How Income Taxes Work

Taxes in Early America

Taxes have always left a sour taste in the mouths of American citizens. This national hatred for taxes dates back to the tax burden placed on the American colonies by Great Britain. Colonists were taxed for every consumer good, from tea and tobacco to legal documents. This "taxation without representation" led to many revolts, such as the Boston Tea Party, in which colonists dumped tea into the Boston Harbor rather than pay the tax on it.

Although the American colonists fought for independence from British rule and British taxes, once the United States government formed, its main source of revenue was derived from placing customs and excise taxes on the same items that had been taxed by Great Britain. In 1812, in an effort to support an expensive war effort, the U.S. government imposed the first sales tax, which was placed on gold, silverware, jewelry and watches. In 1817, internal taxes (taxes on goods and land) were terminated, and the government relied on tariffs (taxes on imports or exports) to support itself. It wasn't until 1862 that the United States imposed the first national income tax [source: Tax Foundation].

To support the Union Army during the American Civil War, Congress passed tax laws in both 1861 and 1862. The office of Commissioner of Internal Revenue was established by the Tax Act of 1862, which stated that the commissioner would have the power to levy and collect taxes. The office also was given the authority to seize property and income in order to enforce the tax laws. These powers remain pretty much the same today, although the Internal Revenue Service (as it's been known since the 1950s) will tell you that enforcement tactics have been toned down a bit [source: IRS].