This Day in Wall Street History 1913: Income tax amendment takes effect

In 1913, the notion of an income tax, though perhaps not palatable to all Americans, was hardly a novelty. The U.S. government levied an income tax during the Civil War, and although it was allowed to lapse after the war, it was deemed constitutional by the Supreme Court in 1881.

In 1894, legislators went after the tax again and passed a graduated income tax as part of the Wilson-Gorman Tariff Act. This time, however, the high court reversed course and deemed the tax unconstitutional on the grounds that the legislation, rather than providing for the redistribution of funds to the states, focused narrowly on one portion of the country.

Undeterred, pro-tax forces drafted and gained passage of the 16th Amendment to the U.S. Constitution in 1909. The amendment, which authorized the federal income tax, was ratified on Feb. 3, 1913, just a month before Woodrow Wilson was inaugurated as president.

The government was not shy about deploying the 16th Amendment and implemented the first graduated income tax later in the same year as part of the Underwood-Simmons Tariff Act.

Underwood-Simmons, one of Wilson's key early initiatives, slashed import duties as a means of promoting free trade and boosting the nation's industrial efforts. In turn, the tax was viewed as a necessary means of recouping some of the funds that the government would lose as a result of the tariff reform.

Source: History.com