A Brief History of Taxes in the U.S.

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The history of the American tax system is a story of revenue needs shaping tax law. For its first seven decades, the federal government relied mainly on tariffs and excise taxes. It turned to an income tax only to pay for the Civil War. A permanent federal income tax arrived in 1913 with the 16th Amendment. Since then, wars, economic crises and political shifts have pushed rates up and down, added payroll withholding, introduced the alternative minimum tax and produced periodic overhauls such as the Tax Reform Act of 1986 and the Tax Cuts and Jobs Act of 2017.

Before the United States: colonial taxes

In the American colonies, taxes were a flash point long before the Constitution. Parliament’s attempts to tax the colonies directly, most famously the Stamp Act of 1765 and the duties that led to the Boston Tea Party in 1773, fueled the slogan “no taxation without representation.” The objection was less to taxes themselves than to being taxed by a legislature in which the colonists had no vote.

Early federal taxation: tariffs, excises and limited government

Under the Articles of Confederation, the national Congress had no power to tax. It could only request money from the states, which often did not pay. That weakness was one reason for the Constitution of 1787, which gave Congress the power to “lay and collect Taxes, Duties, Imposts and Excises.” The Constitution also required that any “direct” tax be apportioned among the states according to population, a rule that would later block an income tax.

The new government moved quickly. The Tariff Act of 1789 placed duties on imported goods, and customs revenue became the backbone of federal finance for decades. In 1791, at Treasury Secretary Alexander Hamilton’s urging, Congress taxed distilled spirits. Farmers in western Pennsylvania who turned grain into whiskey resisted, and the Whiskey Rebellion of 1794 ended only when President Washington sent militia to the region. The whiskey tax and other internal excises were repealed in the early 1800s, then revived temporarily to pay for the War of 1812.

The first income taxes: Civil War to the 1890s

The Civil War broke the old revenue model. Tariffs and land sales could not cover the cost of fighting, so in 1862 President Lincoln signed a revenue law that created the office of the Commissioner of Internal Revenue and imposed the first federal tax on individual incomes. The rate was 3% on incomes from $600 to $10,000 and 5% on incomes above $10,000. The same era brought new excise taxes on many goods and services.

After the war, the need faded and political support for the tax declined. Congress let the income tax expire, and it was repealed in 1872.

The idea returned in 1894. The Wilson-Gorman Tariff Act lowered some tariffs and, to make up the revenue, levied a 2% tax on incomes above $4,000. A year later, in Pollock v. Farmers’ Loan & Trust Co. (1895), the Supreme Court ruled that a tax on income from property was a direct tax. Because it had not been apportioned by population, the tax was unconstitutional. That decision left Congress with two options: abandon the income tax or change the Constitution.

The 16th Amendment and the modern income tax

Congress chose the second path. In 1909 it passed a tax on corporate income, framed as an excise on the privilege of doing business, and sent a constitutional amendment to the states. The 16th Amendment was ratified on Feb. 3, 1913, when the required three-fourths of states had approved it. Its text gives Congress the power “to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

That year Congress enacted the income tax that is the direct ancestor of today’s system. It started with a 1% normal tax on net income. Graduated surtaxes raised the top combined rate to 7%, with the highest surtax of 6% applying to incomes above $500,000. Personal exemptions were generous ($3,000 for a single filer, $4,000 for a married couple), so fewer than 1% of Americans owed any income tax at first.

States moved in the same direction. Wisconsin adopted the first effective modern state income tax in 1911, and many other states followed in later decades.

War, depression and the mass income tax

World War I turned a small tax into a major revenue source. The Revenue Act of 1917 and the Revenue Act of 1918 raised the top rate sharply, to 77% for 1918. Rates came down in the 1920s, then rose again during the Great Depression.

The 1930s also added a second major federal tax. The Social Security Act of 1935 created a payroll tax shared by workers and employers to fund old-age benefits, with collections beginning in 1937. Medicare, created in 1965, added its own payroll tax. For many workers today, payroll taxes are as significant as income taxes.

World War II made the income tax a tax on the middle class. The Revenue Act of 1942 lowered exemptions and raised rates, sharply increasing the number of people who had to file. Collecting from millions of new taxpayers once a year was impractical, so the Current Tax Payment Act of 1943 required employers to withhold tax from wages, the system workers still configure today through Form W-4. The Individual Income Tax Act of 1944 introduced the standard deduction, which let taxpayers subtract a set amount instead of itemizing. The top marginal rate reached 94% for 1944 and 1945.

High top rates continued for years after the war. The top rate stood at 91% for most of the 1950s, although few taxpayers paid it because it applied only to very high incomes and many deductions were available. The Revenue Act of 1964, proposed under President Kennedy and signed by President Johnson, cut the top rate to 70%.

