Income Taxes: Legitimizing The Constitution

The 16th Amendment to the U.S. Constitution, ratified in 1913, established Congress's right to impose a federal income tax. This amendment was the culmination of a series of events, including the Civil War, which prompted the first income tax in 1861, and the rise of the Progressive Era, during which progressive groups advocated for a federal income tax as a way to ensure that wealthy individuals contributed their fair share. The amendment's impact was far-reaching, not only economically but also socially, as it settled the constitutional question of how to tax income and brought about significant changes in the American way of life.

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The 16th Amendment

> The Congress shall have the 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.

Progressive support

The 1894 Wilson-Gorman Tariff Act, which included a 2% income tax provision on incomes over $4,000 (equivalent to $135,951.63 in 2022 USD), was a key moment in this movement. While this act was struck down by the Supreme Court, progressives continued to push for income tax reform. The progressive wing of the Republican Party, including former President Theodore Roosevelt, supported the idea of an income tax to help finance the nation's growing political and military power.

In 1909, President William Howard Taft proposed a 2% federal income tax on corporations, along with a constitutional amendment to authorise the tax. This proposal was made as part of the congressional debate over the Payne-Aldrich Tariff Act, with the hope of temporarily appeasing progressive calls for new taxes. Progressives in Congress attached provisions for an income tax to tariff bills, and their efforts, along with the victory of the Democratic Party in the 1912 presidential election, contributed to the eventual ratification of the Sixteenth Amendment.

The Sixteenth Amendment to the United States Constitution, ratified on February 3, 1913, established Congress's authority to impose a federal income tax without apportioning it among the states based on population. This amendment overruled the Supreme Court's decision in Pollock v. Farmers' Loan & Trust Co. (1895), which had ruled that income taxes were "direct taxes" and therefore required apportionment among the states. The amendment's passage marked a significant step towards a more progressive tax system and had far-reaching social and economic impacts on the nation.

Supreme Court rulings

The implementation of income tax in the United States was influenced by a series of Supreme Court rulings, which also shaped the subsequent amendments to the Constitution.

Springer v. United States (1881)

In 1881, the Supreme Court upheld the federal government's power to levy taxes, citing the Constitution's Taxing Clause in Article I. This decision set a precedent for the legality of income tax, which was introduced during the Civil War.

Pollock v. Farmers' Loan & Trust Co. (1895)

In 1895, the Supreme Court ruled in Pollock v. Farmers' Loan & Trust Co. that the income tax imposed by the Wilson-Gorman Tariff Act of 1894 was unconstitutional. The Court determined that the tax on income derived from an individual's property constituted a "direct" tax, which required apportionment among the states. This ruling posed a significant challenge to the implementation of a federal income tax.

Brushaber v. Union Pacific Railroad Company (1916)

Following the ratification of the 16th Amendment in 1913, which granted Congress the authority to impose an income tax without apportionment, the Supreme Court upheld the constitutionality of the amendment in Brushaber v. Union Pacific Railroad Company (1916). This decision affirmed the legality of the federal income tax under the 16th Amendment.

Eisner v. Macomber (1920)

The Supreme Court addressed the question of what constitutes "income" under the 16th Amendment in Eisner v. Macomber (1920). The Court ruled that proportionate stock dividends were not taxable as income, as they were not "severable" from the underlying capital holding. This decision clarified the scope of taxable income under the amendment.

The Supreme Court rulings played a pivotal role in shaping the legal framework for income taxation in the United States. The initial rulings, such as Springer v. United States, established the federal government's authority to levy taxes. However, the Pollock decision created a significant obstacle to the implementation of a federal income tax by interpreting it as a direct tax requiring apportionment. The subsequent ratification of the 16th Amendment addressed this issue by explicitly granting Congress the power to impose an income tax without apportionment. Finally, the Brushaber and Eisner decisions further solidified the constitutional foundation of the federal income tax and clarified its scope.

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Federal income tax law

Prior to the 16th Amendment, the majority of federal revenue was derived from tariffs on domestic and international goods, with some excise taxes on various goods. The concept of a federal income tax emerged during the Progressive Era, a period characterised by social and political reform. Progressive groups advocated for a federal income tax as a more equitable approach, arguing that it was fairer for wealthy individuals to contribute relatively more.

The Revenue Act of 1861, enacted during the Civil War, introduced the first federal income tax, with a flat 3% tax on incomes over $800. However, this was repealed in 1872. In 1894, Congress passed the Wilson-Gorman Tariff Act, which included a 2% income tax on incomes over $4,000. This was struck down by the Supreme Court in the case of Pollock v. Farmers' Loan & Trust Co. in 1895, as they ruled it was a "direct tax" and therefore required apportionment among the states.

The push for a federal income tax continued, and in 1909, President William Howard Taft proposed a 2% federal income tax on corporations. This led to the proposal of the 16th Amendment, which was passed by Congress the same year. The amendment asserted Congress's 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".

The 16th Amendment's ratification in 1913 resolved the constitutional question of how to tax income and brought about significant changes in American society. It granted Congress the explicit authority to impose a federal income tax, removing the requirement for apportionment based on population. This amendment was further upheld by court cases such as Brushaber v. Union Pacific Railroad Company (1916) and Adams v. Commissioner (1999), which rejected religious and moral grounds for refusing to pay income taxes.

Taxing wealthier individuals

The 16th Amendment to the US Constitution, ratified in 1913, established Congress's right to impose a federal income tax. This amendment was the culmination of a series of events, including the Civil War, which first prompted Congress to introduce a flat 3% income tax on all incomes over $800 in 1861. This was later repealed in 1872.

The end of the 19th century saw the Progressive Era, where progressive groups pushed for a federal income tax, arguing that it was fairer for wealthy individuals to pay for taxes and tariffs, which had largely been paid by the middle class and the poor. In 1894, Congress passed the Wilson-Gorman Tariff Act, which included a 2% income tax on incomes over $4000 (equivalent to $135,951.63 in 2022). This was struck down by the Supreme Court, which ruled that it was a "direct" tax and therefore required apportionment among the states.

In 1909, President William Howard Taft proposed a 2% federal income tax on corporations, to be imposed through an excise tax and a constitutional amendment. This proposal was in response to the 1895 Supreme Court case of Pollock v. Farmers' Loan & Trust Co., where the Court ruled that the income tax was a "direct" tax on income from an individual's property and therefore required apportionment. The Sixteenth Amendment, proposed in 1909, cancelled the "apportionment" requirement for income taxes and was ratified in 1913, restoring Congress's power to levy taxes on incomes without apportionment.

The ratification of the Sixteenth Amendment addressed the constitutional question of how to tax income and had a significant impact on the American way of life. It also helped legitimize the Constitution by demonstrating its ability to adapt to the needs of the nation and address issues of economic inequality. By taxing wealthier individuals, the amendment contributed to a more equitable distribution of the tax burden, ensuring that the middle class and the poor were not disproportionately affected by taxes and tariffs.

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