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

The first federal income tax was enacted in August 1861, three months after the Civil War started. Congress needed money to fund the war effort and created a tax on individual incomes above $800 per year — a threshold that exempted most working people at the time. This tax was explicitly temporary and was scheduled to expire after the war ended.

The tax did expire in 1872, seven years after the Civil War ended. For the next 16 years, the federal government relied on tariffs and excise taxes instead. Then in 1894, Congress tried to bring back an income tax without a constitutional amendment. The Supreme Court struck it down in 1895, ruling that a direct tax on income required an amendment to the Constitution.

Key Takeaways

  • The first federal income tax was created in 1861 to pay for the Civil War and was meant to be temporary.
  • The income tax was repealed in 1872 and did not return until 1913, after the 16th Amendment was ratified.
  • The 16th Amendment, passed in 1913, gave Congress the permanent power to tax income without apportioning it among the states.
  • Income tax has been the largest source of federal revenue since 1913, replacing tariffs as the government's main funding source.

Why the 16th Amendment was necessary

The Constitution originally required that any direct tax be apportioned among the states based on population. This made an income tax impractical — a state with 10 percent of the population would have to pay 10 percent of the total tax collected, regardless of how much income was actually earned there. After the Supreme Court's 1895 ruling, the only way to create a permanent income tax was to amend the Constitution.

The 16th Amendment was ratified on February 3, 1913. It stated simply: "The Congress shall have power to collect taxes on incomes, from whatever source derived, without apportionment among the several States." This removed the apportionment requirement and gave Congress the authority to tax income directly. Three weeks later, on March 1, 1913, the first permanent federal income tax law took effect.

The original income tax rates and who paid

The 1913 income tax was designed to fall on the wealthy. The tax applied only to incomes above $3,000 per year — equivalent to roughly $100,000 in 2024 dollars. At that income level, only about 3 percent of the population owed any federal income tax. The tax rate started at 1 percent on income above $3,000 and rose to 7 percent on income above $500,000.

The tax remained a tax on the wealthy through the 1920s. But during World War II, the income tax was expanded dramatically to fund military spending. The threshold was lowered so that millions of middle-class workers had to pay, and tax rates climbed as high as 94 percent on the highest incomes. After the war, the threshold came down and rates fell, but income tax never returned to being a tax only on the rich.

How income tax replaced tariffs as the main revenue source

Before 1913, the federal government was funded mainly by tariffs — taxes on imported goods. Tariffs were politically popular in some regions and unpopular in others, and they made imported goods more expensive for consumers. The income tax offered a new way to raise money that did not depend on tariffs.

The shift happened gradually. In 1913, tariff revenue and income tax revenue were roughly equal. By 1920, income tax brought in more than tariffs. By 1950, income tax accounted for about 40 percent of federal revenue, while tariffs had fallen to less than 5 percent. Today, income tax — both individual and corporate — remains the largest single source of federal revenue.

Why the income tax was controversial from the start

Even after the 16th Amendment passed, many people opposed the income tax. Some argued it was unfair to tax income at all, or that the rates were too high on the wealthy. Others worried that the government would use the tax to expand its power. These debates have continued for over a century and remain part of political disagreements today.

The income tax also created a new administrative challenge: the government had to figure out how to collect it. The Internal Revenue Service (originally called the Bureau of Internal Revenue) was created to manage the tax system. The first federal income tax forms were simple compared to today's forms, but they still required people to calculate their income and report it to the government.

The growth of income tax during wartime

Income tax remained relatively modest through the 1920s and 1930s. The top tax rate was around 25 percent in the 1920s and rose to 63 percent during the Great Depression. But the real expansion came with World War II. To fund the war, Congress raised the top rate to 94 percent and lowered the income threshold so that millions of ordinary workers had to file returns and pay tax.

Withholding — the system where employers deduct taxes from paychecks — was introduced in 1943 to make it easier to collect taxes from so many people. Before withholding, workers had to pay their taxes in a lump sum once a year. Withholding spread the payment across the year and made the tax system work at a much larger scale. This system remains in place today.

Frequently Asked Questions

Did everyone have to pay income tax in 1913?

No. The 1913 income tax only applied to people earning above $3,000 per year, which was roughly the top 3 percent of earners. Most working people paid no federal income tax. The threshold was gradually lowered over time, especially during World War II, until millions of middle-class workers had to pay.

Why did the Supreme Court reject the 1894 income tax?

The Supreme Court ruled in 1895 that an income tax was a direct tax and therefore had to be apportioned among the states based on population. This made the tax impractical, so Congress passed the 16th Amendment to remove the apportionment requirement and allow Congress to tax income directly.

What happened to income tax after the Civil War ended?

The Civil War income tax was repealed in 1872. The federal government returned to funding itself through tariffs and excise taxes. Income tax did not return until 1913, after the 16th Amendment was ratified. The 41-year gap shows that the income tax was not seen as a permanent part of the tax system until the amendment passed.

How did withholding change the income tax system?

Withholding, introduced in 1943, allowed employers to deduct taxes from paychecks throughout the year instead of requiring workers to pay a lump sum once a year. This made it possible to collect income tax from millions of people and is still the main way federal income tax is collected today.