Before the Income Tax
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The federal government before 1913 funded itself almost entirely through tariffs on imported goods and excise taxes on items like alcohol and tobacco. There was no permanent federal income tax. The government had experimented with one during the Civil War — the Revenue Act of 1861 imposed a flat 3% tax on incomes above $800 — but that tax expired after the war ended.
The income tax came back briefly in 1894 under the Wilson-Gorman Tariff Act, imposing a 2% tax on incomes above $4,000. It didn't last. In 1895, the Supreme Court struck it down in Pollock v. Farmers' Loan & Trust Co., ruling that an income tax was a "direct tax" that had to be apportioned among the states according to population — a standard it could never practically meet. For nearly two decades, a permanent federal income tax was constitutionally off the table.
The breakthrough came with the Sixteenth Amendment, ratified on February 3, 1913. It gave Congress explicit power to "lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States." Those six words — "from whatever source derived" — overrode the Pollock ruling and cleared the constitutional path for the income tax that now funds most of the federal government. It remains one of the most consequential amendments ever ratified.
The Revenue Act of 1913
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The first modern income tax, enacted within months of the Sixteenth Amendment's ratification, was strikingly modest by today's standards. The base rate was just 1% on net incomes above $3,000 for individuals — roughly equivalent to $90,000 in 2024 dollars. Married couples received a higher exemption of $4,000. A graduated surtax added additional percentage points on very high incomes, topping out at 6% on income above $500,000.
Because the exemptions were set so high relative to typical earnings of the era, only about 2% of American households owed any income tax at all. This was by design. The framers of the tax — progressive reformers who had pushed for the Sixteenth Amendment — conceived it explicitly as a tax on the wealthy, a counterweight to tariffs that fell disproportionately on ordinary consumers.
The administrative machinery for collecting this tax was thin. There was no automatic withholding — taxpayers calculated and submitted their own liability. Returns were publicly accessible for a time, which caused enough outrage that Congress quickly restricted access. From these humble origins, the income tax would grow into the dominant mechanism of federal finance within a single generation.
War Transforms the Tax
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The United States' entry into World War I required vastly more revenue than the 1913 tax could produce, and Congress responded by dramatically raising rates and lowering the exemption threshold. By 1918, the top marginal rate on income above $1 million had reached 77%. Even middle-class households began encountering the income tax for the first time as exemptions fell. The war transformed the income tax from a curiosity affecting a thin slice of the wealthy into a genuine revenue engine.
World War II accelerated that transformation even further. The top marginal rate climbed to 94% in 1944–1945. More consequentially, Congress lowered the personal exemption sharply and introduced paycheck withholding in 1943 — a system by which employers deducted taxes from wages before workers ever received them. This change made the income tax practically universal in reach and largely invisible in execution.
The numbers tell the story plainly. In 1939, roughly 4 million Americans filed income tax returns. By 1945, the number had risen to 43 million. The income tax had transformed in three decades from a class tax on the prosperous few into a mass tax touching nearly every working household. That fundamental character — broad-based, collected at the source, largely automatic — has defined the system ever since.
Postwar Reform and the Modern Rate Structure
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After World War II, top marginal rates remained extraordinarily high by modern standards. In the 1950s, the top federal income tax rate sat at 91% on income above $400,000 (roughly $4.5 million today). These rates applied to very few people and generated substantial tax-planning activity — but the post-war economy grew robustly despite them, a fact that continues to animate debates about the economic effects of high marginal rates.
The modern era of income tax reform began with the Reagan administration. The Economic Recovery Tax Act of 1981 cut the top rate from 70% to 50%. The Tax Reform Act of 1986 went further, reducing the top rate to 28% while simultaneously eliminating a large number of deductions, exclusions, and tax shelters. The 1986 act is widely regarded as a model of bipartisan reform — it broadened the base while lowering the rates, and it passed with strong support from both parties.
Subsequent legislation has moved rates back up and then down again. By the early 1990s the top rate had returned to 39.6%. The Tax Cuts and Jobs Act of 2017 reduced it to 37% and restructured the bracket system into its current seven-bracket form, with rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The TCJA also indexed the brackets to the Chained Consumer Price Index, a slightly slower-growing inflation measure, meaning real bracket thresholds drift downward over time relative to traditional CPI. The top rate provisions are scheduled to expire after 2025 absent new legislation.