The Income Tax Amendment Turns 100 and It’s Worth Celebrating

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It’s Super Bowl Sunday, and I’ll be joining America’s favorite party later this afternoon. This morning, though, I’m celebrating a less popular institution: the federal income tax. Today marks the centennial of the Sixteenth Amendment, which wrote that tax into the Constitution.

Why do I feel so alone?

Nobody likes the income tax. Some self-professed patriots have convinced themselves that the Sixteenth Amendment was never properly ratified, and Republicans are launching new assaults on state income taxes. “America’s founders rejected the income tax entirely,” they say, and we should follow their lead.

These people misread history.

The absence of the income tax within the body of the Constitution is easily explained: the idea would never occur to people living in a predominantly agricultural society, as the founders did. When citizens provided for a good portion of their own needs and traded farm commodities to merchants for much of the rest, cash incomes were not perceived as meaningful indicators of ones ability to pay taxes.

Wealth was the key, and that was measured in property rather than income. In the late 18th century, tax lists were based on a person’s holdings, starting with real estate but also including improvements, livestock, and in some cases slaves. Property taxes leaned more heavily on the rich, as income taxes do today. Houses were assessed not only by their size but also by the number of windows, one of the few building materials that needed to be purchased. A citizen with many windows likely possessed the wherewithal to contribute more to governmental coffers.

Embedded within these property taxes, though, were seeds of the income tax. Since some landholdings were clearly more productive than others, they were often valued according to the rent, or income, they could reasonably receive. Artisans and professionals with scant property did not get off scot free; they often had to pay “faculty taxes” based on the amount a blacksmith or a doctor could be expected to earn. Since many services were bartered and record-keeping was between the provider and the client, no governmental authority would have the ability to obtain accurate and objective measures of actual income.

Property taxes, considered at the time a form of “direct” taxation, were sanctioned by the Constitution, but with a hitch: they had to be apportioned according to the population of each state. Indirect taxes, such as import duties and excises, did not face this restriction. By treating direct and indirect taxes differently, however, the framers of the Constitution created a fatal flaw in the tax structure, which the Sixteenth Amendment would finally resolve in 1913.

The federal income tax made its debut during the Civil War, when the Union Congress taxed “the annual gains, profits, or income of every person residing in the United States, whether derived from any kind of property, rents, interests, dividends, salaries, or from any profession, trade, employment, or vocation carried on in the United States or elsewhere.” The rates were mildly progressive: three percent for incomes between $600 and $10,000, and five percent tax on incomes in excess of $10,000. The Supreme Court considered this income tax “indirect.” It was perfectly legal, and because it was not “direct,” it did not need to be apportioned among the states.

But three decades later, in Pollock v Farmers’ Loan and Trust (1895), a conservative High Court declared that since rent, interest, and dividends derived from property, any tax on such income was “direct” and had to be apportioned among the states according to their populations. This was unworkable, however. Since poor states, per capita, were required to contribute as much as rich states, the tax rate on each individual needed to be higher in a poor state than in a rich one. Taxes on wages and salaries, meanwhile, did not need to be treated this way. Money earned by labor could be taxed more readily than money earned by possession of property.

Unfair? Of course, and that’s what led to the Sixteenth Amendment. The contorted distinction between “direct” and “indirect” taxes had to go, and that amendment, composed of a single sentence, whisked it away.

The first part says that Congress has the “power to lay and collect taxes on incomes,” even though taxes on wages and salaries were already considered constitutional, even after the 1895 decision.

The next part gets to the point: incomes “from whatever source derived” would be treated the same, whether stemming from labor or property.

The final phrase states that no income taxes have to be apportioned “among the several states,” because that is what made taxing rents, dividends, and interest unfeasible.

So that’s it. The Sixteenth Amendment, which I celebrate today, merely simplified the tax code. What can be wrong with that?

