Benjamin Franklin remarked in the late 1700s, “In this world, nothing can be said to be certain, except death and taxes.” Few statements have proven as enduring. While taxes have been an ever-present reality, the system by which Americans pay them has evolved dramatically over the past 250 years. Taxes have played a central role in shaping the American economy and government policy.
For much of U.S. history, income tax wasn’t even a concern for the average citizen. It wasn’t until the Current Tax Payment Act of 1943 permanently altered the way Americans interacted with the federal government by introducing the system of tax withholding from paychecks. To understand the significance of this act, it is necessary to explore the broader history of income taxation in the United States and the legislative milestones that led to it.
For much of the nation’s early history, the federal government relied primarily on tariffs, excise taxes, and land sales to generate revenue. The idea of a federal income tax was controversial and initially deemed unconstitutional. The first federal income tax was introduced during the Civil War in 1861 to help finance the Union’s war effort. While the Civil War income tax successfully generated revenue, it was allowed to expire in 1872 as the nation’s finances stabilized.
The debate over income tax resurfaced in the late 19th century as industrialization created vast wealth disparities. Congress passed the Wilson-Gorman Tariff Act of 1894, which included a 2% tax on incomes over $4,000. However, this act was quickly challenged and ultimately struck down by the Supreme Court in 1895, which ruled that an income tax was unconstitutional. This decision effectively ended the income tax for nearly two decades.
The legal obstacle was removed in 1913 when the 16th Amendment to the U.S. Constitution was ratified. It granted Congress the explicit power to levy an income tax. That same year, Congress passed the Revenue Act of 1913, which reintroduced the federal income tax with rates ranging from 1% to 7% on high-income earners. Initially, the tax affected only a small fraction of wealthy Americans. Just as the Civil War had spurred the idea of an income tax, World War I drastically expanded the scope of income taxation. The Revenue Act of 1916 and subsequent wartime measures raised rates and broadened the tax base, transforming the income tax into the government’s primary source of revenue. By the 1920s, income tax collection had become a permanent fixture of American fiscal policy. This remained true until another war necessitated a new way to raise revenue. The United States’ entry into World War II dramatically altered the financial landscape.
Before 1943, Americans generally paid their income taxes in a lump sum once a year, often many months after receiving their income. Compliance was inconsistent, and the government struggled to collect taxes promptly. To address these issues—and to raise more tax revenue—Congress passed the Current Tax Payment Act, which fundamentally restructured tax collection by requiring employers to withhold income taxes directly from workers’ paychecks and remit them to the federal government throughout the year. For individuals whose income was not subject to withholding (e.g., self-employed individuals or people with significant investment income), the act required them to file declarations of estimated tax and make quarterly payments throughout the year.
The law was based on the principle of “pay-as-you-go.” Rather than waiting until the following year, taxpayers now paid their taxes as they earned income. This system dramatically improved compliance and provided the federal government with a steady and predictable stream of revenue at a time when it was desperately needed to finance the war effort. The effects of the act were immediate and long-lasting. Millions of Americans who had never before paid income tax were now part of the tax system. The number of individual taxpayers rose from about 7 million in 1940 to more than 42 million in 1945. The withholding system also eased the burden on taxpayers, who no longer faced a massive lump-sum payment each spring.
The Current Tax Payment Act was one of the most consequential pieces of tax legislation in American history. It permanently established the employer-based withholding system that remains in place today. The act also transformed the income tax from a levy on the wealthy into a broad-based tax that applied to nearly every working American. While the law was initially designed to address wartime needs, its efficiency and effectiveness ensured its continued use long after World War II ended.
Taxes have now become a mainstay of our reality, but how they are collected, who pays them, and how much they pay have changed dramatically. What began as a temporary wartime measure in the 1860s grew into a permanent system by the 1940s, culminating in the all-too-familiar payroll withholding and quarterly estimated taxes. Today, every paycheck that Americans receive carries with it a reminder of Franklin’s enduring truth: nothing is certain but death and taxes.
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
