The U.S. faced economic disparity through protectionist tariffs that benefitted Northern manufacturers but imposed higher prices on Southern and Western farmers. These tariffs created a regressive tax, as poor consumers paid a higher percentage of their income in taxes, exacerbating tensions across different regions. A solution emerged as the Populist movement pushed for a progressive income tax, gaining support from working and middle-class Americans. Political advocates, including President Taft, pushed for change, resulting in the proposal of the 16th Amendment. This amendment allowed for the taxation of incomes without apportionment among the states. With ratification in 1913, the first constitutional income tax was introduced, starting at 1% on both individual and corporate incomes with higher rates for significant earnings. During World War I, the tax rate peaked at 83% for the wealthiest. This transition positioned income tax as the main source of federal revenue, eventually phasing out tariffs.

In the early 20th century, payroll taxes in America posed significant challenges. Initially, the burden fell on employees to report and pay taxes, which not only complicated the process but also resulted in underreporting. The system faced limited scrutiny due to its impact on a small percentage of earners and low tax contributions. The Underwood-Simmons Tariff Act of 1913 was a legislative attempt to enforce employer withholding, introducing complex regulations that were met with corporate opposition and repealed by 1917. The Social Security Act of 1935 successfully implemented employer withholding, leveraging lessons from past failures and employer feedback. World War II expanded tax withholding as the U.S. needed funding for the war, enacting the Current Tax Payment Act of 1943. This act led to a dramatic increase in tax filers, from 4 million in 1939 to 50 million in 1945. The system mitigated inflation and has been consistently operational ever since, fundamentally altering Americans' engagement with annual taxes.