When Did Congress Start Taxing Income?

The saying goes there are only two things in this life you have to do, pay taxes and die. Income tax has become an accepted procedure in the United States. However, the income tax did not always exist, and it wasn’t always accepted.

The first income tax by the United States government occurred during the Civil War. The North needed funds to help support the army, and the idea of taxing income was proposed. The first personal income tax was included as a clause within the Revenue Act of 1861.

The Revenue Act of 1861 announced an income tax as a flat rate tax. The Act introduced a rate of taxation of 3% for incomes above $800 (if you adjust this figure for inflation, this introduced a 3% tax for incomes greater than about $17,000).

The Act also introduced an income tax of 5% on income for individuals that lived outside the United States. This income tax was soon repealed by Congress, and replaced with the Revenue Act of 1862. This act changed the income tax from a flat rate to a progressive scale.

The Revenue Tax of 1862 introduced a tax of 3% for incomes greater than $600, and a tax of 5% for incomes above $10,000 and for individuals living outside the United States. This Act also specified that the income tax would be terminated in a couple of years (1866).

Challenges to Income Taxation

Although Congress had allowed the income tax law to expire by year 1873, one of the challenges against this tax reached the Supreme Court in 1880. This was in the case of Springer v. United States. Springer alleged that the income tax was a violation of the direct tax requirement in the Constitution. Thus, the plaintiff questioned the constitutionality of Congress’ income tax.

Since the tax was already expired, the Supreme Court declared that the Congress did have a right to issue an income tax. This Court determined that the income tax was essentially an excise tax, and thus it was constitutional.

First Peacetime Tariff

In 1894, the government again found a need for an income tax. Congress passed the Wilson-Gorman tariff, and this issued the first income tax during the peacetime. In this tariff, there was a tax of 2% on income more than $4000. Thus, the majority of individuals were excluded from this tax in the United States. In fact, the tax affected less than 10% of households in the United States.

This issue was again brought before the Supreme Court in Pollock v. Farmers’ Loan and Trust Company. The constitutionality of the income tax was again questioned. In a close decision, the Supreme Court reversed its earlier rule and determined that the income tax was unconstitutional. Five judges sided that the tax was unconstitutional, and four judges sided that the tax was in fact constitutional. The tariff was thus repealed.

Sixteenth Amendment

Responding to the Court’s decision, Congress passed the Sixteenth Amendment in 1909. The Sixteenth Amendment stated that Congress was allowed to issue income taxes without first apportioning it among the states or basing it upon census results. The western states strongly supported the amendment, while the eastern states were more against it. In 1913, three fourths of the states had ratified it, and it was added to the Constitution.

Shortly after the amendment was added to the Constitution, Congress passed the Revenue Act of 1913. This act declared an income tax of 1% on income greater than $3000, and an income tax of 7% on any income that was greater than $500,000. In 1916, the Supreme Court declared this progressive income tax constitutional.

Creation of the IRS and Tax Rates

The Internal Revenue Service (IRS) was established to handle the collection of taxes and to impose penalties for non-payment. The IRS also sets tax rates.

The tax rates have changed many times throughout history.

• Top tax rate - The tax rates have ranged from the top rate of 7% of income earned above $500,000 at its inception but has risen and fallen many times since then. At the height of World War II, the highest tax bracket for income earned above $200,000 was 94% but it fell again after the war.
• Minimum tax rate - The minimum tax brackets have also fluctuated over the years, ranging from 1% in 1913 during the first income tax to a high point of 23% in 1994.

As of 2010 the rates are 10% for the minimum income earned and include six different brackets up to a top rate of 35% on income above $373,000.