The first federal income tax in the United States was imposed during the Civil War and was initially set at 3% of incomes over $800. It was repealed after the war.
The same Congress which passed the Wilson-Gorman Tariff of 1894 also passed the first peacetime income tax, partly to offset the loss of revenue from the new tariff. The United States Supreme Court ruled in 1895 in Pollock v. Farmers` Loan & Trust Co. that the 1894 income tax was a "direct tax" and thus prohibited by the Constitution. It left open certain limited forms, but due to both political and practical considerations, a federal income tax became impossible.
The situation was changed with the passage of Amendment XVI in 1913, which explicitly gave the federal government the power to tax incomes. This became the federal government`s largest source of revenue. Tax rates increased during the Great Depression and World War II, rising from a top rate of 25% in 1930 to a confiscatory 94% in 1944. It remained at 89% in 1962 and fell gradually over the next four decades.
Up until World War II, the number of taxpayers had been much smaller than the total employed population, but it became clear at the outset of the conflict that incomes would be assessed on a much broader base than ever before. The question of collecting this money in a manner that would assure the Treasury its due while not placing an undue financial burden on taxpayers was widely discussed. A proposal was made in 1942 by Beardsley Rumhl, at that time the chairman of the Federal Reserve Bank of New York, to collect the taxes gradually by withholding anticipated taxes from paychecks throughout the year. This plan was adopted in 1943.
The statistics for the number of taxpayers illustrates the scale of the collection issue. In 1940, the number of taxpayers had been on a little over 4 million. In 1942, the year in which Ruml made his proposal, it had already risen to 17,688,219. By the end of the war, the number of taxpayers had risen to 60 million.