History of the U.S. Federal Income Tax

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Money raised through income tax is used to pay for the programs, benefits, and services provided by the U.S. government for the benefit of the people. Essential services such as national defense, food safety inspections, and federal benefit programs including Social Security and Medicare could not exist without the money raised by the federal income tax. While the federal income tax did not become permanent until 1913, taxes, in some form, have been a part of American history since our earliest days as a nation.

Evolution of Income Tax in America

While taxes paid by American colonists to Great Britain were one of the main reasons for the Declaration of Independence and ultimately the Revolutionary War, America's Founding Fathers knew that our young country would need taxes for essential items such as roads and especially defense. Providing the framework for taxation, they included procedures for the enactment of tax law legislation in the Constitution. Under Article I, Section 7 of the Constitution, all bills dealing with revenue and taxation must originate in the House of Representatives. Otherwise, they follow the same legislative process as other bills.

Before the Constitution 

Before final ratification of the Constitution in 1788, the federal government lacked the direct power to raise revenue. Under the Articles of Confederation, money to pay the national debt was paid by the states in proportion to their wealth and at their discretion. One of the goals of the Constitutional Convention was to ensure that the federal government had the power to levy taxes.

Since Ratification of the Constitution

Even after the ratification of the Constitution, most federal government revenues were generated through tariffs — taxes on imported products — and excise taxes — taxes on the sale or use of specific products or transactions. Excise taxes were considered "regressive" taxes because people with lower incomes had to pay a higher percentage of their income than did people with higher incomes. The most recognized federal excise taxes still in existence today include those added to the sales of motor fuels, tobacco, and alcohol. There are also excise taxes on activities, such as gambling, tanning or the use of highways by commercial trucks.​

As is true with the modern income tax, those early taxes were far from popular among the people. But with the spirit of the American Revolution and independence still running high, some of the people took their dislike of taxes to far higher level.

Between 1786 and 1799, three organized rebellions—all protesting various taxes—challenged the authority of the state and federal governments to generate needed revenue.

Shays' Rebellion from 1786 to 1787 was raised by a group of farmers in objection to what they considered the unfair methods used by state and local tax collectors.

The Whiskey Rebellion of 1794 in western Pennsylvania came in protest to what President George Washington's Secretary of the Treasury Alexander Hamilton wrongly considered an innocuous excise tax “upon spirits distilled within the United States, and for appropriating the same.”

Finally, Fries’ Rebellion of 1799 was led by a group of Pennsylvania Dutch farmers opposed to a new federal government tax on houses, land, and enslaved people. While the farmers owned lots of land and houses, they were generally not enslavers so they were not keen on paying taxes.

Early Income Taxes Came and Went

During the Civil War from 1861 to 1865, the government realized that tariffs and excise taxes alone could not generate enough revenue to both run the government and conduct the war against the Confederacy. In 1862, Congress established a limited income tax only on people who made more than $600 but abolished it in 1872 in favor of higher excise taxes on tobacco and alcohol. Congress re-established an income tax in 1894, only to have the Supreme Court declare it unconstitutional in 1895.

16th Amendment Forward

In 1913, with the costs of  World War I looming, ratification of the 16th Amendment permanently established the income tax. The 16th Amendment states:

“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

The 16th Amendment gave Congress the power to tax the incomes of all individuals and the profits of all businesses. The income tax enables the federal government to maintain the military, construct roads and bridges, enforce the laws and federal regulations, and carry out other duties and programs.

By 1918, government revenue generated from the income tax exceeded $1 billion for the first time and topped $5 billion by 1920. The introduction of the mandatory withholding tax on employee wages in 1943 increased tax revenue to almost $45 billion by 1945. In 2010, the IRS collected nearly $1.2 trillion through income tax on individuals and another $226 billion from corporations.

The Role of Congress in Taxation

According to the U.S. Treasury Department, the goal of Congress in enacting tax-related legislation is to balance the need to raise revenue, the desire to be fair to taxpayers, and the desire to influence the way taxpayers save and spend their money.

Income Tax Today, Reality and Controversy

As envisioned in 1913, the modern United States income tax is designed to be a “progressive” tax system, meaning that higher-income earners should pay a larger percentage of their income in taxes than lower-income earners. For example, according to the IRS, the top 1% of income earners in 2008 paid 38% of all U.S. income tax revenue collected, while earning 20% of the total income reported. On the other end of the income scale, the bottom 50% of income earners paid only 3% of all taxes collected, while earning 13% of the total reported income.

Despite its progressive payment design, the modern income tax system is often accused of increasing income inequality, the uneven distribution of wealth among the American population. While Congressional Budget Office (CBO) confirms that U.S. federal tax policies substantially reduce income inequality measured after taxes, the unequal distribution of wealth—the gap between rich and poor—remains far wider than in most other developed countries.

According to a 2017 report from economist Edward Woolf based on the federal Survey of Consumer Finances, the wealthiest 1% of Americans now own 40% of the country’s wealth, the highest share in the last 50 years. Woolf’s report further shows that the wealth gap between the top 1% of income earners and the bottom 90% has been widening steadily over the past few decades. Without a doubt, income inequality and the social and moral questions involved in closing the wealth gap will remain a hot topic in U.S. politics for years to come.

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Longley, Robert. "History of the U.S. Federal Income Tax." ThoughtCo, Jan. 6, 2021, thoughtco.com/history-of-the-us-federal-income-tax-3321600. Longley, Robert. (2021, January 6). History of the U.S. Federal Income Tax. Retrieved from https://www.thoughtco.com/history-of-the-us-federal-income-tax-3321600 Longley, Robert. "History of the U.S. Federal Income Tax." ThoughtCo. https://www.thoughtco.com/history-of-the-us-federal-income-tax-3321600 (accessed April 23, 2021).