A Brief, Enlightening History of the U.S. Income Tax Wars

Sometimes rates have been as high as 94 percent. Sometimes they’ve been as low as 0 percent. Here’s the whole roller coaster of a story.

A Brief, Enlightening History of the U.S. Income Tax Wars

No income tax! — This cartoon from 1894 depicts a scene from an income tax office during a period when the U.S. had no income tax.

Income tax is a hot topic in the United States as the left and right sides of the government seem to be in a perpetual battle as to who should foot the majority of the bill for running the country. In the simplest terms, many on the right want lower income taxes, believing giving the rich and businesses tax cuts will help money fall from their pockets into more people’s pockets, while the folks on the left generally support higher taxes to fund social programs and the government in general. Some say taxing the rich up to 70 percent is the only fair way to support the U.S. government.

This battle over taxation isn’t a new one. It’s been an ongoing struggle since the Civil War, as tax rates have risen, fallen and even outright disappeared many times throughout the centuries.

Just how often has it changed? What follows is a timeline of the crazy rollercoaster ride that has been the U.S. income tax code.

Note: In years when the income tax code varied by filing status, we used the filing status of married filing separately.

July 4, 1776 - May 30, 1862

Ah, the good old days. From July 4, 1776 through May 30, 1862 — nearly 86 glorious years — Americans lived free of federal income tax. Sure, there were taxes on the local level, but Uncle Sam hadn’t crammed his hand in workers’ pockets yet.

While this was a wonderful time for American workers, the Civil War broke out in 1861, putting a strain on government finances. This sparked the first-ever federal income tax in the U.S.

June 1, 1862 - June 29, 1864

With the Civil War draining government coffers, Congress passed the Revenue Act of 1862 on June 1, 1862, creating the first-ever federal income tax.

This law required U.S. citizens to pay the government taxes based on their yearly income. There was no tax on incomes under $600, but folks earning $601 to $10,000 paid 3 percent. The wealthiest people — those earning more than $10,000 per year — paid 5 percent.

The 1862 law was actually the second wartime effort to create in income tax. The Revenue Act of 1861 attempted to tax those earning more than $800 at 3 percent as well, but it wasn’t enforceable.

June 30, 1864 - 1866

The concept of the rich paying “their fair share” is not a new thing. It dates back to the first modification of the income tax code in 1864. At this time, there were ongoing debates about the Civil War being the poor fighting the rich man’s war, which lead to tax reform.

On June 30, 1864, Congress passed the Revenue Act of 1864 that created new tax brackets. There was still no income tax up to the first $600, but workers paid 5 percent tax on income between $600 and $5,000, 7.5 percent on income between $5,001 and $10,000, and 10 percent on anything over $10,000.

1867 - 1869

In 1867, the Civil War had been over for nearly two years, and the need for war-supporting revenue had dwindled. Critics of the tax code rose up and pushed Republican lawmakers to eliminate the progressive tax structure and introduce a new flat tax.

This new law put a flat 5 percent income tax on all income over $1,000 per year.

1870 - 1872

With even less demand following the Civil War and post-war rebuilding, Congress voted in 1870 to slice the tax rate in half. This dragged the income rate down to just 2.5 percent on all income over $1,000 per year.

1873 - 1912

With all the post-war rebuilding complete, lawmakers allowed the Civil War tax laws to expire, bring in nearly 40 years of no federal income tax from 1873 through 1912. There was one hiccup in this four decades of no taxes, and that was the introduction of the Wilson-Gorman Tariff Act that included a 2 percent tax on all income over $4,000 per year.

This act spurred the Pollock v. Farmers' Loan & Trust Company Supreme Court case that argued taxation of income was an unconstitutional direct tax. The Supreme Court agreed it was unconstitutional on April 8, 1895, making the U.S. free of federal income taxes again.

1913 - 1915

World War I was looming, and the government knew it would need a financial shot in the arm to support its allies in the war. This brought about the passage of the 16th Amendment to the Constitution, which read: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.” This effectively overruled the 1895 Supreme Court ruling.

Once ratified in 1913, Congress went to work creating the 1040 form Americans know so well and seven new income tax brackets. These brackets ranged from 1 percent on first $20,000 to 7 percent on $500,001 and up.

The U.S. wouldn’t see fewer than seven tax brackets again until 1987. Things got very complex, but we’re not going to follow all of the twists and turns. Just the major ones. Still, keep that seat belt on.

1916

In 1916, the U.S.’s entry into World War I created an even greater need for revenue and the passage of the Revenue Act of 1915. This resulted in even more tax brackets and significant increases for the ultra-wealthy population.

The 14 tax brackets ranged from 2 percent on the first $20,000 to 15 percent on $2,000,001 and up.

