The Birth & Growth of the Income Tax in the United States

Income Tax Congress Revenue Act

Income Tax

Most people are oblivious of the fact that the United States has not always consistently imposed an income tax. Most people assume that the Internal Revenue Service has existed in its current form forever. Though it is false, this assumption is not without reason: national governments have a well-earned reputation of being tax hungry entities. In reality, however, the U.S. has only consistently collected a tax on income since the passing of the sixteenth amendment in 1913. But though the U.S. has only regularly collected an income tax since after the sixteenth amendment, this does not mean that the U.S. government never collected such a tax earlier.

After the eruption of the Civil War, President Lincoln and the Congress passed the Revenue Act of 1861, and this act allowed the government to impose a tax on income to fund the war effort for the Union. The Revenue Act gave birth to a federal office in charge of collecting the tax, and this office was the embryonic form of the IRS.

The Revenue Act of 1861 grew out of necessity. The Union army needed additional funds in its struggle against the Confederacy. The 1861 act first put forth a rate of 3 percent on income above $800. This rate was subsequently discarded when the Revenue Act of 1862 was passed. The act of 1862 imposed a rate of 3 percent on income between $600 and $10,000, and 5 percent on income over $10,000. These rates were also later discarded and in 1864 a new act (the Revenue Act of 1864) imposed rates of 5 percent on income between $600 and $5,000, 7.5 percent on income between $5,000 and $10,000 and 10 percent on income above $10,000. These multiple acts provided the Union with a large source of its revenue: approximately 21 percent of Union funds were raised from income taxes.

Though it was only intended as a temporary measure during wartime, the income tax lingered for a bit after the Union declared victory. The various public projects associated with the Reconstruction era required funding, and so an income tax was collected until roughly 1872. But even though the tax expired around this time, a precedent was established, and in 1894 a peacetime income tax was included as a provision of the so-called Wilson-Gorman Tariff Act. The Wilson-Gorman act reduced the tariff rates set by a previous act, and proposed a 2 percent tax on income above $4,000 in order to cover the deficit. The income tax provision of the Wilson-Gorman measure was ruled unconstitutional by the Supreme Court in its opinion of Pollock v. Farmers’ Loan & Trust Co. in 1895, but the income tax eventually made its return with the sixteenth amendment.

To this day, opponents of the income tax continue to make arguments against its constitutionality, but none of these arguments have passed legal scrutiny. No matter what your position on the income tax, it is important to remember that even if this tax disappeared tomorrow we can be certain another one would take its place in double quick time.

Image credit: Electronic_Frontier_Foundation

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johnAbout john
Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.

Huddleston Tax CPAs of Seattle & Bellevue
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