Federal income tax began in 1861 as a temporary Civil War measure, became permanent in 1913, and has shaped how Americans fund government ever since

The United States did not have a federal income tax for its first 72 years. Before 1861, the federal government raised money through tariffs on imports, excise taxes on goods like whiskey, and land sales. The Civil War changed that. Congress passed the first income tax in August 1861 as an emergency measure to pay for the war effort. It was meant to expire when the war ended.

That temporary tax lasted much longer than expected. Congress kept renewing it through Reconstruction and into the 1890s, though it shrank as a revenue source. In 1894, Congress tried to pass a new income tax without a war to justify it, but the Supreme Court struck it down in 1895, ruling that direct taxes on income required a constitutional amendment.

The 16th Amendment, ratified in February 1913, gave Congress the power to tax income without apportioning it among the states. Three months later, the first permanent federal income tax took effect. That 1913 tax was steep for the wealthy—7 percent on incomes over $500,000—but it touched very few people. Most Americans earned far less and paid nothing.

Key Takeaways

  • The first federal income tax appeared in 1861 as a Civil War emergency and was supposed to be temporary.
  • The Supreme Court blocked a permanent income tax in 1895, ruling it violated the Constitution.
  • The 16th Amendment, ratified in 1913, gave Congress the power to tax income directly.
  • The 1913 income tax started at 7 percent on very high earners and affected almost no ordinary workers.
  • Income tax has grown from a tax on the wealthy into the largest source of federal revenue.

Why the Civil War forced a new kind of tax

Before 1861, the federal government had no income tax because it did not need one. Tariffs—taxes on imported goods—paid for most federal operations. The tariff on British textiles, French wine, and other imports was often 20 to 40 percent of the purchase price. This system worked as long as trade was steady and the government's bills were small.

The Civil War broke that balance. The Union Army needed uniforms, weapons, ammunition, and food. The Navy needed ships. The government's spending jumped from roughly $63 million in 1860 to $1.3 billion by 1865. Tariffs alone could not raise that much money fast enough. Congress needed a new revenue source that could reach individuals directly.

The income tax Congress passed in August 1861 was crude by modern standards. It taxed only income over $800 per year—a threshold that excluded most workers. It was also temporary: the law said it would expire in 1866. Congress renewed it several times, and it stayed on the books through 1872, when it finally ended. The tax had raised about $376 million during the war and Reconstruction—a huge sum at the time.

The 1894 tax and the Supreme Court's 1895 rejection

In the 1890s, the federal government faced a different problem: it was spending more than it collected. Tariff revenue had fallen because of an economic depression. Congress looked back at the income tax as a solution and passed a new one in 1894, this time without a war to justify it. The tax was 2 percent on incomes over $4,000—again, a threshold that hit only the wealthy and upper-middle class.

The wealthy challenged it in court. In Pollock v. Farmers' Loan & Trust Co., decided in May 1895, the Supreme Court ruled 5 to 4 that the income tax was unconstitutional. The Court said the Constitution required "direct taxes"—taxes on property or income—to be divided among the states based on population. An income tax that applied nationwide without that apportionment violated that rule. The 1894 tax was struck down, and income tax disappeared again.

This ruling left Congress with a dilemma. It could not pass an income tax without amending the Constitution. Amending the Constitution required approval by two-thirds of both houses of Congress and ratification by three-fourths of the states—a slow and uncertain process. Yet the need for revenue kept growing, and the tariff system was becoming unpopular. The political pressure for change built over the next 18 years.

The 16th Amendment and the 1913 tax

In 1909, Congress proposed the 16th Amendment to overturn the Supreme Court's decision. The amendment was straightforward: "The Congress shall have power to collect taxes on incomes, from whatever source derived, without apportionment among the several States." It did not set a tax rate or say who would pay. It straightforward gave Congress the power to do it.

Ratification took four years. Delaware became the 36th state to approve it on February 3, 1913—the number needed to make it part of the Constitution. Within weeks, Congress passed a new income tax law, and it took effect on March 1, 1913.

The 1913 tax was steeply progressive. It started at 1 percent on incomes over $3,000 and rose to 7 percent on incomes over $500,000. Because the cost of living was much lower in 1913, a $3,000 income was roughly equivalent to $100,000 today. The tax affected perhaps 3 percent of the population—mostly business owners, professionals, and the wealthy. Most factory workers, farmers, and clerks paid nothing.

How income tax grew from a luxury tax to the main revenue source

The income tax started small but grew fast. In 1913, it raised about $28 million. By 1920, it raised $311 million. By 1940, it raised $892 million. World War II accelerated the shift. To pay for the war, Congress lowered the income threshold and raised the rates. By 1944, the top rate hit 94 percent. More importantly, the tax began to reach ordinary workers, not just the wealthy.

After the war, the income tax never shrank back to its pre-war reach. The threshold stayed low, and millions of middle-class Americans became income taxpayers. Today, the federal income tax is the largest single source of federal revenue—roughly 50 percent of all federal tax revenue. Payroll taxes (Social Security and Medicare) are the second-largest source at roughly 35 percent. Excise taxes, tariffs, and other sources make up the rest.

This shift happened gradually, through wars, recessions, and political choices about tax rates and brackets. But it all traces back to the 16th Amendment and the 1913 law that made it possible.

Why the threshold mattered more than the rate

The income tax's real power came not from how much it taxed the wealthy, but from how many people it eventually reached. In 1913, a 7 percent tax on $500,000 incomes affected almost nobody. In 1944, a 94 percent tax on high incomes affected more people, but the real change was that a 23 percent tax on $2,000 incomes affected millions of ordinary workers.

Congress controlled both the threshold and the rate. Lowering the threshold—the income level at which you start paying tax—brought in far more revenue than raising the rate on the wealthy. It also changed the tax from a luxury tax on the rich into a mass tax that touched most working Americans. This shift happened mostly during and after World War II, when the government needed enormous sums and Congress was willing to tax the middle class to get them.

The threshold has moved up and down since then, adjusted for inflation and changed by Congress through tax law. But the basic structure—a tax on income that reaches most workers—has remained since 1944.

Frequently Asked Questions

Did Americans have to pay income tax before 1913?

Yes, but only during the Civil War and Reconstruction. The first income tax ran from 1861 to 1872. It taxed only high earners and was meant to be temporary. After 1872, there was no federal income tax until 1913.

Why did the Supreme Court strike down the 1894 income tax?

The Court ruled that income is a "direct tax" under the Constitution and must be apportioned among states based on population. An income tax that applied nationwide without that apportionment violated the Constitution. The 16th Amendment overturned this ruling.

How many people paid income tax in 1913?

Very few—roughly 3 percent of the population. The tax started at 1 percent on incomes over $3,000, which was a high threshold in 1913. Most workers earned far less and paid nothing.

When did income tax start affecting ordinary workers?

During World War II. Congress lowered the income threshold and raised rates to pay for the war. By 1944, millions of middle-class Americans were paying income tax for the first time. The threshold never returned to its pre-war level.

Is income tax the largest source of federal revenue today?

Yes. Federal income tax now raises roughly 50 percent of all federal tax revenue. Payroll taxes for Social Security and Medicare are the second-largest source at roughly 35 percent. Other taxes and fees make up the remainder.