Modernizing tax administration

The agency behind the system also evolved. The Bureau of Internal Revenue was renamed the Internal Revenue Service in 1953. The IRS introduced its first toll-free telephone line for taxpayer questions in 1965. Electronic filing began in 1986 on a limited basis, and from 1992 taxpayers who owed a balance could also file electronically. E-filing has since become the standard way Americans submit their returns, most of them on Form 1040, the individual return that dates back to the 1913 law.

Major tax reforms since the 1960s

The Alternative Minimum Tax (1969)

In 1969, Congress learned that a small number of high-income households had used combinations of exclusions, deductions and credits to pay little or no federal income tax. Its answer was the alternative minimum tax, a parallel calculation with fewer preferences. Taxpayers compute both the regular tax and the AMT and pay the higher amount. Because the AMT’s original exemption was not indexed for inflation, it gradually reached into the upper middle class, which led to repeated “patches” by Congress and, later, permanent inflation indexing.

The Economic Recovery Tax Act (1981)

Signed by President Reagan, this law cut the top individual rate from 70% to 50% and began indexing tax brackets for inflation, so that rising prices alone would no longer push people into higher brackets.

The Tax Reform Act (1986)

The Tax Reform Act of 1986 is widely regarded as the most sweeping overhaul of the modern income tax. It collapsed the rate structure to two main brackets, 15% and 28%, and paid for the lower rates by eliminating many deductions and shelters. It taxed capital gains at the same rate as ordinary income, ending their preferential treatment until later laws restored it (see short-term vs. long-term capital gains). Passive activity loss rules shut down a shelter industry that let investors offset wages with paper losses from real estate and other partnerships, and a broader AMT reached more high-income taxpayers.

Rate increases and cuts: 1990 to 2012

The low rates of 1986 did not last. Budget laws in 1990 and 1993 added higher brackets, and the top rate reached 39.6% in 1993. Tax cuts signed by President George W. Bush in 2001 and 2003 lowered the top rate to 35% and reduced taxes on capital gains and dividends. Those cuts were temporary. The American Taxpayer Relief Act, passed at the start of 2013 to resolve the expiration (often dated to 2012), kept the lower rates for most taxpayers but restored the 39.6% top rate for the highest earners.

The Tax Cuts and Jobs Act (2017)

President Trump signed the Tax Cuts and Jobs Act in 2017. For individuals, it nearly doubled the standard deduction and lowered most rates. The 15%, 25%, 28% and 33% brackets became 12%, 22%, 24% and 32%, and the top rate fell from 39.6% to 37%. In exchange, it reduced the cap on mortgage debt eligible for the interest deduction, limited the state and local tax (SALT) deduction to $10,000, eliminated many miscellaneous itemized deductions and suspended personal exemptions. On the business side, it cut the corporate rate from 35% to a flat 21%.

Many of the individual provisions were written to expire after 2025, while the corporate rate cut was permanent. Congress later acted to preserve several key individual provisions, including the lower rates and the larger standard deduction.

The Inflation Reduction Act (2022)

The Inflation Reduction Act of 2022 focused on energy and enforcement more than on individual rates. It created and expanded tax credits for clean energy, electric vehicles and energy-efficient home improvements, imposed a 15% minimum tax on the financial-statement income of very large corporations and increased IRS funding. Energy credits created by the law have since been targets for repeal or reduction as Congress extended other tax provisions.

Excise and “sin” taxes

Excise taxes are the oldest federal internal taxes, going back to the 1791 whiskey tax. An excise tax applies to the sale of a specific product or activity rather than to income. It is usually paid by the producer, importer, wholesaler or retailer, which then builds the cost into the price consumers pay.

Today’s best-known federal excise taxes apply to alcohol, tobacco and gasoline, with others on items such as airline tickets and certain health insurance arrangements. The federal tax on cigarettes is about $1 a pack, and beer and wine are generally taxed at lower rates than distilled spirits.

Taxes on alcohol and tobacco are often called “sin taxes” because they both raise revenue and discourage consumption, particularly among young people. The revenue is modest: in fiscal 2023, federal excise taxes brought in $75.8 billion, about 1.7% of $4.4 trillion in total federal tax receipts. Gasoline excise taxes mainly fund highway and transit spending through the Highway Trust Fund.

How the tax burden has changed over time

Two longer-term shifts stand out. Top rates swung widely, but rates alone do not show what people actually paid, since deductions, exemptions and bracket thresholds changed alongside them. And federal revenue moved from tariffs and excises before 1913 to individual income and payroll taxes, which now provide the large majority of federal receipts. Each major law responded to a specific pressure, such as war costs, a court ruling, perceived loopholes, deficits or downturns. That is why the code keeps changing, and why provisions written as temporary, from the Bush cuts to the TCJA, so often become the next round of legislation.

The Bottom Line

Anyone who files a return or follows tax policy can see that today's rules grew out of specific pressures such as wars, court rulings, deficits and loopholes. Rates, deductions and brackets have changed many times since 1913, and provisions written as temporary often return as the next fight in Congress. Taxpayers should expect the code to keep shifting and should check the current rules each year.