Cecily Zamora
The history of tax laws in the United States is a long and complex one, with the country's first tax laws being introduced in the 1760s as a colonial protest against British taxation. This led to the American Revolution, with the independent nation collecting taxes on imports, whiskey, and glass windows. States and localities collected poll taxes on voters and property taxes on land and commercial buildings. The US imposed income taxes during the Civil War in the 1860s, which were repealed in 1872. The Sixteenth Amendment was ratified in 1913, allowing Congress to levy an income tax on individuals and entities. Since then, there have been numerous changes and reforms to tax laws, with the most recent major reform being the Tax Cuts and Jobs Act (TCJA) in 2017.
| Characteristics | Values |
|---|---|
| Year of latest tax laws | 2025 |
| Name of latest tax laws | One Big Beautiful Bill Act |
| Previous tax laws | Tax Cuts and Jobs Act (TCJA) |
| Year of previous tax laws | 2017 |
| Year income taxes were first introduced | 1861 |
| Year income taxes were repealed | 1872 |
| Year income taxes were reintroduced | 1913 |
| Tax laws that were part of Jim Crow laws | Poll taxes |
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What You'll Learn
The Revenue Act of 1861
Tax laws have evolved over time, with the first income taxes introduced in the US during the Civil War. The Revenue Act of 1861, formally known as the Act of August 5, 1861, was a significant piece of legislation in US tax history. This Act, motivated by the need to fund the Civil War, imposed a flat tax of 3% on annual incomes exceeding $800 (equivalent to $27,997 in 2024 or $384,000 in 2021). The tax applied to all individuals residing in the US, regardless of the source of their income.
The Act was drafted by Congress under the leadership of Senator William Pitt Fessenden, the chair of the Senate Finance Committee. It faced considerable debate, with some viewing the income and property taxes as necessary evils to sustain the government. Despite the controversy, the bill was passed by Congress and signed into law by President Abraham Lincoln.
Additionally, the Act instituted a property tax on real estate, with the tax amount levied in proportion to each state's population. This Act laid the groundwork for the formation of the Internal Revenue Service on July 1, 1862, by establishing a system of tax districts, assessors, and collectors. However, the income tax provision of the Revenue Act of 1861 was short-lived, as it was repealed in 1862 and replaced with a more comprehensive bill in the Revenue Act of 1862.
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The 16th Amendment
> 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.
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The Tax Reform Act of 1986
The Act also made changes relating to employee stock ownership plans. It repealed the employee stock ownership tax credit for compensation paid or accrued after December 31, 1986. It also permitted the exclusion from the gross estate of a decedent of 50% of the qualified proceeds from a qualified sale of employer securities. The Tax Reform Act of 1986 also introduced the General Nondiscrimination rules, which applied to qualified pension plans and 403(b) plans for private sector employers.
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The Tax Cuts and Jobs Act (TCJA)
The TCJA made a series of concessions, including cutting tax rates across various income tax brackets. It lowered tax rates across income levels to reduce Americans' income tax burden and eliminated popular itemized deductions. The law created a single flat corporate tax rate of 21%, down from 35%, which was ten percentage points higher than the OECD average.
The TCJA impacted individuals based on their income level, filing status, and deductions. It permanently removed the mandate requiring individuals to purchase health insurance, a key provision of the Affordable Care Act. The Act also limited the mortgage interest deduction for married couples filing jointly to $750,000 worth of debt.
According to a 2017 report by the nonpartisan Tax Policy Center, the TCJA was expected to lower taxes by an average of $1,600 in 2018 and 2025. The top 20% of Americans by income were projected to receive roughly 65% of the tax savings, while the bottom 80% of taxpayers (income under $149,400) would receive 35% of the benefit in 2018 and 34% in 2025. However, by 2027, this group was expected to receive none of the benefits, with some even incurring costs.
The TCJA's provisions were temporary and set to expire at the end of 2025, with taxes reverting to the pre-TCJA rates from 2017. However, the "One Big Beautiful Bill" (OBBB) of 2025 included legislation to stop most of the tax laws from automatically reverting to the 2017 rates, making some of the TCJA provisions permanent.
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The Revenue Act of 1918
The history of tax laws in the United States dates back to the country's early days, with various tax acts and amendments shaping the taxation system over time. One significant piece of legislation in this regard was the Revenue Act of 1918, which played a crucial role in raising funds for World War I and had a lasting impact on the country's tax structure.
The key provisions of the Revenue Act of 1918 included a significant increase in income tax rates compared to the previous year. The bottom tax bracket was expanded but raised from 2% to 6%simplified tax structure by creating a single tax framework with a Normal Tax and a Surtax. This replaced the more complex system of "like normal tax" and "like additional tax" applied in previous years.
The top marginal tax rate was a notable aspect of the act, soaring to 77% for income above $1,000,000. This represented an increase from the previous top rate of 67% under the War Revenue Act of 1917, which had applied to income above $2,000,000. The Revenue Act of 1918 also applied to incomes for 1918, with the top normal tax rate reduced to 8% for 1919 and 1920, resulting in a marginal tax rate of 73%.
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Frequently asked questions
The US's first official federal income tax was the Revenue Act of 1861, predating the Sixteenth Amendment.
The Sixteenth Amendment was passed by Congress on July 2, 1909, and ratified on February 3, 1913.
The Sixteenth Amendment established Congress's right to impose a federal income tax.
The Tax Reform Act of 1986 was the first major tax reform after the Sixteenth Amendment. It made numerous changes, including taxing ordinary and capital gains income at the same rate.
The most recent significant change to the US tax system was the Tax Cuts and Jobs Act (TCJA), signed into law by President Trump in 2017. It included significantly increasing standard deductions and reducing personal income tax rates.
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