The Past and Present of the Federal Income Tax

Each year taxpayers prepare themselves to endure the tedious process of reporting their income to the International Revenue Service (IRS). Traditionally, the deadline falls on April 15, but this past spring was an anomaly due to the federal holiday, Emancipation Day. The electronic process of correctly claiming one’s income, deductions, and credits is relatively progressive, but the income tax itself dates back over a century.

The first traces of a federal income tax occurred during the Civil War when President Lincoln signed the Revenue Act of 1861 into law. The act was motivated by the need to fund the skyrocketing expenses of war, and called for a three percent tax on annual incomes over $800.

The following year, the Revenue Act was adjusted, and the income tax transformed into a graduated tax consisting of three tiers. The first tier was a no tax collection for U.S. residents whose annual incomes were less than $600. Followed by the second tier: U.S. residents whose annual incomes were greater than $600 and less than $10,000 owed a three percent tax of total income. Culminating with the third tier: U.S. residents whose annual incomes were greater than $10,000 owed a five percent tax of total income. The Civil War income taxes were repealed a decade later.

In 1894, Congress enacted a flat rate federal income tax, attached to the Wilson-Gorman Tariff Act. This was the first time the federal income tax was imposed during peacetime. The act called for a two percent tax on income over $4,000, which at that time accounted for fewer than ten percent of U.S. households. The tax was ruled unconstitutional a year later by the U.S. Supreme Court in the Pollock v. Farmers’ Loan & Trust Company hearing. The verdict stated taxes not apportioned by state population as unconstitutional.

Following this ruling, the income tax once again made history when Congress passed the 16th amendment on July 2, 1909 and ratified it February 3, 1913. The 16th amendment states that:

'The Congress shall have 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.'

The same year the 16th amendment was ratified, lawmakers also introduced the first 1040 form, which U.S. taxpayers still use today to file an annual income tax return. During Franklin D. Roosevelt’s presidency, annual income tax rates increased under the Revenue Act of 1942. Following this legislation, FDR also imposed the Current Tax Payment Act, which requires employers to withhold taxes from employees’ wages and remit them quarterly.

Nearly a decade later, President Eisenhower oversaw The Bureau of Internal Revenue transform into the IRS. Following the shift in nomenclature, the IRS changed the annual filing deadline for individual tax returns from March 15 to the current date of April 15.

As time progressed so did technology, and in 1986 taxpayers had the capability to participate in limited electronic filing – full electronic filing capacity took place six years later in 1992. The electronic system created in 1992 mirrors the current process taxpayers undergo today. Although the April 15 deadline and corresponding electronic system are relatively recent, the U.S. federal income tax has played a fundamental and rich role in U.S. history.