The federal income tax began in 1861 as a temporary Civil War measure, became permanent in 1913 after the 16th Amendment, and has shaped how the government funds itself ever since.

The United States did not have a federal income tax for most of its first century. Before 1861, the government relied on tariffs, excise taxes, and land sales. When the Civil War broke out, Congress needed money fast and passed the first income tax in August 1861 — explicitly calling it temporary and tied to the war effort. That tax expired in 1872, five years after the war ended.

For the next 40 years, there was no federal income tax. In 1894, Congress tried to bring it back, but the Supreme Court ruled in Pollock v. Farmers' Loan & Trust Co. that a direct tax on income from property was unconstitutional without apportionment among the states. This decision blocked any income tax until the rules changed. The 16th Amendment, ratified in February 1913, gave Congress the power to tax income directly without apportionment. Three months later, the first permanent federal income tax took effect.

Key Takeaways

  • The first federal income tax ran from 1861 to 1872 as a Civil War emergency measure, then disappeared for 40 years.
  • The Supreme Court's 1895 decision in Pollock v. Farmers' Loan & Trust Co. blocked income taxes until the Constitution was amended.
  • The 16th Amendment, ratified in 1913, gave Congress permanent authority to tax income without apportionment among states.
  • The 1913 tax applied only to high earners — the first year, fewer than 3 percent of households paid any federal income tax.
  • Withholding from paychecks did not begin until 1943, so early taxpayers paid in a lump sum once a year.

The Civil War income tax: 1861 to 1872

Congress passed the first income tax on August 5, 1861, just four months into the Civil War. The law taxed income above $800 per year at a rate of 3 percent. Because $800 was roughly equivalent to the annual wage of a skilled worker, the tax hit only the wealthy. The government needed the revenue to pay for soldiers, supplies, and equipment, and an income tax was faster to implement than raising tariffs or creating new excise taxes.

The tax was never meant to be permanent. Congress renewed it each year, always describing it as a war measure. After the war ended in 1865, the tax remained in place for seven more years — partly because the government still needed revenue to pay war debts and partly because Congress had grown accustomed to the income. The tax finally expired on December 31, 1871, and was not renewed.

The 40-year gap and the Pollock decision

From 1872 to 1913, the United States had no federal income tax. The government funded itself through tariffs on imported goods, excise taxes on items like alcohol and tobacco, and customs duties. This system worked during peacetime but proved inflexible when the government needed more revenue.

In 1894, during an economic depression, Congress passed a new income tax. This time it was meant to be permanent, not temporary. The tax applied to income above $4,000 per year at a rate of 2 percent. Wealthy Americans challenged the law in court, arguing it was unconstitutional. In May 1895, the Supreme Court agreed in Pollock v. Farmers' Loan & Trust Co. The Court ruled that a tax on income from property (such as rent, dividends, or interest) was a "direct tax" and could not be imposed without apportionment — meaning each state would have to pay a share based on its population, which made the tax impractical. The 1894 tax was struck down, and no income tax could be levied until the Constitution changed.

The 16th Amendment and permanent income tax

The 16th Amendment was introduced in Congress in 1909 and ratified by the states on February 3, 1913. It reads: "The Congress shall have power to collect taxes on incomes, from whatever source derived, without apportionment among the several States." This single sentence overturned the Pollock decision and gave Congress the authority to tax income directly.

Three months after ratification, on June 30, 1913, the first permanent federal income tax took effect under the Tariff Act of 1913 (also called the Underwood Tariff). The new tax applied to income above $3,000 per year at a rate of 1 percent, with higher rates on larger incomes. Because $3,000 was a substantial sum in 1913 — roughly equivalent to $100,000 today — the tax initially affected only about 3 percent of households. The wealthy paid most of the revenue.

How the early income tax worked

The 1913 income tax operated very differently from today's system. There was no withholding from paychecks. Instead, taxpayers calculated their own income at the end of the year and paid the tax in a lump sum, usually in March or April. The government did not have the infrastructure to verify income, so it relied on taxpayers to report honestly. Enforcement was weak.

The tax rates were low by modern standards but progressive — meaning higher earners paid a higher percentage. In 1913, the top rate was 7 percent on income above $500,000. By 1916, as World War I approached and the government needed more revenue, Congress raised the top rate to 15 percent. After the United States entered the war in 1917, rates climbed sharply. By 1918, the top rate reached 77 percent on income above $1 million.

Withholding and the modern system

The income tax remained a "pay once a year" system until World War II. During the war, the government needed to raise revenue quickly and expanded the income tax to cover millions of middle-class workers, not just the wealthy. Paying in a lump sum became impractical.

In 1943, Congress introduced payroll withholding. Employers began deducting income tax from each paycheck and sending it to the government. This system made it easier for the government to collect revenue throughout the year and easier for workers to pay in small amounts rather than a large sum. Withholding has remained the standard method ever since.

Why the income tax took so long to establish

The delay between 1872 and 1913 reflects a fundamental disagreement about federal power. Many Americans and politicians believed the Constitution did not allow a direct tax on income without apportionment. Others argued that income tax was necessary to fund the government fairly. The debate was not just about money — it was about what powers the federal government should have.

The 16th Amendment settled the question by changing the Constitution itself rather than reinterpreting it. This made clear that income tax was now constitutional and permanent. Once the amendment passed, income tax became the largest source of federal revenue and has remained so for over a century.

Frequently Asked Questions

Did everyone have to pay the income tax when it started in 1913?

No. The 1913 tax applied only to income above $3,000 per year, which was a high threshold. Fewer than 3 percent of households paid any federal income tax that year. The tax was designed to hit the wealthy. It was not until World War II that the income tax became a mass tax affecting millions of ordinary workers.

Why did the Supreme Court block the 1894 income tax?

The Court ruled that a tax on income from property (rent, dividends, interest) was a "direct tax" under the Constitution and could not be imposed without apportionment among the states. Apportionment would have made the tax unworkable. The 16th Amendment removed this obstacle by explicitly allowing Congress to tax income without apportionment.

How long did it take to go from the first income tax to a permanent one?

Fifty-two years. The first income tax was passed in 1861 and expired in 1872. The permanent income tax did not begin until 1913, after the 16th Amendment was ratified. The gap was caused by the Supreme Court's 1895 decision blocking income taxes and the time it took to amend the Constitution.

When did the government start taking taxes out of paychecks?

Payroll withholding began in 1943 during World War II. Before that, taxpayers paid their income tax once a year in a lump sum. Withholding made it easier for the government to collect revenue and easier for workers to pay in smaller amounts throughout the year.