Federal Income Tax History in the US: From 1862 to Today

US Federal Income Tax History

Each year, people rush to get their taxes done by April 15. As you shuffle papers, fill out forms, and perform calculations, you might wonder about income tax history and how the practice of taxing personal income started. The concept of taxing income has long shaped our history. Let’s explore federal income tax history to learn why the income tax was established and how it has evolved over the years.

Why the Federal Income Tax was Introduced

The history of federal income tax in the US is a fascinating one. While the federal income tax did not become permanent until 1913, taxes have been a part of our history since the early days of our nation.

Historically Taxes Were from Excise Taxes & Tariffs

Historically, the bulk of the US government’s revenue was from excise taxes and tariffs. Excise taxes are taxes on the sale or use of specific products and tariffs are taxes on imported products. Some common excise taxes that still exist today include taxes on the sale of gasoline, tobacco, and alcohol.

Excise Taxes Were Unfair to Lower Income Families, Sparking the Need for An Income Tax

With excise taxes, people with lower incomes have to pay a higher percentage of their income than those with higher incomes. As a result, excise taxes were increasingly bearing on the less affluent members of the US population. A graduated-scale income tax was seen as a more fair way to collect taxes.

The Early History of the Federal Income Tax

1862-1872: Income Taxes Were Temporarily Introduced Due to the Civil War

Initially, income tax was introduced in the United States in 1862 as a temporary measure in order to help raise money during the American Civil War. The income tax was only for people who made more than $600, and it was abolished in 1872.

1890s: The US Government Began Discussing a Permanent Income Tax

In the 1890s, the US government looked into creating a permanent income tax in order to distribute the federal tax burden more evenly among the affluent and less affluent.

Instituting the Federal Income Tax

1894-1895: The US Government Enacted a Federal Income Tax that was Found Unconstitutional

The US government tried to enact a countrywide income tax in 1894, but it was found unconstitutional by the US Supreme Court in 1895, because all federal taxes had to be based on state population at the time.

1913: The 16th Amendment of the Constitution was Ratified, Allowing for Federal Income Taxes

The US Constitution had to be changed in order to create a permanent income tax. In 1913, the 16th Amendment of the US Constitution was ratified, eliminating the need to base federal taxes on state population.

1913: The Permanent Federal Income Tax Begins

The 16th amendment gave Congress legal authority to tax income and resulted in a permanent income tax law, taxing the income of both individuals and corporations. That same year, the first 1040 form was created.

The Federal Income Tax Evolves

1918-1920: Internal Revenue Collection Rises

In 1918, annual internal revenue collections passed the billion-dollar mark for the first time and rose to $5.4 billion by 1920.

1943: Tax Withholding from Pay Checks Begins

The Current Tax Payment Act of 1943 reintroduced the concept of tax withholding in the US. Tax withholding had been introduced in the Tariff Act of 1913, but it was repealed by the income tax of 1916. Withholding of tax on wages includes income tax, Social Security, and Medicare.

2014: The IRS Processes More Than 133 Million Returns

Today, the IRS processes more than 133 million returns, and in 2010, the IRS collected nearly $1.2 trillion through income tax on individuals and $226 billion on corporations. The money that the government raises through income tax is used to pay for benefits, programs, and services that benefit the people. Some of these essential services include public roads, Social Security, Medicare, national defense, and food safety inspections.

Now that you have some knowledge of income tax history, you will understand the reasons behind this annual ritual that takes place in the weeks leading up to April 15. If you are looking for some advice on how to do your taxes yourself, check out our article to find some helpful tips.