1917

In 1917, Congress got a taste of just how expensive a global-scale war can be. This resulted in the passage of the War Revenue Act, which ushered in massive tax hikes and cut tax exemptions in an effort to maintain our overseas wartime efforts. These massive tax increases played a huge role in the 1917 U.S. budget in surpassing the combined budget from 1771 through 1916.

The 21 new tax brackets ranged from 2 percent on the first $2,000 to 67 percent on all income over $2 million.

1918

There have been recent talks of a 70 percent tax hit on the wealthy, and proponents of this change often point back to this era as a reference. With WWI efforts still in full swing, Congress passed the Revenue Act of 1918 that segmented the tax brackets even more and stuck Uncle Sam’s hands deeper into everyone’s pockets, especially the ultra-wealthy population.

The 56 tax brackets in 1918 began at 6 percent for the first $4,000 in yearly income and rose to 77 percent on all income over $1 million.

1919 - 1921

With WWI behind us and the war against alcohol — aka prohibition — on the horizon, the tax rates fell slightly with the passage of the Revenue Act of 1919.

The 56 tax brackets from 1919 through 1921 began at 4 percent for the first $4,000 in yearly income and rose to 73 percent for income over $1 million.

1922 - 1923

In the 1920s, Treasury Secretary Andrew Mellon argued the high taxation of the rich leads them to put their huge income in sheltered investments, keeping it away from the 60-plus percent tax rate. This helped lead to the Nov. 23, 1921 passage of the Revenue Act of 1921 that eliminated the massive tax rates on the super-wealthy starting in 1922, but it had little impact on those making $200,000 per year or less.

The 50 tax brackets in 1922 started at 4 percent for the first $4,000 of yearly income and rose to 58 percent for any income over $200,000. This meant cuts of up to 15 percentage points for the ultra-wealthy.

1924

In 1924, Andrew Mellon continued pushing for dramatic tax cuts to help spur the economy and lift all boats with the rising tide of the wealthy. Unlike the previous cuts, the 1924 Revenue Act included deeper tax cuts for middle-class workers.

The 43 tax brackets in 1924 started at just 2 percent for the first $4,000 in income — a 50 percent reduction — and topped out at 46 percent for people earning more than $500,000.

1925 - 1931

In late-1925, Congress introduced yet another massive tax cut that heavily favored the wealthy. Known as the Revenue Act of 1926, these cuts were enacted in Feb. 1926 but applied retroactively to 1925.

In this era, 23 tax brackets started from 1.5 percent for the first $4,000 in income and rose to 25 percent for people who earned over $100,000.

1932 - 1935

With American reeling from the Great Depression, congress passed massive tax hikes across the board in hopes of balancing an out-of-whack budget stemming from the financial collapse of 1929 and bringing more revenue into government coffers. This resulted in the federal government more than doubling most of the marginal tax rates, piling on the tax brackets — back up to 55 — and pushing heaviest on the wealthy.

During this era, the marginal tax rate started at 4 percent for the first $4,000 in income and rose to 63 percent for all income over $1 million.

1936 - 1941

Deep in the throes of The Great Depression, the Roosevelt administration saw federal receipts dwindle and recognized the need to increase taxes even further on the wealthy. The Revenue Act of 1936 did just that by introducing huge tax hikes on the wealthy while keeping taxes lower for the have-nots.

On the bottom end of the 31 brackets, the tax rate began at 4 percent for the first $4,000 in income and rose 81 percent for anything over $5 million.

1942 - 1963

Following the bombing of Pearl Harbor on Dec. 7, 1941, the U.S. ran head first into WWII to help the Allied Forces. The Roosevelt administration quickly found out what Lincoln learned during the Civil War: War is expensive. In an attempt to finance the war efforts, congress passed the Revenue Act of 1942 on Oct. 21.

While the tax hike affected everyone, the poorest saw the biggest percentage increases. The rates across 24-26 brackets began at 19 percent for the first $2,000 in income and rose 2 to 5 percentage points for every $2,000 to $10,000 income until hitting 83 percent at $100,000. At the top end, families earning more than $100,000 saw their tax rates fluctuate between 85 and 94 percent.

Despite WWII ending in 1945, these sky-high taxes remained through 1963.

1964 - 1981

President John F. Kennedy was vocal about trimming taxes, giving everyone — including the wealthy — more of their hard-earned dollars back. President Kennedy was assassinated before he could get the job done, but his replacement, Lyndon Johnson, took up the mantle and helped push through the bipartisan Tax Reduction Act on Feb. 26, 1964.

This act included sweeping cuts across the board, but the largest cuts went to the wealthiest. At the bottom end of the 26-33 brackets, the tax rates began at 16 percent for the first $500 in income and rose to 77 percent for income over $200,000. That’s a whopping 14-percentage-point cut from 1963’s 91 percent rate for more than $200,000.

More cuts came in 1965, as the bottom rate fell to 14 percent for the first $500 and the top rate dropped to 70 percent for anyone earning more than $100,000. In 1977, new tax laws allowed the first $1,600 of income to be tax-free.

