![]() Thus, individuals with more ability to pay were taxed at a higher rate. Those with an annual income between $600 and $10,000 were taxed at the rate of 3 percent while those earning over $10,000 paid 5 percent. When the Union debt reached $500 million in 1862, Congress next passed the nation's first graduated income tax. ![]() ![]() The enormous costs of waging war had plunged the Union into debt ($75 million in 1861) forcing Congress to seek a new source of revenue. When a tax takes a larger percentage of a poor person's income than a rich person's income, economists refer to it as "regressive." But in 1913 when Congress passed an income tax law after the ratification of the 16th Amendment, the tax burden shifted to the rich-at least for a while.Īlthough an income tax was proposed as early as 1812, Congress did not enact one until 1861, when the Civil War began. The burden of these taxes fell heavily on working Americans, who spent a much higher percentage of their income on goods than rich people did. Before 1913, federal government revenues came mainly from taxes on goods-tariffs on imported products and excise taxes on items like whiskey.
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