America 250: History of the US Tax Code

Just as many parts of American life have transformed over the past 250 years, so too has the federal tax system. While most taxes levied in the 18th century are still levied in some form today, the federal government’s reliance on them, the complexity of the tax code, and Americans’ overall tax burdens have shifted considerably. What was once a tariffTariffs are taxes imposed by one country on goods imported from another country. Tariffs are trade barriers that raise prices, reduce available quantities of goods and services for US businesses and consumers, and create an economic burden on foreign exporters. and excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. regime used primarily to raise tax revenue to pay off war debt has evolved into a progressive income tax system used to fund a wide range of social and economic objectives far removed from its original purpose.

Early America Relied Heavily on Tariffs and Excise Taxes

In colonial America, tariffs (customs duties) and excise taxes provided the bulk of government tax revenue, though other taxes, like head (poll) taxes and faculty taxes, also played a role. This was partially due to the mercantilist economic and political philosophy of the time, which shaped how nations competed for wealth and influence. Governments sought to raise revenue by maximizing exports, minimizing imports, and imposing excise taxes on goods such as alcohol, coffee, and tobacco. In fact, it was colonial anger toward the British for levying many of these same taxes without their consent that helped set the stage for the American Revolution.

After winning independence, the young republic continued to rely on tariffs and excise taxes to generate most tax revenue, with Congress introducing the nation’s first internal excise tax on distilled spirits in 1791. The country did not yet possess a reliable, broad-based system of income tax revenue that would later dominate tax collections. The federal government was still small and did not have the capability of effectively tracking and taxing individual incomes. More importantly, while Article 1, Section 8, Clause 1 of the US Constitution authorized Congress to “lay and collect” taxes, it also stipulated that direct taxes be apportioned among the states, something that a national income tax would violate.

For these reasons, the federal government continued to rely mostly on tariffs and excise taxes to fund its operations for the first half of its existence, despite both being volatile revenue streams vulnerable to changes in global trade or conflict between nations.

The Birth of the Modern US Tax System

Change came with the outbreak of the Civil War. To help raise money for the Union war effort, Congress passed the Revenue Act of 1862, which created the nation’s first individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source and expanded excise taxes. However, the Act was short-lived, as Congress repealed it in 1872 following the war’s conclusion. A second attempt at a national income tax came in 1894, with the passage of the Wilson-Gorman Tariff Act, which, for the first time, differentiated between taxing individual income and corporate income. However, the relevant tax provisions were found unconstitutional shortly after.  

It would not be until the ratification of the 16th Amendment in 1913 that the federal government’s reliance on tariff and excise tax revenue would begin to wane. A combination of rapid industrialization, increasing globalization, declining tariff revenue, and shifting political winds led Congress to pass the Revenue Act of 1913, officially reestablishing the individual income tax and allowing federal taxes to be levied on both individuals and businesses.

At first, the income tax only applied to high earners at a top rate of just 1 percent, but the costs of World War I led Congress and President Wilson to raise the top rate in stages to 77 percent by 1918. This prompted reforms, especially under President Coolidge, that reduced the top rate to 25 percent by 1925. During the Great Depression and World War II, under President Roosevelt, the federal income tax was significantly expanded, and the top rate was increased to 94 percent by 1944. Ever since, the income tax has been the largest source of federal tax revenue in most years.

The early 20th century also saw the introduction of several new taxes, including the estate tax (1916), the gift tax (1924), the sales tax (1930), and Social Security payroll taxes (1937), though some, like the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. , were levied exclusively at the state and local level.

It was also during this period, specifically World War II, that the amount of tax revenue collected by the federal government and Americans’ overall tax burdens increased substantially to a permanently higher level. Before 1941, the US federal government rarely collected more than 5 percent of gross domestic product (GDP) in tax revenue, with state and local governments raising more revenue than the federal government. However, following the war’s conclusion, federal tax receipts have in most years remained above 15 percent of GDP, and federal expenditures have remained above pre-war levels.

Tax Reform in the Modern Era

Over the next several decades, top marginal rates would remain high, and the tax code would become more complex as Congress introduced numerous new deductions and exemptions, though President Kennedy’s tax reforms reduced the top income tax rate to 70 percent by 1965. Major reform came in the 1980s with legislation like the Economic Recovery Act of 1981, which slashed all individual tax rates and allowed accelerated depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and disco for business investment, and the Tax Reform Act of 1986, which also cut rates and simplified the system by flattening the rate structure and broadening the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates..

Recently, Congress has introduced other reforms—most notably, the Tax Cuts and Jobs Act of 2017, which lowered individual and corporate marginal income tax rates and expanded provisions like the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. Taxpayers who take the standard deduction cannot also itemize their deductions; it serves as an alternative., and the One Big Beautiful Bill Act of 2025, which made much of the 2017 law permanent. Between the 2017 and 2025 legislation, Congress also produced the Inflation Reduction Act, which contained energy provisions, a new excise tax on stock buybacks, and a complex alternative minimum tax for large companies.

A 250-Year Transformation

Even with these reform efforts in 2017 and 2025, the federal tax code today is far more complex than it was 250 years ago and far more burdensome than anything early American taxpayers experienced.

While it’s anyone’s guess what the next 250 years have in store for America’s tax code, prioritizing the principles of sound tax policy could be even more transformative for government revenues and taxpayers alike.

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