A Brief History of Taxes in the U.S.

Reviewed by Lea D. UraduFact checked by Suzanne KvilhaugReviewed by Lea D. UraduFact checked by Suzanne Kvilhaug

America’s first citizens were subject to very few taxes. As time went on, however, more levies were added, including federal income tax, the alternative minimum tax, corporate tax, estate tax, and Federal Insurance Contributions Act (FICA) taxes. Some have increased. Others were repealed, only to be added again.

Key Takeaways

• The Constitution gives Congress the power to impose taxes and other levies on the general public.
• The Civil War led to the creation of the first income tax in the U.S.
• The federal income tax still in place in 2024 was officially enacted in 1913.
• Many of the taxes we pay were created in the 1920s and 1930s, including the estate tax, gift tax, and Social Security taxes.
• Income tax rates used to apply to everyone based on income, regardless of their filing status (single, married, and heads of households).

America Before Income Taxes

Taxes have been around for thousands of years, especially income taxes, but that wasn’t always the case in the United States. The country was income-tax-free in its infancy because there was no federal government to establish one. The British government imposed a variety of taxes on the colonists, however. These included a head tax, real estate taxes, and the infamous tea tax that led to the Boston Tea Party.

After the Revolutionary War, the Constitution gave Congress the power to impose taxes and other levies on the general public after the Revolutionary War. States were responsible for collecting and passing them on to the federal government. Most of these were excise taxes imposed on specific goods or services such as alcohol and tobacco. The government also tried direct taxation: taxing things that an individual owned. That didn’t last and the government went back to collecting excise taxes.

Income Taxes

The Civil War led to the creation of the country’s first income tax and the first version of the Office of the Commissioner of Internal Revenue, what we now know as the Internal Revenue Service (IRS). This office took over the responsibility of collecting federal taxes, thus relieving individual states of the duty. Excise taxes were also added to almost every commodity possible: alcohol, tobacco, gunpowder, and even tea.

The federal income tax as we know it was officially enacted in 1913. Corporate income taxes were enacted in 1909.

Income Tax Rates Then and Now

Tax rates tend to change, often rising. The marginal tax rate was 1% on income of $0 to $20,000, 2% on income of $20,000 to $50,000, 3% on income of $50,000 to $75,000, 4% on income of $75,000 to $100,000, 5% on income of $100,000 to $250,000, 6% on income of $250,000 to $500,000, and 7% on income of $500,000 and up when the federal income tax was implemented to help finance World War I in 1913.

Tax rates were the same for everyone who filed taxes and there were no filing statuses. All taxpayers paid the same rate whether they were single, married, or heads of households. That changed over time. Tax rates increased considerably and then dropped. The highest marginal tax rate is 37% as of 2024. Modern tax rates also depend on filing status.

The highest U.S. marginal tax rate was 94% in 1944 and 1945.

Other Taxes

The federal government has created numerous other taxes over the years, including:

• Estate tax
• Gift tax
• Social Security tax
• Alternative Minimum Tax
• Corporate Alternative Minimum Tax

The first estate tax was enacted in 1797 to fund the U.S. Navy. It was repealed but reinstituted over the years, often to finance wars. The modern estate tax as we know it was implemented in 1916.

Multiple taxes were created in the 1920s and 1930s. The gift tax came about in 1924.

President Franklin Roosevelt signed the Social Security Act in 1935. The government first collected Social Security taxes in January 1937, although no benefits were paid out until January 1940.

The alternative minimum tax (AMT), a type of federal income tax, wasn’t enacted until 1978. This parallel system uses a separate set of rules to calculate taxable income after allowed deductions. It’s designed to prevent higher-income taxpayers from avoiding their fair share of taxes.

Congress passed a corporate alternative minimum tax (CAMT) in 2022, which began operating in 2023. It applies to corporations with average annual adjusted book income over $1 billion for three consecutive years.

Note

Sales taxes have been imposed by states but not the federal government. The first sales tax was enacted in West Virginia in 1921. Eleven other states followed suit in 1933. Eighteen more states had a sales tax in place by 1940. Alaska, Delaware, Montana, New Hampshire, and Oregon are the only states without a sales tax as of July 2024.

Sin Taxes 

Sin taxes are excise taxes imposed on products that are considered to be harmful to humans and by extension to society.

