Under Art. I § 9 of the Constitution, direct taxation of individuals was prohibited except in proportion to the census. On February 3, 1916, the Sixteenth Amendment was ratified to impose an income tax, without regard to the population of any state. The Constitution granted Congress the power to levy indirect taxes. Prior to 1913, the federal budget relied on excise taxes, tariffs, customs duties and public land sales for most of its revenue.
During the Civil War, Congress had enacted a flat rate tax on income to finance the war effort. It was repealed in 1872. In 1894, Congress again approved a flat rate income tax. The Supreme Court declared that tax unconstitutional in Pollock v. Farmers’ Loan & Trust Co., 151 U.S. 601 (1895), ruling that it was levied without regard to population.
The Revenue Act of 1913 was passed on October 3 and provided that a tax would be levied against income, including income derived from wages, salaries, and compensation as well as interest, dividends, rents and securities. The tax rate was 1% on couples earning over $4,000 and on individuals earning over $3,000, with higher earners to pay more.
