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The US had few taxes in its beginning, and was generally an unregulated republic.

From 1791 to 1802, the United States government had limited internal taxes on vices and specialty including distilled spirits, carriages, refined sugar, tobacco and snuff. Additional taxed items were property sold at auction, corporate bonds, and slaves. The War of 1812 brought the nation’s first sales taxes on these additional items: gold, silverware, jewelry, and watches.

In 1817 Congress disbanded all internal taxes, relying on tariffs on imported goods to provide funds for running the federal government.

In 1862, during the Civil War effort, Congress enacted the nation’s first income tax law. It was based on the principles of graduated, or progressive, taxation and of withholding income at the source. During the Civil War, a person earning from $600 to $10,000 per year paid tax at the rate of 3%. Those with incomes of more than $10,000 paid taxes at a higher rate. Additional sales and excise taxes were added, and an “inheritance” tax was created.

The Act of 1862 established the office of Commissioner of Internal Revenue. The Commissioner was given the power to assess, levy, and collect taxes, and the right to enforce the tax laws through seizure of property and income and through prosecution. The powers and authority remain very much the same today.

In 1866, internal revenue collections reached their highest point in the nation’s 90-year history—more than $310 million. This was the highest revenue amount until 1911.

In 1868, Congress again focused its taxation efforts on tobacco and distilled spirits and eliminated the income tax in 1872. It had a short-lived revival in 1894 and 1895. In the latter year, the U.S. Supreme Court decided that the income tax was unconstitutional because it was not apportioned among the states in conformity with the Constitution.

In 1913, the 16th Amendment to the Constitution made the income tax a permanent fixture in the U.S. tax system. The amendment gave Congress legal authority to tax income and created a revenue law that taxed incomes of both individuals and corporations. The Internal Revenue Service was now a part of the US Federal Government and

During 1918, annual internal revenue collections for the first time passed the billion-dollar mark, rising to $5.4 billion by 1920. With the advent of World War II, employment increased, as did tax collections—to $7.3 billion.

1943 – The withholding tax on wages was introduced and was instrumental in increasing the number of taxpayers. 60 million US citizens were paying taxes and tax collections rose to $43 billion by 1945.

 

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