Federal tobacco taxes were first enacted in 1794 but they came and went over the years until 1864. A box of 20 cigarettes was taxed at 0.8 cents that year. The rate is $1.01 per pack in 2024.

States also tax cigarettes. Missouri taxes them at a low of $0.17 per pack in 2024. New York taxes them at a high $5.35 per pack.

Important

Cigarette and alcohol taxes are built into the prices of these goods so many Americans don’t realize they’re paying them.

Spirits, wine, and beer are taxed by both the federal and state governments. Each state sets its own tax rates for each type of alcohol.

The top federal excise tax rates are $13.50 per proof gallon of spirits, $1.07 to $3.15 per gallon of wine, depending on the wine’s alcohol content, and $18 per 31-gallon barrel of beer.

• The lowest state tax rate for spirits in 2024 was $2.00 per gallon in Missouri and the highest rate was $36.55 per gallon in Washington.
• The lowest state tax rate for wine in 2024 was $0.20 per gallon in California and Texas. The highest was $2.50 per gallon in Alaska.
• Beer was taxed at a low of $0.02 per gallon in Wyoming in 2024 and a high of $1.29 per gallon in Tennessee.

The government began taxing tobacco and alcohol to pay back the debts it incurred during the Revolutionary War, but social purposes have long influenced the taxation of these items as well. The higher the tax, the more likely Americans are to be discouraged from consuming tobacco and alcohol.

But tobacco and alcohol taxes are flat taxes so they fall disproportionately on the poor. It’s mostly low-income individuals who are discouraged from using tobacco and alcohol because other income groups can more easily afford to pay the taxes.

Gasoline Taxes

Federal excise taxes on gasoline were implemented in June 1932 under President Herbert Hoover as part of the Revenue Act of 1932. This act was designed to increase the amount of money the government had at its disposal. The gasoline tax was expected to raise $150 million in tax revenue for the government.

Gas was taxed at a rate of $0.01 per gallon in 1932. The tax rose to 18.4 cents per gallon by 2024. State gasoline taxes and fees can tack on an additional cost, averaging 29.15 cents per gallon. The lowest gas tax is just four cents per gallon in Florida. The highest is 57.9 cents per gallon in California.

Investment Taxes

Taxing investment income might seem particularly counterproductive because investment is necessary for economic growth. However, that hasn’t stopped the government from including it under its wide umbrella of taxable income.

Capital gains taxes were enacted in 1913, along with the income tax. Dividend taxes were enacted in 1936 but they only lasted through 1939. They reappeared in 1954 and have persisted ever since.

When Did Americans Start Paying Income Tax?

The first personal income tax was imposed by Congress in 1861 to raise revenue for the Civil War. Congress repealed the tax in 1872 but the idea was brought back in the 16th Amendment to the Constitution, which established Congress’ right to impose a federal income tax.

The amendment was passed by Congress in 1909, ratified by the states, and took effect on Feb. 25, 1913. Less than 1% of the population paid income taxes that first year at a rate of 1% of net income.

What Are Sin Taxes?

Sin taxes are levied on specific goods and services at the time of purchase. These items are taxed because they are or are thought to be harmful or costly to society. Tobacco products, alcohol, and gambling ventures are examples of items on which these taxes are levied. Sin taxes seek to deter people from engaging in socially harmful activities and behaviors.

What Is the Alternative Minimum Tax?

The alternative minimum tax (AMT) is designed to ensure that taxpayers who earn above a certain threshold pay their fair share of taxes. The AMT places a floor on the percentage of taxes that a filer must pay to the government no matter how many deductions or credits they may claim.

The IRS exempts income from the AMT up to a certain level and this amount adjusts annually with inflation. The AMT exemptions in 2024 are $133,300 for married individuals filing jointly and $85,700 for single filers.

The Bottom Line

History is full of tax rebellions. Taxes incited Americans to destroy three shiploads of British tea back in 1773. Alexander Hamilton‘s proposed excise tax on alcohol was enough to prompt the Whiskey Rebellion in Pennsylvania in 1791.

Tax rebellions didn’t continue but pressure to reshape taxes has produced laws periodically that reshape what Americans pay. Some of the largest changes came from 2017’s Tax Cuts and Jobs Act (TCJA). The U.S. saw major changes from legislation in 1981 and 1986 before that, and again in 1993 and 1997.

Many changes made by the TCJA end or expire in 2025 unless Congress acts to renew them.

Read the original article on Investopedia.