Taxation

Although several countries in Europe, including France and Great Britain, had begun a personal income taxation system in the 1700s, the United States did not adopt an income tax until 1862, during the Civil War. A few years later, however, this wartime measure was repealed.

In 1894 Congress tried again by initiating a two percent tax on individual and corporate income. But in 1895 the Supreme Court declared the levy unconstitutional. Article 1 of the U.S. Constitution states that "direct taxes shall be apportioned among the several states." Direct taxes are those which are levied on the property, business, or income of the individual who pays the tax. The Court ruled that the U.S. Constitution prohibited the federal government from enacting an income tax because revenue derived from the tax would not be distributed in direct proportion to the nation's population.

It would take the ratification of the Sixteenth Amendment in February of 1913 to pave the way for creation of a national income tax. The amendment provided Congress with the power to levy "taxes on income, from whatever source derived, without apportionment among the several States." The Tariff Act of 1913 included a provision for a tax on individual and corporate incomes. Before a national income tax was adopted, the U.S. government relied primarily on income generated from tariffs. Today, that has shifted and income taxes are a major budget revenue.