Until the Civil War, federal revenues came from relatively low tariff rates imposed on a broad base of imported goods and from excise taxes. However, tariffs and excise taxes could not support escalations in government spending caused by the Civil War. Drawing on the example of the British Parliament’s adoption of an income tax in 1799 to help finance the Napoleonic Wars, the U.S. Congress adopted the first federal income tax in 1861 to partially finance the Civil War. Legislators regarded the war-motivated income tax as an indirect tax because neither real nor personal properties were taxed directly. The constitutionality of the tax was not challenged, and it expired in 1872.
During the post-Civil War years, high tariffs, often established to protect selected industries from foreign competition, and excise taxes were the major sources of revenues. By the early 1890s, tax structure was a political issue, with debate centering on the equity of the tax burden. In 1894, with strong Democratic support, a modest income tax was adopted. The first $4000 of income was exempt from taxation, and the initial tax rate was 2 percent. The prevailing view was that this tax would apply to high-income taxpayers and corporations without extending to the wages and salaries of working people.
In 1895, the U.S. Supreme Court declared the income tax unconstitutional in the case of Pollock v. Farmers’ Loan and Trust Co. on the basis that it was a direct tax. Article I, Section 9 of the original U.S. Constitution provided that ‘‘No capitation, or other direct tax shall be laid, unless in proportion to the census.’’ After the income tax was declared unconstitutional, Democrats began to introduce constitutional amendments to permit it. By the early 1900s, political support had broadened to include progressive Republicans. The Sixteenth Amendment, which legalized an income tax, was submitted to the states in 1909 and ratified in 1913. At this time, roughly 2 percent of American households paid the new tax.
