US Federal Government’s First Personal Income Tax (1861)

The US federal government imposed the first personal income tax, on August 5, 1861, to help pay for its war effort in the American Civil War – (3% of all incomes over US$800).

It was only in 1894 that the first peacetime income tax was passed through the Wilson-Gorman tariff. The rate was 2% on income over $4000 (equivalent to $110,000 in 2016), which meant fewer than 10% of households would pay any. The purpose of the income tax was to make up for revenue that would be lost by tariff reductions.

In 1913, the Sixteenth Amendment to the United States Constitution made the income tax a permanent fixture in the U.S. tax system. Congress re-adopted the income tax in 1916, levying a 1% tax on net personal incomes above $3,000 and a 6% surcharge on incomes above $500,000. By 1918, the top rate of the income tax was increased to 77% on income over $1m to finance World War I.