Federal Income Tax
Before 1913, federal government revenues came mainly from taxes on goods—tariffs on imported products and excise taxes on items like whiskey. The burden of these taxes fell heavily on working Americans, who spent a much higher percentage of their income on goods than rich people did.
The new revenue bill phased in tariff reductions, lowering rates from an average of 40 percent in 1913 to just 16 percent by 1920. To offset tariff revenue losses, it executed the tax swap from Bailey's earlier proposal. The United States added a modest new income tax
The modern federal income tax in the United States officially began in 1913, following the ratification of the 16th Amendment on February 3, 1913. Congress subsequently passed the Revenue Act of 1913, officially making the income tax law on October 3, 1913. The first collection of these new income taxes officially took place on March 1, 1914.
A brief overview of how this system was established includes:
- The 16th Amendment: This amendment granted Congress the constitutional and lasting authority to levy taxes on individual and corporate incomes.
- Original Rates: The initial structure was highly progressive but modest compared to today. The first tax was a 1% rate on net personal income above ($3,000), with a maximum 7% surtax on incomes exceeding ($500,000).
- Who Paid: Because average workers earned roughly $800 a year, the tax only applied to the wealthiest 3% to 4% of the population
While 1913 marks the birth of the lasting, constitutional income tax, the federal government actually introduced the first temporary income tax in 1861 via the Revenue Act to help fund the Civil War. It was later repealed in 1872.