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

The United States first imposed a federal income tax in 1861 to fund the Civil War. It was explicitly temporary—Congress set an end date and expected to let it expire once the war ended. The tax applied only to high earners; most working people paid nothing because the threshold was set well above typical wages.

That first income tax lasted until 1872, when Congress let it expire as promised. For the next 25 years, the federal government had no income tax at all. It funded itself through tariffs on imported goods and excise taxes on specific items like alcohol and tobacco.

In 1894, Congress tried to bring back an income tax during an economic downturn, but the Supreme Court ruled it unconstitutional in 1895. The Court said a direct tax on income had to be apportioned among states based on population, which made it impractical to administer. That ruling stood until the 16th Amendment was ratified in 1913.

Key Takeaways

  • The first federal income tax ran from 1861 to 1872 as a Civil War funding measure and applied only to high earners.
  • An 1894 attempt to restore the income tax was struck down by the Supreme Court in 1895 as unconstitutional.
  • The 16th Amendment, ratified in 1913, gave Congress the power to tax income without apportioning it among states.
  • The modern income tax system began in 1913 with the same basic structure—progressive rates and withholding—that exists today.

Why the Supreme Court blocked the 1894 income tax

The Constitution divides taxes into two categories: direct taxes and indirect taxes. Indirect taxes (like tariffs and excise taxes) could be applied uniformly across the country. Direct taxes—which included income tax—had to be apportioned among states based on their population.

Apportionment made an income tax nearly impossible to run. If a state with 10 percent of the U.S. population had to pay 10 percent of total income tax revenue, the tax rate would have to vary wildly by state to work. A state with many wealthy residents might need a 1 percent rate to hit its target, while a poorer state might need 20 percent. The Supreme Court saw this as unworkable and ruled the 1894 tax unconstitutional.

Congress and the states responded by amending the Constitution. The 16th Amendment, proposed in 1909 and ratified in 1913, explicitly exempted income tax from the apportionment requirement. It gave Congress the power to tax income "without apportionment among the several States."

How the 1913 income tax worked

When the income tax returned in 1913, it started small. Only about 3 percent of the population paid it because the threshold was high—roughly $3,000 per year, which was a comfortable middle-class income at the time. The tax rate was also low: 1 percent on income above the threshold, rising to 7 percent on the highest earners.

The 1913 tax introduced two features that remain central to the system today: progressive rates (higher earners pay a higher percentage) and withholding (employers deduct tax from paychecks). Withholding did not become mandatory until 1943, but the principle was established early.

World War I changed the scope dramatically. By 1918, the top tax rate had climbed to 77 percent, and millions more people were paying tax. After the war, rates fell but never returned to 1913 levels. The income tax had become a permanent, broad-based system.

Why income tax replaced tariffs as the main revenue source

Before 1913, the federal government relied almost entirely on tariffs—taxes on goods imported from other countries. Tariffs funded the military, built infrastructure, and paid government salaries. But tariffs had a major weakness: they raised prices for consumers and could trigger trade wars with other nations.

An income tax offered an alternative. It could raise large sums without raising prices on goods. It also felt fairer to many people because it was based on ability to pay—wealthier people paid more, both in dollars and in percentage of income.

The shift was gradual. In 1913, income tax brought in very little revenue because so few people paid it. By the 1940s, income tax had become the largest source of federal revenue, a position it has held ever since. Tariffs still exist but now play a minor role in federal funding.

How tax rates have changed since 1913

The top income tax rate has swung dramatically over the past century. It started at 7 percent in 1913, climbed to 77 percent during World War I, fell to 24 percent in the 1920s, rose to 94 percent during World War II, and has fluctuated between roughly 28 percent and 39.6 percent since 1980. The number of tax brackets—the income ranges taxed at different rates—has also changed many times, from 2 brackets in 1913 to as many as 55 in 1975 and back down to 7 today.

The income level at which people start paying tax has also shifted. In 1913, it was around $3,000. Adjusted for inflation, that would be roughly $100,000 today, but the actual threshold is much lower—around $14,000 for a single person in 2024. This means a much larger share of the population now pays federal income tax than in 1913.

State income taxes came later than the federal tax

Most states did not have income taxes in 1913. They relied on property taxes, sales taxes, and business taxes. The first state income tax was Wisconsin's, enacted in 1911—two years before the federal tax returned. Other states followed slowly. By 1930, only 15 states had income taxes. Today, 41 states and the District of Columbia have income taxes; only 9 states have none.

State income taxes operate independently of the federal system. A state can have a high income tax while the federal rate is low, or vice versa. Some states tax all income; others exempt certain types, like retirement income or capital gains. The rates and brackets vary widely.

Frequently Asked Questions

Did people pay income tax before 1861?

No. The federal government had no income tax before the Civil War. It funded itself through tariffs on imported goods and excise taxes on specific items. Some states had property taxes and other local taxes, but there was no federal income tax.

Why did the income tax expire in 1872?

Congress had always intended it as temporary. The Civil War ended in 1865, and by 1872 the immediate need for war funding had passed. Congress let the tax expire as originally planned. It would be 22 years before another income tax was attempted.

Could the Supreme Court strike down the income tax again today?

No. The 16th Amendment explicitly gives Congress the power to tax income without apportionment. That amendment would have to be repealed—which requires a two-thirds vote in both the House and Senate plus ratification by three-fourths of the states—for the income tax to become unconstitutional again.

What was the income tax rate when it started in 1913?

The rate was 1 percent on income above the threshold, rising to 7 percent on the highest earners. The threshold was around $3,000 per year, so most working people paid nothing. Rates climbed sharply during World War I and have changed many times since.