On August 5, 1861, President Abraham Lincoln signed the Revenue Act of 1861 into law, slapping a 3% flat tax on incomes over $800 to fund the Civil War.

That’s right-164 years ago, the federal government first dipped its hands into Americans’ wallets with an income tax. Prior to this, the federal government funded itself largely through tariffs .

Back in 1861, $800 was a hefty sum-about $27,997 in 2024 dollars. Despite that nominally small amount of annual income, it must be remembered that the United States was much more agrarian at the time. In other words, even though $30K (rounding up) isn’t a lot for annual income today, it was an enormous salary in 1861. So much so, that only about 3% of folks had to pay up .

This income tax was seen by Treasury Secretary Salmon Chase as a wartime necessity, not a permanent fixture. Secretary Chase had a difficult problem to solve: he needed money to fund the Union during the American Civil War, but he had limited options to pay for the war:

• Tariffs were raised, but those tariffs were seen as aggressive moves towards the United States’ trade partners, convincing some of those partners to trade with the Confederacy instead.
• Bonds were issued, but at the time it was common for bonds to be paid out with interest. For most of the war, Chase couldn’t afford to issue bonds that paid interest because that would be more money the United States would have to pay back at maturity.
• In addition to regular, short-term bonds, Chase tried selling long-term bonds-bonds that would mature in 20 or 30 years. While Chase was able to sell some of both types of bonds, they usually sold for below par, meaning the purchasers of the bonds didn’t have faith that the bond would mature and pay out, so they bought the bonds to trade them like stock.
• With Congressional approval, Chase could print money, inflating the currency and thus making it worth less. Not worthless-though that’s what happens during hyperinflation-but worth less than what it used to be worth, just like how, in recent times, the same nominal amount of money buys less groceries.
• Eventually, Legal Tender was issued. As presented to the American public, legal tender was effectively a 0% bond without a maturity date. You could redeem the currency at any time for gold, but people didn’t and eventually started using the notes as currency; I’ll have a special report on legal tender soon.

For more on Salmon Chase’s problems funding the American Civil War, check out Roger Lowenstein’s Ways and Means: Lincoln and His Cabinet and the Financing of the Civil War.

Little did anyone know the “modest” income tax would set the stage for more than a half-century of political battles, culminating in the 1909 drama that birthed the Sixteenth Amendment, which today lets Uncle Sam claim a chunk of your hard-earned cash.

The Civil War Cash Crunch

By 1862, Congress realized the 1861 tax wasn’t enough. The Revenue Act of 1862 replaced it, tweaking the rates to 3% on incomes between $600 and $10,000, and 5% on incomes above that . It also birthed the office of the Commissioner of Internal Revenue, a precursor to the abomination known as the IRS. These taxes were “temporary”, finally repealed a decade later under the Grant administration.

A Brief Resurgence and a Supreme Court Smackdown

Fast forward to 1894, when Democrats, under President Grover Cleveland, tried reviving the income tax with the Wilson-Gorman Tariff Act. This one targeted incomes over $4,000 with a 2% tax, aiming to offset tariff cuts. But in 1895, the Supreme Court, in Pollock v. Farmers’ Loan & Trust Co. struck it down, calling it an unconstitutional “direct tax” that needed to be apportioned by state population. The ruling slammed the brakes on income tax dreams, but the Progressive Era was brewing, and so-called “Reformers” weren’t giving up.

The 1909 Drama: Republicans Dare Democrats

Enter 1909, a year of pure political theater. The Progressive Era had folks clamoring for fairer taxes to curb the so-called excesses of the Gilded Age’s robber barons. Tariffs, which claimed to hit working-class families hardest (similar to the logic currently employed today), were under fire, and an income tax was the reformers’ darling. President William Howard Taft and conservative Republicans, led by Senator Nelson Aldrich, were cozy with high tariffs (think the Payne-Aldrich Tariff Act). They wanted to protect business interests, not tax the wealthy. But Progressive Republicans and Democrats were pushing hard for an income tax, and public support was growing.

Taft and Aldrich, skeptical of an income tax but feeling the heat, pulled a cunning move: they proposed the Sixteenth Amendment to Congress in June 1909.

Why?

They figured it was a safe bet.

Amending the Constitution required two-thirds of Congress and three-fourths of the states (36 of 48 then), a hurdle they doubted reformers could clear. It was a dare to Democrats and Progressive Republicans: go on record supporting a new tax and risk voter backlash, or vote no and look like you’re siding with corporations and the wealthy.

The plan backfired. Democrats, alongside Progressive Republicans like Senators Robert La Follette and William Borah, called the bluff. The Senate passed the amendment 77–0 on July 5, 1909, and the House followed with a 318–14 vote on July 12, 1909. Conservatives were stunned-public demand and reformist zeal were stronger than they’d bet on. The amendment went to the states, and by February 3, 1913, it was ratified, declaring Congress could tax incomes “from whatever source derived, without apportionment.”

Text of The Sixteenth Amendment

ARTICLE XVI. The Congress shall have the 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.

Originally published at https://professortom.substack.com.

The First U.S. Income Tax and the Road to the Sixteenth Amendment was originally published in Mutliplayer Emacs on Medium, where people are continuing the conversation by highlighting and responding to this story.