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Contributor: Elephango Editors. Lesson ID: 13577
Why did the U.S. switch from tariffs to income tax? Explore the rise of the 16th Amendment, the Progressive Era’s impact, and the ongoing debate over taxation.
Imagine if you had to pay an extra fee every time you bought something—just because it came from another country. That’s how the U.S. government funded itself before the 20th century.
Instead of taxing your paycheck, it taxed imported goods through tariffs.
But tariffs had a major downside. They made foreign goods more expensive, hurt American farmers who sold their crops overseas, and created trade wars.
Eventually, the government needed a new way to make money that didn’t rely on unpredictable trade. Enter the federal income tax.
Before you dive into how this major shift happened, watch this short video about how tariffs affected farmers in 2018—long after they were the government’s main source of income. The past has a way of repeating itself!
Taxes: Direct vs. Indirect
Not all taxes are created equal. There are two main types.
Direct Tax: Taken directly from a person or business.
Examples: income tax, property tax
Indirect Tax: Applied to goods or services before they reach you.
Examples: tariffs, sales tax
The U.S. Constitution initially allowed Congress to collect indirect taxes like tariffs but placed strict limits on direct taxes.
The Founding Fathers were wary of a government that could take money straight from its citizens—just like Britain had done before the Revolution.
Why Was Income Tax Originally Unconstitutional?
Look at Article I, Section 2 of the Constitution.
"Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers…"
Translation: If the government wanted to tax citizens directly, it had to divide the tax among the states based on population. That meant the federal government couldn't just decide to take a percentage of each person's paycheck—it had to tax states as a whole.
Because of this rule, an income tax wasn't allowed under the original Constitution.
Lincoln's War-Time Tax
During the Civil War, President Abraham Lincoln needed money to fund the war.
Instead of raising tariffs, he passed the Income Tax Act of 1862. It took 3% from lower-income citizens and 5% from higher-income earners. It was controversial but seen as necessary during war-time.
Once the war ended, the tax was repealed in 1872.
An Economic Crisis and the First Big Tax Debate
Fast-forward to 1893, when the U.S. plunged into an economic depression. Congress needed money and passed the Wilson-Gorman Tariff Act in 1894, which included an income tax.
But the Supreme Court quickly shut it down, ruling it unconstitutional.
Why Was the 16th Amendment Passed?
Unstable Revenue —The U.S. economy was growing, and tariffs did not bring enough money to support modernization.
A More Fair System — Many Americans believed wealthy individuals and corporations should contribute more instead of relying on tariffs that hurt farmers and working-class citizens.
By 1913, three-quarters of the states had ratified the 16th Amendment, giving Congress the power to collect income taxes without distributing them among the states.
It said: "The Congress shall have 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."
This officially made federal income tax legal.
The Birth of a Progressive Tax System
Instead of a flat tax, where everyone pays the same percentage, the U.S. adopted a graduated tax system—meaning the more you earn, the higher your rate.
Examples
Someone earning $5,000 might pay 10% ($500).
Someone earning $50,000 might pay 25% ($12,500).
This system aimed to make taxation fairer, but debates over income tax continue today.
Now that you understand how a federal income tax became legal in the U.S., head over to the Got It? section to examine the arguments for and against passing the 16th Amendment.
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