1982 - 1986

Aqua Net, Deloreans and a talking Trans Ams named K.I.T.T. weren’t all the early-1980s were known for. They were also known for actor-turned-president Ronald Reagan begrudgingly signing the Tax Equity And Fiscal Responsibility Act of 1982. This act went completely against everything President Reagan stood for, as it closed many loopholes the wealthy and businesses used to pay fewer taxes while also lowering the marginal tax rates for the lowest earners and cutting spending. This new law helped spur the fastest economic growth in U.S. history, according to the Bureau of Economic Analysis.

This new tax carried on the previous law’s 0 percent tax rate on the first $1,700 in income. This rose to 12 percent for anything above $1,700 and through $2,750 and capped off at 50 percent on all income over $42,800. If you do the math, that is a 9- to 20-percentage-point reduction compared to the previous year.

The upper income threshold in the 50 percent bracket got progressively higher throughout the years, topping out at $87,625 in 1986. Overall, during these years the number of tax brackets fell to 14.

1987 - 1992

On Oct. 22, 1986, Congress passed the second of two Democrat-sponsored Reagan-era tax cuts. Known as the Tax Reform Act of 1986, this law not only marked one of the biggest simplifications of the tax code in modern history, but it was also the first time the taxes on the lowest earners went up while taxes on the wealthiest went down.

This new law was the end of the 0 percent tax bracket, as the lowest rate was 11 percent on all income up to $1,500. It then rose to 15 percent for $1,501 to $14,000 in income, 28 percent for $14,001 to $22,500, 35 percent for $22,500 to $45,000, and 38.5 percent for anything over $45,000.

From 1988 through 1990, there were only two main tax brackets — 15 percent and 28 percent — but there was a 33 percent tax bubble that applied extra tax on yearly income between $35,950 and $123,570. This tax bubble was actually a 5 percent surtax on the 28 percent rate and acted as a phase-out tool to eliminate the benefits of the highest earners seeing the first $30,950 of their income taxed at just 15 percent. All income over $123,570 went back to the normal 28 percent rate.

1993 - 2000

In 1992, a saxophone-playing, smooth-talking young lad by the name of Bill Clinton took office under the pledge to cut middle-class taxes to spur the economy. Instead, President Clinton immediately turned his focus to our teetering economy and massive debt.

To stabilize our economy and reduce debt, Clinton and Congress narrowly pushed through the 1993 Omnibus Budget Reconciliation Act that left most middle- and low-income earners’ taxes steady but increased the amount wealthier Americans and corporations paid.

The five tax brackets began at 15 percent for the first $18,450 in earnings and rose to 28 percent for income between $18,451 and $44,575. Folks earning $44,576 to 70,000 paid 31 percent.

While the above brackets are similar to the previous year’s numbers, there were two new upper brackets. Folks who earned $70,001 to $125,000 paid 36 percent tax, and workers earning more than $125,000 paid 39.6 percent.

2001 - 2017

George W. Bush — the son of former president George H. W. Bush — took office in 2001 and immediately went to work trying to pull us from an economic recession.

e and Congress pushed through the Economic Growth and Tax Relief Reconciliation Act of 2001 that reduced taxes across the board, increased child tax credits, expanded the earned income tax credit and more. In 2003, the law was refreshed, further reducing tax rates.

These tax cuts rolled into the Obama administration, and by 2012, tax rates started from 10 percent on the first $8,700 of income and rose to 15 percent from $8,7001 to $35,350. The rates then rose to 25 percent at $35,351, 28 percent at $71,351, 33 percent at $108,726, and 35 percent from $194,176 and higher.

Barack Obama and Congress made many of the Bush-era tax cuts permanent with the American Taxpayer Relief Act of 2012.

This new law retained all six of the Bush-era income tax rates, but the income brackets shifted upward. At the lowest end, the 10 percent tax rate income cap jumped $225 to $8,925. At the highest end, the 33 percent income tax rate income cap jumped $5,000 to $199,175. The only hard changes were a $225,000 cap on the 35 percent tax bracket and a new 39.6 percent tax bracket for those who earned more than $225,000.

2018 - Present

President Donald Trump and the Republican-majority Congress passed the Tax Cuts and Jobs Act in 2017 that went into effect in the 2018 fiscal year. This law not only eliminated many of the time-consuming itemized deductions individual filers had to go through, but it also nearly doubled the standard deduction, doubled the child tax credit and raised the phase-out income for the child tax credit.

This law also brought in lower taxes rates for most Americans. Under the reformed law, the rates are 10 percent up to $9,525, 12 percent from $9,526 to $38,700, 22 percent from $38,701 to $82,500, 24 percent from $82,501 to $157,500, 32 percent from $157,501 to $200,000, 35 percent from $200.001 to $300,000, and 37 percent from $300,001 and up.