History

Federal Income Tax

The first federal income tax was imposed by Congress in 1862, to finance the Union's waging of the Civil War. It levied a 3% tax on incomes above $600, rising to 5% for incomes above $10,000. Rates were raised in 1864. The Civil War income tax was repealed in 1872, but a new income tax was enacted in the late 1800s. http://www.archives.gov/publications/prologue/winter_1986_civil_war_tax_records.html However, the Supreme Court struck down the income tax in 1895. It ruled that the portion of the income tax that applied to income on property was a direct tax that, under the US Constitution, could not be levied without apportioning the tax by population.

In 1913, however, the states ratified the Sixteenth Amendment to the United States Constitution, which made possible modern income taxes. That same year, the first Form 1040 appeared after Congress levied a 1% tax on net personal incomes above $3,000 with a 6% surtax on incomes of more than $500,000. As the nation sought greater revenue to finance the World War I effort, the top rate of the income tax rose to 77% in 1918. It dropped sharply in the post-war years, down to 24% in 1929, and rose again during the Depression. During World War II, Congress introduced payroll withholding and quarterly tax payments.

At first the income tax was incrementally expanded by the United States Congress, and then inflation automatically raised most persons into tax brackets formerly reserved for the wealthy. Income tax now applies to almost 2/3 of the population. The lowest earning workers ($20,000 in 2000) pay no income taxes as a group and actually get a small subsidy from the federal government because of child credits and the Earned Income Tax Credit. Notably, however, lower income individuals pay a disproportionate share of payroll taxes for Social Security, Medicare, Unemployment Insurance, and the like. These payroll taxes can amount to 7-10% of every dollar and since they do not show up on tax forms their impact is less noticed.

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