The federal income tax began in 1861 as a temporary war measure

The United States first collected income tax in 1861 to fund the Civil War. Congress passed the Revenue Act of 1861, which taxed income above $800 per year at a rate of 3 percent. This was meant to be temporary — a way to pay for military expenses during the war.

The tax was repealed in 1872, after the war ended. For the next 16 years, the federal government had no income tax at all. It relied instead on tariffs (taxes on imported goods) and excise taxes (taxes on specific products like alcohol and tobacco).

In 1894, Congress tried to bring back an income tax without a war as justification. The Wilson-Gorman Tariff Act included a 2 percent tax on income over $4,000. The Supreme Court struck it down in 1895, ruling that the Constitution did not allow Congress to tax income directly without apportioning it among the states based on population.

The 16th Amendment made the income tax permanent in 1913

To get around the Supreme Court's ruling, Congress proposed the 16th Amendment in 1909. It gave Congress the power to "collect taxes on incomes, from whatever source derived, without apportionment among the several States." The states ratified it in 1913.

That same year, the Revenue Act of 1913 created the modern federal income tax. It taxed income above $3,000 at rates starting at 1 percent and going up to 7 percent for the highest earners. The tax applied to individuals, corporations, and partnerships.

The income tax was no longer temporary. It became the main source of federal revenue and has remained so ever since.

Key Takeaways

  • The first federal income tax was enacted in 1861 to pay for the Civil War and was repealed in 1872 when the war ended.
  • Congress attempted to reinstate income tax in 1894, but the Supreme Court ruled it unconstitutional without a constitutional amendment.
  • The 16th Amendment, ratified in 1913, gave Congress the power to tax income directly and permanently.
  • The modern income tax system began with the Revenue Act of 1913, which set initial tax rates between 1 and 7 percent.

Tax rates have changed dramatically since 1913

When the income tax started in 1913, the top rate was 7 percent. During World War I, it climbed to 77 percent by 1918. In the 1920s, it dropped back down. During the Great Depression and World War II, it rose again — reaching 94 percent in 1944 and 1945.

The top rate stayed very high through the 1950s and 1960s. In 1961, it was 91 percent. It fell to 70 percent in 1970 and dropped further to 50 percent in 1981. The Tax Reform Act of 1986 lowered it to 28 percent. Since then, the top rate has moved between 28 and 39.6 percent depending on the year and which party controlled Congress.

The number of tax brackets and the income thresholds that trigger each rate have also shifted many times. What counted as "high income" in 1913 would be considered middle class by current standards.

Who paid income tax has expanded over time

In 1913, income tax was a tax on the wealthy. The lowest income threshold was $3,000 per year — roughly $100,000 in current dollars. Most working people paid nothing.

This changed during World War II. The government needed more revenue and lowered the income threshold to reach middle-class workers. By the end of the war, millions of ordinary employees were paying income tax for the first time. The withholding system — where employers deduct tax from each paycheck — was introduced in 1943 to collect it efficiently.

The income tax threshold continues to change each year based on inflation, reaching people at much lower income levels than it did in 1913.

State income taxes came later than the federal tax

While the federal government was debating income tax in the 1890s, some states were already collecting it. Wisconsin was the first state to pass an income tax, in 1911. Other states followed, especially after the 16th Amendment made the federal income tax constitutional.

Not all states have an income tax today. Nine states — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire — do not tax wage income. New Hampshire taxes only interest and dividend income. The remaining states and the District of Columbia all have some form of income tax, though the rates and brackets vary widely.

The income tax system has grown more complex

The original 1913 income tax was straightforward: calculate your income, subtract a standard deduction, and pay the rate that applied to your bracket. The tax code was about 400 pages long.

The Internal Revenue Code is now over 2,600 pages, with thousands of additional pages of regulations and guidance. Congress has added deductions, credits, and special rules for different types of income and different groups of people. Some of these were meant to encourage certain behaviors (like saving for retirement or buying a home). Others were added to help specific industries or populations.

This complexity means that two people earning the same income may pay very different amounts of tax depending on their circumstances, investments, and life choices.

Frequently Asked Questions

Why did the Supreme Court reject the 1894 income tax?

The Supreme Court ruled in 1895 that a direct tax on income had to be apportioned among states based on population, which would have made the tax impractical. The 16th Amendment removed this requirement and allowed Congress to tax income without apportionment.

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

The initial rate was 1 percent on income above $3,000, rising to 7 percent for the highest earners. These rates were much lower than the rates that took effect during World War I and World War II.

Do all states have income tax?

No. Nine states do not tax wage income at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire. New Hampshire taxes only interest and dividend income. All other states and the District of Columbia have some form of income tax.

When did employers start withholding taxes from paychecks?

The withholding system began in 1943 during World War II. Before that, most people paid their income tax in a lump sum once a year. Withholding made it easier for the government to collect from millions of workers and helped fund the war effort.