Foundations in Personal Finance: Middle School Edition for Homeschool
HISTORY OF THE FEDERAL INCOME TAX
Today, the months of January to April mark the annual tax season in America (The time in
which you receive your W-2, the federal record of your gross pay and your tax payments, from
your employer to the time taxes are due). But did you know that the federal income tax has
not always been a part of the American taxation system?
The financial requirements of the Civil War effort prompted the first American income tax in
1861. It was a progressive tax that was based on citizens' ability to pay. Only people above a
certain income level were expected to pay. The government relied on voluntary compliance
with the income tax. While some Americans complied, many did not. Less than 1 percent of
all households actually paid the tax. The federal income tax was repealed in 1872.
Congress passed a new version of the federal income tax in 1894. It required people to pay
a flat income tax rate of 2 percent. In 1895, the Supreme Court declared the income tax
unconstitutional because it violated the part of the Constitution that requires any direct tax
to be divided among the states according to population.
By the turn of the twentieth century, the American economy had grown as a result of
industrialization and modernization. The then progressive government supported more
programs than ever before. With industrialization, a small section of the population became
wealthy, but many remained poor.
In 1909, Congress proposed an income tax that would not be based on the population of the
states. Ratification of the Sixteenth Amendment in 1913 made the income tax constitutional,
which allowed the federal government to tax citizens' incomes directly.
The federal income tax code is often criticized for being extremely complex and even unfair.
Some Americans argue that the Sixteenth Amendment should be repealed. Agree with them
or not, the federal income tax persists as a part of our collective reality.
Chapter 3: Lesson 2 Activity
Tax Season in the US