What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community. Get Started Now!


Income tax

An income tax is a tax levied by a government entity, based upon earnings.

Expanded Definition

According to information on the IRS website, President Lincoln and Congress created an income tax in 1862 to help pay for the Civil War. The income tax was repealed a decade later, then revived n 1894. But the Supreme Court declared it unconstitutional in 1895.

Then came the 16th Amendment, ratified in 1913: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."

In 1913, the first Form 1040 appeared after Congress levied a 1 percent tax on net personal incomes above $3,000 with a 6 percent surtax on incomes of more than $500,000.

An income tax would be considered a progressive tax because people pay different amounts based on how much they make. A sales tax, on the other hand is considered regressive because each person pays the same amount regardless of their ability to pay.

Related Fool Articles

Related Terms

Recent Mentions on Fool.com

Advertisement