On Aug. 5, 1861, Congress passed the Revenue Act of 1861, a bill considered the origins of the U.S. income tax. Under the bill, incomes over $800 were taxed 3 percent.
Passage of the First Income Tax
Article I, Section 8, Clause 1 of the Constitution gives Congress the “Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States.”
In 1861, Congress was looking for a way to fund the Union’s Civil War effort. Some officials wanted an emergency property tax similar to the one passed during the War of 1812. However, a property tax would be a direct tax and thus would be subject to Article I, Section 9, Clause 4 of the Constitution, which requires that direct taxes be applied proportionally across states. This would have placed an unfair burden on the less populated states.
Instead Congress passed an income tax as part of the Revenue Act of 1861 that imposed a 3 percent tax on incomes higher than $800 a year. “Because it did not tax property directly, congressional leaders viewed the income tax as indirect, and thus immune from constitutional strictures,” explains the Tax History Museum.
The law stated that “there shall be levied, collected, and paid, upon annual income of every person residing in the U.S. whether derived from any kind of property, or from any professional trade, employment, or vocation.”
Within a year, before taxes had been collected under the new law, the provisions of the act were modified by the Revenue Act of 1862, which made the income tax two-tiered: Incomes between $600 and $10,000 were taxed at 3 percent, while higher incomes were taxed at 5 percent. It also created the commissioner of internal revenue to collect the taxes.
In 1872, with need for government revenue lessened following the end of the Civil War, the income tax was repealed.
The Return of the Income Tax
Sources in this Story
- Tax History Museum: 1861-1865: The Civil War
- Library of Congress: A Century of Lawmaking for a New Nation: U.S. Congressional Documents and Debates: Statutes at Large, 37th Congress, 1st Session
- Internal Revenue Service: Historical Highlights of the IRS
Congress tried to reinstitute the income tax in 1894 with the passage of the Wilson Tariff Act. The act also created the Bureau of Internal Revenue, which later became the Internal Revenue Service.
However, a year later the Supreme Court, in Pollock v. Farm Loan and Trust Co., ruled that the income tax was a direct tax and thus was unconstitutional because it was not apportioned among the states on the basis of population.
The income tax was thus abandoned. In 1909 President William Howard Taft proposed that Congress pass a constitutional amendment allowing for the collection of an income tax. Four years later, the 16th Amendment was ratified, giving Congress the “power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states.”
That same year, Congress levied a 1 percent tax on incomes of more than $3,000, and a 6 percent tax on incomes of more than $500,000. It also introduced Form 1040, the same basic form that is used today.
