The Income Tax Amendment: Powering The Nation

The 16th Amendment, which established Congress's right to impose a federal income tax, was passed by Congress on July 2, 1909, and ratified on February 3, 1913. The amendment, which changed a portion of Article I, Section 9 of the Constitution, grants Congress 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. The adoption of the 16th Amendment marked a significant shift in the way the federal government received funding and had far-reaching social and economic impacts.

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The 16th Amendment

> 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 1909, progressives in Congress attached a provision for an income tax to a tariff bill. Conservatives, hoping to kill the idea, proposed a constitutional amendment, believing it would never be ratified by three-fourths of the states. However, the amendment was ratified by one state legislature after another, taking effect on February 25, 1913, with the certification by Secretary of State Philander C. Knox.

Federal income tax history

The history of federal income tax in the United States began during the Civil War in 1861, when President Lincoln signed a revenue-raising measure to help pay for expenses. This first income tax levied a 3% tax on incomes between $600 and $10,000, and a 5% tax on incomes above $10,000. In 1867, Congress cut the tax rate due to public opposition, and from 1868 to 1913, 90% of revenue came from taxes on liquor, beer, wine, and tobacco.

In 1894, the Wilson Tariff Act briefly revived the income tax, but the Supreme Court ruled it unconstitutional in 1895 as a direct tax that was not apportioned among the states based on population. President William Howard Taft proposed a 2% federal income tax on corporations in 1909, and Congress passed a resolution for a constitutional amendment to allow an income tax.

The 16th Amendment, passed by Congress on July 2, 1909, and ratified on February 3, 1913, established Congress's right to impose a federal income tax. The amendment was the culmination of a series of political maneuvers and was influenced by high inflation and rising prices due to federal tariffs. Despite opposition from establishment Republicans and New York Governor Charles Evans Hughes, who feared excessive centralization of governmental power, the amendment was ratified by three-fourths of the states and became part of the Constitution.

The Revenue Act of 1913, enacted shortly after the ratification of the 16th Amendment, lowered tariffs and implemented a federal income tax. While less than 1% of the population initially paid income taxes at a rate of only 1% of net income due to exemptions and deductions, the amendment dramatically changed the American way of life by settling the constitutional question of how to tax income.

Opposition to the amendment

The 16th Amendment, passed in 1913, grants Congress the authority to levy an income tax without having to determine it based on population. The amendment was passed by Congress in 1909 in response to the 1895 Supreme Court case of Pollock v. Farmers' Loan & Trust Co., which had declared federal income taxes unconstitutional.

Opposition to the 16th Amendment was led by establishment Republicans due to their close ties to wealthy industrialists. However, not all Republicans were opposed to the idea of a permanent income tax. In the years leading up to the amendment's passage, the country was generally in a left-leaning mood, with Democrats, Progressives, Populists, and other left-oriented parties arguing that tariffs disproportionately affected the poor and were an unreliable source of revenue.

One of the main arguments against the 16th Amendment was that it would give the federal government too much power and centralize power away from the states. For example, in 1910, New York Governor Charles Evans Hughes spoke out against the amendment, arguing that the wording implied that the federal government would have the power to tax state and municipal bonds, making it "impossible for the state to keep any property".

There were also concerns about the process by which the amendment was ratified. Some argued that the text of the amendment that was ratified differed from the text proposed by Congress, and that certain states, such as Oklahoma and Kentucky, should not have been counted as approvals. These arguments have been rejected by the courts as legally frivolous.

Even after the passage of the 16th Amendment, there have been ongoing protests and proposals to repeal it. Some tax protesters argue that the amendment was never properly ratified or that it does not provide the power to tax income. Others argue that the income tax is an unconstitutional direct tax that should be apportioned among the states according to population. These arguments have also been rejected by the courts, which have upheld the constitutionality of the income tax.

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Ratification

The 16th Amendment to the U.S. Constitution, which established Congress's right to impose a federal income tax, was passed by Congress on July 2, 1909, and ratified on February 3, 1913. The amendment was proposed as part of the congressional debate over the 1909 Payne-Aldrich Tariff Act.

The process of ratifying the 16th Amendment was a lengthy and contentious one. Initially, conservative Republican leaders believed that the amendment would not be ratified, as it required approval by three-quarters of the state legislatures. However, despite their opposition, a coalition of Democrats, progressive Republicans, and other groups ensured that the necessary number of states ratified the amendment.

The amendment was first proposed by Senator Norris Brown of Nebraska, who submitted two proposals, Senate Resolutions Nos. 25 and 39. The amendment proposal finally accepted was Senate Joint Resolution No. 40, introduced by Senator Nelson W. Aldrich of Rhode Island, the Senate majority leader, and Finance Committee Chairman. The resolution proposing the 16th Amendment was passed by Congress on July 12, 1909, and submitted to the state legislatures.

Between 1909 and 1913, several conditions favoured the passage of the 16th Amendment. Inflation was high, and many blamed federal tariffs for rising prices. The Republican Party was divided and weakened by the loss of Roosevelt and the Insurgents who joined the Progressive Party. In 1912, the Democrats won the presidency and control of both houses of Congress, and the country was generally in a left-leaning mood.

On February 25, 1913, Secretary of State Philander Knox proclaimed that the amendment had been ratified by three-fourths of the states and had become part of the Constitution. The Revenue Act of 1913, which implemented a federal income tax, was enacted shortly after. The 16th Amendment removed the precedent set by the Pollock decision, which had ruled that Congress could not impose a tax on income arising from personal property without apportioning the sum among the states according to population.

Impact on the American way of life

The 16th Amendment, passed by Congress on July 2, 1909, and ratified on February 3, 1913, established Congress's right to impose a federal income tax. The text of the amendment reads:

> 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.

The impact of the federal income tax on the American way of life has been far-reaching, both socially and economically. While the federal income tax affects Americans differently depending on their income level, source of income, marital status, age, residence, homeownership, parenthood, and other factors, it is the federal government's single largest revenue source.

In 2020, the IRS collected $1.66 trillion in individual income taxes, with close to 54% of that sum coming from taxpayers with AGIs between $100,000 and $1 million. However, millions of Americans receive money from the IRS due to refundable tax credits, which primarily benefit people with lower incomes. For example, after refundable credits were figured in, taxpayers with AGIs below $30,000 collectively received over $78.6 billion from the IRS in 2020.

The federal income tax has also been a source of political debate in the United States. Opposition to the 16th Amendment was led by establishment Republicans due to their close ties to wealthy industrialists. In recent years, the Trump tax cuts of 2017 had their most significant impact on upper-middle-income taxpayers, with average effective tax rates falling the most for those with AGIs between $200,000 and $500,000.

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