What is the Purpose of Federal Income Tax?

Former Supreme Court Justice Oliver Wendell Holmes called taxes the price that citizens pay for life in a civilized society. The primary form of taxation in the United States is the federal income tax, which is collected from both individuals and businesses. The income tax became a permanent part of the U.S. tax system in 1913 with the passage of the 16th Amendment.

The Constitution, in Article I, Section 8, grants Congress the power to pay the country's debts and provide for “the general welfare” of the United States. While the U.S. has a variety of taxes, the federal income tax is the chief method for financing all government operations. These operations include national defense, federal health and education programs, the federal judiciary and aid to state and local governments.

The U.S. relied on tariffs and excise taxes collected on liquor, tobacco and other items until 1862, when Congress enacted the nation’s first income tax to finance the Civil War. The Civil War income tax had many of the features of the modern federal income tax, including withholding and graduated rates, meaning that the more you earned, the higher your tax rate. During the Civil War, people earning up to $10,000 a year were subject to a 3 percent tax rate, while a higher rate applied to yearly incomes exceeding $10,000.

Congress eliminated the income tax in 1872, seven years after the end of the Civil War, and revived it again in 1894 before eliminating it in 1895, when a Supreme Court ruling deemed the income tax unconstitutional.

The 16th Amendment, which was ratified in 1913, gave Congress the legal authority to enact an income tax, and the federal income tax has been a permanent part of the U.S. tax system ever since. Graduated tax rates in 1913 ranged from a low of 1 percent to a top rate of 7 percent on incomes exceeding $500,000 a year. At that time, fewer than 1 percent of U.S. taxpayers were subject to the income tax. The practice of withholding taxes from paychecks began in 1943, during World War II, and brought more Americans into the income tax system.

The personal income tax is the largest revenue source for the U.S. government, generating five times the revenue produced by the corporate income tax, according to the U.S. Treasury Department. An important aspect of the income tax is the payroll tax, which is withheld from paychecks for Social Security and Medicare.