First Income Tax: Congress Finances the Civil War

The Union was running out of money. By the summer of 1861, the Civil War was consuming resources at a rate the federal government had never faced, and traditional revenue sources — primarily tariffs and land sales — could not cover the cost of raising, equipping, and feeding the largest army in American history. On August 5, 1861, President Lincoln signed the Revenue Act of 1861, which included the first federal income tax in American history: a flat 3 percent levy on all annual incomes exceeding $800. The $800 threshold was not arbitrary. It was roughly equivalent to the average annual income of a middle-class family, meaning the tax fell primarily on the wealthy. Congress was explicit about the reasoning: those who benefited most from the preservation of the Union should bear a proportional share of the cost of saving it. The practical revenue from the 1861 act was minimal, however, and it was replaced by the more aggressive Revenue Act of 1862, which introduced a graduated rate structure and established the Bureau of Internal Revenue to collect it. The income tax was understood from the start as a wartime emergency measure. Federal revenue had traditionally come from customs duties and excise taxes, and the idea of the government directly taxing citizens' earnings was considered a radical departure from American fiscal tradition. Several constitutional questions about the tax's legality simmered beneath the surface but were suppressed by wartime urgency. The tax rates increased as the war continued, reaching 10 percent on incomes over $10,000 by 1864. After the war ended, the income tax was gradually reduced and finally repealed in 1872. But the precedent had been established. When Congress attempted to revive the income tax in 1894, the Supreme Court struck it down as unconstitutional. The Sixteenth Amendment, ratified in 1913, settled the question permanently, establishing the federal government's power to tax income. Every April 15 filing traces its lineage back to the desperate fiscal arithmetic of the Civil War's first summer.