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October 13, 2003
Our Fiscal Nonagenarian: The Income Tax Turns 90

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The income tax just turned 90, having become law on October 3, 1913, as part of the Underwood-Simmons Tariff Act.

1912 Form 1040But the 1913 tax was different from the levy we've come to know and love (or resist and revile, as the case may be). The law established a "normal" rate of 1 percent on both individual and corporate incomes. Lawmakers set the personal exemption at a lofty $3,000, leaving the vast majority of Americans completely exempt; according to historian Elliot Brownlee, only 2 percent of American households paid the tax during its early years.

The tax also included a graduated surtax. With rates ranging from 1 percent to 6 percent, it added a new, distinctly progressive element to the federal revenue system. Because most revenue still came from tariff duties and a handful of excise taxes, the income tax provided a symbolic counterweight to those regressive revenue tools.

16th AmendmentThe 1913 law provided a capstone to the vigorous 1909 debate over income taxes. In that year, Democrats and progressive Republicans had mustered considerable support for a new income tax. However, Republican leaders in both the House and Senate remained steadfastly opposed to the idea. Eager to forestall a party rebellion, Republican President William Howard Taft proposed a compromise: Congress would enact a modest corporate income tax as a substitute for broader income taxation. Also, lawmakers would submit to the states a constitutional amendment explicitly authorizing the federal government to impose an income tax. The amendment was designed to eliminate any lingering doubts growing out of the Supreme Court's 1895 Pollock decision about the constitutionality of an income tax.

Taft's plan succeeded -- perhaps too well, from the perspective of many conservatives. Ratification of the 16th Amendment proved relatively easy, and on February 25, 1913, Secretary of State Philander Knox certified the amendment's adoption. With support from Taft's successor, Woodrow Wilson, lawmakers soon approved the 1913 income tax law, and the Bureau of Internal Revenue, as the IRS was then known, prepared the first Form 1040 soon after.

The income tax remained a very narrow tax until World War I, when revenue needs prompted lawmakers to modestly expand its breadth. Even then, it never reached far into the middle class. It would take another national crisis to finally transform the levy from a "class tax" to a "mass tax"; today's income tax was a product of World War II.

Reproductions courtesy of the National Archives