Before 1941, the federal government rarely collected more than 5 percent of gross domestic product in tax revenue, but following World War II, federal tax receipts have stayed above 15 percent of GDP in most years, according to a new educational report from the Tax Foundation published as part of its "Short Form" series. The analysis traces how what was once a tariff and excise tax regime used primarily to pay off war debt has evolved into a progressive income tax system funding a wide range of social and economic objectives far removed from its original purpose.
In colonial America and the early republic, tariffs and excise taxes provided the bulk of government revenue, with Congress introducing the nation's first internal excise tax on distilled spirits in 1791. The federal government continued relying mostly on these revenue streams for the first half of its existence because it lacked the capability to effectively track and tax individual incomes, and the Constitution stipulated that direct taxes be apportioned among the states—something a national income tax would violate. The first individual income tax came with the Revenue Act of 1862 to fund the Union war effort, but Congress repealed it in 1872 after the war's conclusion. A second attempt in 1894 through the Wilson-Gorman Tariff Act was found unconstitutional shortly after, and it wasn't until the 16th Amendment's ratification in 1913 that the federal government's reliance on tariff and excise tax revenue began to wane. The Revenue Act of 1913 reestablished the individual income tax at a top rate of just 1 percent for high earners, but the costs of World War I led Congress to raise the top rate to 77 percent by 1918, before reforms under President Coolidge reduced it to 25 percent by 1925. During the Great Depression and World War II, the top rate increased to 94 percent by 1944, and the income tax has been the largest source of federal tax revenue in most years ever since.
The report finds that the early 20th century also saw the introduction of several new taxes, including the estate tax in 1916, the gift tax in 1924, the sales tax in 1930, and Social Security payroll taxes in 1937, though some were levied exclusively at the state and local level. The authors note that it was specifically during World War II that the amount of tax revenue collected by the federal government and Americans' overall tax burdens increased substantially to a permanently higher level—before 1941, state and local governments raised more revenue than the federal government. Major reform came in the 1980s with the Economic Recovery Act of 1981 and the Tax Reform Act of 1986, which cut rates and simplified the system by flattening the rate structure and broadening the tax base, while recent changes include the Tax Cuts and Jobs Act of 2017 and the One Big Beautiful Bill Act of 2025, which made much of the 2017 law permanent.
The report explains that the shift from tariffs and excise taxes to income taxes resulted from a combination of rapid industrialization, increasing globalization, declining tariff revenue, and shifting political winds. Both tariffs and excise taxes were volatile revenue streams vulnerable to changes in global trade or conflict between nations, making them unreliable as the federal government's responsibilities expanded. The ratification of the 16th Amendment in 1913 resolved the constitutional barrier that had prevented a national income tax, allowing federal taxes to be levied on both individuals and businesses without apportionment among the states. Over subsequent decades, top marginal rates remained high and the tax code became more complex as Congress introduced numerous new deductions and exemptions, though reforms in the 1980s, 2017, and 2025 attempted to simplify the system and lower rates.
The report concludes that even with recent reform efforts, "the federal tax code today is far more complex than it was 250 years ago and far more burdensome than anything early American taxpayers experienced." While it's anyone's guess what the next 250 years hold for America's tax code, the authors write that prioritizing the principles of sound tax policy could be "even more transformative for government revenues and taxpayers alike." The bottom line: America's tax system has undergone a complete transformation from simple customs duties on imports to a sprawling income tax apparatus that now collects triple the share of the economy it did before World War II.