The Revenue Act of 1862 (July 1, 1862, Ch. 119, 12 Stat. 432), was passed by the United States Congress to help fund the American Civil War. The Act was signed into law by President Abraham Lincoln, introducing the first progressive rate income tax to the country.
The office of the Commissioner of Internal Revenue was established, with the Act specifying that Federal income tax was a temporary measure that would terminate in "the year eighteen hundred and sixty-six").
Annual income of U.S. residents, to the extent it exceeded $600, was taxed at a 3% rate; those earning over $10,000 per year were taxed at a 5% rate. With respect to the income tax liability generated by the salaries of "officers, or payments to persons in the civil, military, naval, or other employment or service of the United States, including senators and representatives and delegates in Congress", the law also imposed a duty on paymasters to deduct and withhold the income tax, and to send the withheld tax to the Commissioner of Internal Revenue.
This Act repealed the flat rate income tax that had been established by the Revenue Act of 1861.
To assure timely collection, income tax was "withheld at the source" by the employer.
Read more about Revenue Act Of 1862: Incomes Adjusted For Inflation - Bureau of Labor Statistics (BLS)
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