did not begin until 1943, during World War II. The government needed to collect more revenue faster, so it required employers to withhold tax throughout the year instead of waiting for people to pay in one lump sum at tax time. This system is still used today.

Tax rates have also changed dramatically. The top rate was 7 percent in 1913, rose to 77 percent during World War I, dropped to 24 percent in the 1920s, rose again to 94 percent during World War II, and has fluctuated between roughly 28 percent and 39.6 percent in recent decades. The number of tax brackets, the definition of taxable income, and the rules for deductions have all been rewritten many times.

Why the timing matters for understanding taxes today

Knowing that income tax is only about 110 years old helps explain why the tax code is so complicated. It has been amended hundreds of times. Each amendment was usually a response to a specific economic situation, war, or political priority. The result is a system that reflects more than a century of decisions, many of which contradict each other.

It also explains why income tax was not always part of American life. People born before 1913 lived their entire working lives without paying federal income tax. The idea that the federal government collects a percentage of your wages is actually a 20th-century invention, not something that has always existed.

Frequently Asked Questions

Did Americans pay federal income tax before 1913?

Yes, but only briefly. There was an income tax from 1861 to 1872 to pay for the Civil War, and another from 1894 to 1895. The 1894 tax was struck down by the Supreme Court. After 1895, there was no federal income tax until 1913.

Why did the Supreme Court reject the 1894 income tax?

The Court ruled that income tax was a direct tax and had to be apportioned among states based on population. This would have made it unworkable — each state would have needed a different tax rate. The 16th Amendment, passed in 1913, removed this requirement.

When did employers start taking taxes out of paychecks?

Withholding began in 1943 during World War II. Before that, people paid income tax once a year in a lump sum. The government switched to withholding to collect revenue faster for the war effort, and the system has continued since then.

Has the income tax rate always been the same?

No. The top rate was 7 percent in 1913, rose to 94 percent during World War II, and has ranged from roughly 28 to 39.6 percent in recent decades. Tax brackets, deductions, and what counts as taxable income have also changed many times.