Isabella Carter
The IRS, or the Internal Revenue Service, was established in 1953 as a successor to the Bureau of Internal Revenue, which was created in 1913 after the ratification of the 16th Amendment to the U.S. Constitution. This amendment, proposed by President Taft in 1909 and ratified on February 3, 1913, authorized Congress to impose a federal income tax, marking a significant shift in the way the federal government received funding. The 16th Amendment addressed the constitutional question of how to tax income, and its ratification was facilitated by the victory of the Democratic Party in the 1912 Presidential Election.
| Characteristics | Values |
|---|---|
| Date of proposal | July 2, 1909 |
| Date of ratification | February 3, 1913 |
| Proposer | President Taft |
| Ratified by | 36 states |
| Number of states at the time | 48 |
| Amendment number | 16 |
| Amendment name | The 16th Amendment |
| Amendment type | Constitutional Amendment |
| Amendment topic | Federal Income Tax |
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What You'll Learn
The 16th Amendment
Before the 16th Amendment, the majority of funds given to the federal government came from tariffs on domestic and international goods. The Constitution's original Taxing Clause in Article I granted Congress the authority to "lay and collect Taxes, Duties, Imports, and Excises". For "direct" taxes, Article I mandated that they be collected based on the population of the states.
The first official federal income tax was the short-lived Revenue Act of 1861, which imposed a flat 3% tax on all incomes over $800. This was later modified to include a graduated tax. However, the income tax was repealed in 1872.
In 1909, progressives in Congress attached a provision for an income tax to a tariff bill. Conservatives, hoping to thwart the idea, proposed a constitutional amendment enacting such a tax, believing it would never be ratified by three-fourths of the states. However, the amendment was ratified by one state legislature after another, surprising its opponents.
It's worth noting that there have been claims, such as in the 1985 book "The Law That Never Was" by William J. Benson and Martin J. "Red" Beckman, that the 16th Amendment was never properly ratified. These claims have been ruled fraudulent and rejected by courts.
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The US Constitution
In the context of the Internal Revenue Service (IRS), the 16th Amendment to the US Constitution is particularly relevant. Proposed by President Taft in 1909, the 16th Amendment was ratified on February 3, 1913, and it established Congress's right to impose a federal income tax. This amendment was the result of a series of political events and marked a significant shift in how the federal government received funding.
The history of income taxation in the US dates back to the Civil War. In 1861, Congress passed the Revenue Act, which imposed a flat 3% tax on all incomes over $800. This was followed by the Wilson-Gorman Tariff Act of 1894, which included a 2% income tax on incomes over $4,000. However, the Supreme Court struck down this tax in 1895, ruling it unconstitutional as a direct tax that was not apportioned among the states.
Despite this setback, the progressive movement of the late 19th and early 20th centuries continued to advocate for a federal income tax, arguing that it would be fairer for wealthy individuals to contribute more. In 1909, progressives in Congress attached an income tax provision to a tariff bill. Conservatives, hoping to thwart the idea, proposed a constitutional amendment, believing it would never be ratified. However, from 1909 to 1913, the 16th Amendment was ratified by the required 36 states out of the then 48, and it became part of the Constitution.
The 16th Amendment's text 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." This amendment resolved the constitutional question of how to tax income and brought about significant changes in American life. It shifted the federal government's funding sources and empowered the IRS to collect revenue through income taxation.
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Congress's right to impose a federal 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. This amendment, also known as the Income Tax Amendment, was the result of a series of political manoeuvres and had a significant impact on both the social and economic landscape of the United States.
Prior to the 16th Amendment, the Taxing Clause in Article I of the Constitution granted Congress the general authority to "lay and collect Taxes, Duties, Imports, and Excises." However, for direct taxes, Article I mandated that they be collected based on the population of the states. The Supreme Court's decision in Pollock v. Farmers' Loan & Trust Co. in 1895 ruled that federal income taxes were unconstitutional because they violated the "rule of apportionment" specified in Article I, sections 2 and 9 of the Constitution.
In an attempt to reduce tariff rates, which were the federal government's primary source of revenue at the time, Congress enacted another income tax in 1894 as part of the Wilson-Gorman Tariff Act. This tax imposed a 2% rate on incomes greater than $4,000. However, this was struck down by the Supreme Court, which ruled that it was a direct tax and therefore required apportionment among the states.
Following the decision in Pollock, Congress sent the 16th Amendment to the states for ratification. This amendment specifically grants Congress the power to impose a direct income tax without apportionment among the states. The amendment states: "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 ratification of the 16th Amendment marked a significant shift in how the federal government received funding and had far-reaching consequences for the American way of life. It resolved the constitutional question of how to tax income and led to the creation of the Bureau of Internal Revenue, later renamed the Internal Revenue Service (IRS), which became primarily responsible for collecting revenue to fund the federal government.
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The Revenue Act of 1913
While the Act lowered tariffs and provided some economic benefits, it also had its challenges. With the onset of World War I in 1914, American imports dropped significantly, while exports reached record highs. This shift in trade dynamics impacted customs receipts, causing a decline of about one-third after 1914. Additionally, the Act faced opposition and criticism, particularly from farmers in the south and west who suffered from low prices for their agricultural products while facing high prices for manufactured goods.
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The Civil War tax
The Civil War, which began in 1861, prompted the first American income tax. In the summer of 1861, Salmon P. Chase, the Secretary of the Treasury, reported to Congress that he would need $320 million over the next fiscal year to finance the war. He thought he could raise $300 million by borrowing, increasing existing taxes, and selling public lands. This left Congress with the task of raising the remaining $20 million.
The House Ways and Means Committee responded by drafting a bill to tax personal and corporate incomes. This bill, the first of its kind in the United States, imposed a flat 3% tax on all incomes over $800. It passed quickly in both the House and the Senate but was never enacted. However, it paved the way for the next income tax bill.
In 1862, President Abraham Lincoln signed the Revenue Act of 1861 into law. This act imposed a 3% tax on incomes between $600 and $10,000 and a 5% tax on higher incomes. The act also included various import tariffs on goods such as sugar, tea, coffee, liquor, and fruits, as well as an additional 10% tax on articles imported in foreign vessels from beyond the Cape of Good Hope. The act established a system of tax districts, assessors, and collectors, which laid the groundwork for the formation of the Internal Revenue Service on July 1, 1862.
The law was amended in 1864 to include a 5% tax on incomes between $600 and $5,000, a 7.5% tax on incomes between $5,000 and $10,000, and a 10% tax on incomes above $10,000. The Confederacy, which had authorized its first national income tax measure in 1863, also collected graduated income taxes during the Civil War. The Union's income tax was repealed in 1872 and declared unconstitutional.
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Frequently asked questions
The IRS was signed into the Constitution by President Woodrow Wilson on February 3, 1913, via the 16th Amendment.
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 16th Amendment had a significant social and economic impact, as it shifted the way the federal government received funding for its operations. It also led to the creation of the Bureau of Internal Revenue, later renamed the Internal Revenue Service (IRS) in 1953.
