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Income Tax: Historical Perspectives

Income tax documents being manually sorted March 14, 1944. © BETTMANN/CORBIS

1799 to help finance the Napoleonic Wars, the U.S. Con- In 1895, the U.S. Supreme Court declared the
gress adopted the first federal income tax in 1861 to help income tax unconstitutional in the case of Pollock v. Farm-
finance the Civil War. Legislators regarded the war- ers’ Loan and Trust Co. on the basis that it was a direct tax.
motivated income tax as an indirect tax because neither Article I, Section 9 of the U.S. Constitution provided that
real nor personal properties were taxed directly. The con- “No capitation, or other direct tax shall be laid, unless in
stitutionality of the tax was not challenged, and it expired proportion to the census.” After the income tax was
in 1872. declared unconstitutional, Democrats began to introduce
During the post-Civil War years, high tariffs, often constitutional amendments to permit it. By the early
1900s, political support had broadened to include pro-
established to protect selected industries from foreign
gressive Republicans. The Sixteenth Amendment, which
competition, and excise taxes were the major sources of
revenues. By the early 1890s, tax structure was a political legalized an income tax, was submitted to the states in
issue, with debate centering on the equity of the tax bur- 1909 and ratified in 1913. At this time, roughly 2 percent
den. In 1894, with strong Democratic support, a modest of American households paid the new tax.
income tax was adopted. The first $4,000 of income was
exempt from taxation, and the initial tax rate was 2 per- MODIFICATIONS TO FEDERAL
cent. The prevailing view was that this tax would apply to INCOME TAX OVER TIME
high-income taxpayers and corporations without extend- Various aspects of the federal income tax have changed
ing to the wages and salaries of working people. since its inception.

376 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION