Innovation & Wealth › The Gilded Age › Progressive Era reform and trust-busting
Federal income tax (16th Amendment)
ratified February 3, 1913· Law or policy· Laws, labor & antitrust
Well documentedSolid records, texts or physical evidence.
A 1913 constitutional amendment let Congress tax incomes directly, creating today's federal income tax.
See it on the Innovation & Wealth map →What happened
After the Supreme Court struck down an 1894 income tax in 1895, Congress proposed the 16th Amendment in 1909; enough states ratified it by February 3, 1913. That October's law taxed 1% of income above $3,000 (about $100,000 today), with surtaxes up to a 7% top rate. Fewer than 2% of households owed anything at first. World War I pushed the top rate to 77% by 1918, and the tax soon replaced tariffs as the main federal revenue.
Impact on society and the economy
It shifted federal taxes from tariffs on goods everyone bought toward the incomes of the well-off, and gave Washington the money for two world wars, the New Deal and later programs.
How we know
The amendment's text, state ratification records, the Revenue Act of 1913, and IRS Statistics of Income tables, published from 1916, which economists still use to study top incomes.
Still debated
Economists still debate how high top tax rates affect work, investment, growth and inequality; the 1913–1980 high-rate era is read in conflicting ways.
Connections (3)
▸Progressive Era reform and trust-busting produced Federal income tax (16th Amendment)Well documented
The connection
Tariffs, which raised prices for everyone, paid most federal bills, and Populists and Progressives wanted the rich to pay more. After the Supreme Court struck down an 1894 income tax, Congress in 1909 proposed amending the Constitution. Reform-minded state legislatures ratified it, and the 1913 Revenue Act imposed the tax alongside lower tariffs.
When and how
Washington and state capitals, 1909–1913; President William Howard Taft, Senator Nelson Aldrich, Representative Cordell Hull and William Jennings Bryan.
How we know
Party platforms from 1896 to 1912 demanded an income tax; congressional records and state ratification votes trace the amendment's passage.
Debates
Some historians say conservative Republicans backed the amendment in 1909 expecting it to fail ratification; others doubt that gambit. Its broad support surprised many.
▸Federal income tax (16th Amendment) began taxing the incomes of Robber barons and the great trustsMostly agreed
The connection
The 1913 tax applied only to incomes above $3,000, with a top rate of 7% on income over $500,000, so it fell mainly on the richest families, such as the Rockefellers. World War I raised the top rate to 77% by 1918, and a federal estate tax followed in 1916. For the first time, great fortunes faced steady federal taxation.
When and how
United States, 1913–1920s; Congress and the Treasury. In the 1920s Treasury Secretary Andrew Mellon, himself a tycoon, cut the top rate to 25%.
How sure are we?
Tax statutes and IRS Statistics of Income tables, published from 1916, show how many top earners paid and at what rates.
Debates
How much taxes actually shrank top fortunes, compared with war, the Depression and inflation, is debated; the rich also shifted money into tax-exempt bonds and foundations.
▸Piketty's Capital in the Twenty-First Century drew its data from records of Federal income tax (16th Amendment)Well documented
The connection
Because the 1913 income tax made the rich report their incomes, it created America's first systematic data on top earners. Thomas Piketty and Emmanuel Saez used these IRS tables to trace the top 1%'s share of income from 1913: high before 1929, much lower from the 1940s to the 1970s, and rising sharply after 1980.
When and how
Paris and Berkeley, 1998–2014; Piketty and Saez's 2003 paper on US income inequality since 1913, then Piketty's 2013 book, alongside Anthony Atkinson's work on Britain.
How we know
Their papers and the World Inequality Database document the method, explicitly built on IRS Statistics of Income tables.
Debates
Tax data miss untaxed income and shift with tax-law changes; economists Gerald Auten and David Splinter argue the rise in top shares is much smaller.