Income tax started in the United States in 1861, then was repealed, then came back permanently in 1913

The federal government first collected income tax during the Civil War in 1861 as a temporary measure to fund the war effort. That tax lasted until 1872, when Congress let it expire. For the next 41 years, the U.S. had no federal income tax at all. In 1894, Congress tried to bring it back, but the Supreme Court ruled in 1895 that a direct income tax was unconstitutional without apportionment among the states. That legal barrier stood until the 16th Amendment was ratified in 1913, which gave Congress the power to collect income tax without apportionment. The first permanent federal income tax began that same year.

Before 1913, the federal government funded itself mainly through tariffs on imported goods and excise taxes on specific items like alcohol and tobacco. Income tax was not part of the regular revenue system. The shift to income tax in 1913 marked a fundamental change in how the U.S. government raised money.

Key Takeaways

  • The first U.S. income tax ran from 1861 to 1872 as a Civil War emergency measure and then was repealed.
  • Congress attempted to reinstate income tax in 1894, but the Supreme Court blocked it as unconstitutional in 1895.
  • The 16th Amendment, ratified in 1913, removed the constitutional barrier and allowed permanent federal income tax.
  • Before 1913, the federal government relied on tariffs and excise taxes instead of income tax to fund operations.

The Civil War income tax: 1861 to 1872

When the Civil War began, the federal government needed immediate revenue to pay for troops, supplies, and military operations. Congress passed the first income tax law in August 1861. It taxed income above $800 per year at a rate of 3 percent. The tax applied to wages, business profits, and investment income.

This tax was explicitly temporary. Congress renewed it several times during and after the war, gradually raising rates as the war became more expensive. By 1865, the top rate had climbed to 10 percent on income above $5,000. After the war ended in 1865, Congress continued the tax for several more years, but public opposition grew. In 1872, with the war long over and the immediate fiscal crisis resolved, Congress repealed the income tax entirely. For the next four decades, it did not exist.

The failed 1894 attempt and the Supreme Court ruling

In the 1890s, the federal government faced budget shortfalls and political pressure to shift the tax burden away from tariffs, which were unpopular in agricultural regions. Congress passed an income tax law in 1894 that would have taxed income above $4,000 at a rate of 2 percent. However, before the tax could be collected, a lawsuit challenged its constitutionality.

In Pollock v. Farmers' Loan & Trust Co. (1895), the Supreme Court ruled that a direct tax on income from property (such as rental income or investment returns) was unconstitutional unless it was apportioned among the states based on population. This ruling made a practical income tax nearly impossible. Apportionment would have meant that a state with 10 percent of the U.S. population would have to collect 10 percent of the total income tax revenue, regardless of where the income actually came from. The ruling effectively blocked any federal income tax for the next 18 years.

The 16th Amendment and permanent income tax in 1913

The Supreme Court's 1895 decision stood as a barrier until the 16th Amendment was proposed in 1909 and ratified on February 3, 1913. The amendment states: "The Congress shall have power to collect taxes on incomes, from whatever source derived, without apportionment among the several States." This single sentence removed the constitutional obstacle and gave Congress explicit authority to tax income directly.

Congress moved quickly. On October 3, 1913, President Woodrow Wilson signed the income tax provision of the Tariff Act of 1913 into law. The tax took effect immediately. The initial rate was 1 percent on income above $3,000 for individuals (equivalent to roughly $35,000 in 2024 dollars), with a top rate of 7 percent on income above $500,000. Unlike the Civil War tax, this one was permanent and has remained part of the federal tax system ever since.

Why the government switched from tariffs to income tax

Before 1913, tariffs were the primary source of federal revenue. A tariff is a tax on imported goods, and it made up the bulk of federal income throughout the 1800s. However, tariffs had serious drawbacks. They raised the price of imported goods for consumers, which hurt working people and farmers. They also created regional resentment because agricultural states imported more than they exported, so they paid more in tariffs than industrial states did.

An income tax shifted the burden to those with higher earnings and was seen as more progressive. It also provided a more stable revenue stream than tariffs, which fluctuated with trade volumes and international relations. By 1913, the political consensus had shifted enough to support both the constitutional amendment and the new tax law.

How the income tax has changed since 1913

The income tax that began in 1913 was modest by modern standards. The 1 percent base rate and 7 percent top rate affected only the wealthiest Americans. During World War I and World War II, rates climbed dramatically to fund military spending. By 1944, the top marginal rate reached 94 percent on the highest incomes. After the wars, rates remained high but gradually declined over the decades.

The structure of the tax has also evolved. Congress has added deductions, credits, and exemptions; changed filing requirements; and adjusted brackets and rates dozens of times. The Internal Revenue Service, created in 1862 as the Bureau of Internal Revenue, has grown into a large agency responsible for collecting and enforcing the tax. Despite all these changes, the fundamental system that began in 1913 remains in place.

Frequently Asked Questions

Did people pay federal income tax before 1913?

Yes, but only from 1861 to 1872. That tax was temporary and tied to the Civil War. After it was repealed in 1872, there was no federal income tax for 41 years. Congress tried to bring it back in 1894, but the Supreme Court blocked it as unconstitutional.

Why did the Supreme Court say the 1894 income tax was unconstitutional?

The Court ruled that a direct tax on income from property had to be apportioned among states based on population, which would have made the tax impractical to administer. The 16th Amendment, ratified in 1913, removed this requirement and gave Congress clear power to tax income.

What was the first income tax rate in 1913?

The initial rate was 1 percent on income above $3,000 for individuals, with a top rate of 7 percent on income above $500,000. These rates applied only to the wealthiest Americans. The vast majority of workers did not owe federal income tax until World War II.

How much of federal revenue comes from income tax today?

Individual income tax and corporate income tax together make up roughly half of all federal revenue, with the rest coming from payroll taxes, excise taxes, and other sources. The exact percentage varies year to year depending on economic conditions and changes in tax law.