The Sixteenth Amendment completed the framers’ work. When fifty-five American statesmen gathered in Philadelphia in the summer of 1787, their young nation faced financial implosion. Since the Articles of Confederation had not empowered Congress to raise its own funds, “the United States in Congress Assembled” was forced to beg money from the states — and that was not working out.

In half a year preceding the Constitutional Convention, Congress received only $663; try governing and defending a nation on that budget and you’ll understand why the framers were so set on giving Congress ample powers of taxation. They wanted the Constitution to provide the federal government, their own creation, with a reliable source of income, broadly based and fair, so it could honor its debts and ensure its credit. The key to effective government was revenue.

The Sixteenth Amendment provided a viable means of accomplishing the framers’ goal. Never would the federal government shrink so small as to drown in a bathtub, as Grover Norquist and others now wish. Henceforth, the United States would be able to raise sufficient funds to “establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessing of Liberty.” Let’s raise our mugs and toast to that, fellow Americans, and bellow a hearty “Huzzah!”

About Ray Raphael

Ray Raphael is an American historian and author of sixteen books. He is noted for his work on the American Revolution and the regional history of Northern California. Ray Raphael's most recent books are Mr. President: How and Why the Founders Created a Chief Executive (Knopf, 2012) and Constitutional Myths: What We Get Wrong and How to Get It Right (The New Press, forthcoming in March). His earlier books include Founding Myths: Stories That Hide Our Patriotic Past. He is currently a Senior Research Fellow with Humboldt State University in Arcata, California. A full booklist and much more can be found on his website, rayraphael.com
Posted in: Constitutional, GOP, Law, Policy
  • http://healthynwealthy.org HNW

    “By treating direct and indirect taxes differently, however, the framers of the Constitution created a fatal flaw in the tax structure, which the Sixteenth Amendment would finally resolve in 1913.”

    To the contrary, this was not a flaw, but rather a saving grace, a protection against tyrannical government. The rates on indirect taxes are limited by a quasi-market force: if the tax gets too high, then people won’t bother buying the items/goods. John Adams wrote about that. With direct taxes, like income and property taxes, there is no limit to how high the government can raise them. This is why the founding fathers preferred indirect taxes. This is also why any new direct tax must pass through the House of Representatives, which is based on population. That stipulation was not by accident either, and was not a “flaw.” This makes direct taxes very difficult to pass, which is how they wanted it. It prevents poorer states from looting from the richer states. The Sixteenth Amendment just basically threw Article 1 Section 2 out the window, and subsequent rulings and dissents by the Supreme Court confirm that view.

    “The Supreme Court considered this income tax “indirect.” It was perfectly legal, and because it was not “direct,” it did not need to be apportioned among the states.”

    The Supreme Court was wrong. If you’re going to argue that it’s constitutional because the SC says so, then please save your breath, as your argument begs the question.

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  • http://rayraphael.com Ray Raphael

    Yes, the framers preferred indirect taxes, but except Luther Martin and a few holdouts, they all insisted that Congress be given the power to levy direct taxes as well. For Madison, Hamilton, Washington, and company, granting Congress broad powers of taxation was a driving force behind the Convention. The reason they insisted on apportionment for direct taxes had nothing to do with “poor states” and “rich states” — that’s reading history backwards. They wanted to prevent REGIONAL direct taxation: on slaves, for instance, which would burden the South, or fishnets, which would burden the Northeast.

    What they did not foresee is that virtually ANY direct tax, if apportioned among the states, would result in different tax rates for residents of different states — and that was the fatal flaw. They did not do this to PREVENT direct taxes, but to make them fair, and that didn’t work out.

    The only portion of Article 1, Section 2 that is relevant had already been thrown out by the Section 2 of the Fourteenth Amendment.

    I heartily disagree with the Pollock decision, which necessitated the Sixteenth Amendment. I’m talking history here, not philosophy. That decision made it easier to tax income from labor than from property. Without the Sixteenth Amendment, your wages and salaries could be taxed today, and likely at a greater rate, since income from rent, interest, and dividends would get off scott free.