Every mid-April, CPAs and postal workers hunker down as everyone waits until the last possible moment to pay their taxes. The history of the tax in the United States is a rich (pun slightly intended) and complicated one. At least four clauses of the original Constitution dealt with the subject, a response to the tyrannous taxation that led up to the American Revolution. But law and money are both contentious subjects, and when you put them together, well, just sit back and watch the fireworks.
Much of the confusion around taxation has been surrounding the definition of “direct” vs “indirect” taxes in the Constitution. Direct taxes, as defined in Article I, must be apportioned among the states based on population – in fact this is stated in the same sentence that defines how many Representatives each state gets. Indirect taxes have so such restriction. Article I clearly defines Duties, Imposts and Excises as uniform throughout the United States – and until 1913, these taxes generated most of the federal revenue. But direct taxes have always been a gray area. The Constitution speaks directly to capitation, which was fairly well understood to mean lump-sum taxes (equal for each person) and property taxes.
So where does income fall in this spectrum, and especially when a lot of income is generated by the owning and selling of property? This has been a debate since the beginning, and in fact there was an income tax created in 1861 to fund the Civil War. After that expired in 1872, multiple movements and parties began to call for a permanent graduated income tax. Then, in 1894, the Wilson-Gorman Tariff Act was proposed, which included a tax of two percent on incomes over $4000 (which is a pretty decent salary today). This led a case that reached the Supreme Court (Pollock v. Farmers’ Loan & Trust Co.), where the high court ruled that any taxes on incomes that trace back to property (which includes things ranging from rents to dividends) were unconstitutional unless treated as direct, meaning apportioned by population amongst the states. This effectively killed the concept of an income tax at the time, because it went strictly down to wages, which would have unfairly burdened those that work for the ones that have all the wealth through other means. And so began the push for a Constitutional Amendment.
On February 3, 1913, four years after passage in Congress, the 16th Amendment was ratified by the state of Delaware, reaching the required 3/4 mark to make it a part of our Constitution:
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.
As I was researching this Amendment, a number of the search hits led to pages that question whether the 16th Amendment really gave our government the power to tax our income. When I read it, I have difficulty seeing that argument; the wording seems pretty straightforward. The only argument that seems reasonable is that it might seem to contradict the original Constitution in Article I – but the definition of an “Amendment” is that it changes something. The Supreme Court seems to have agreed throughout its many personalities since 1913, which is why we still enter every April with trepidation. Regardless of your stance, it’s difficult to see how the United States could have fought in World Wars, brought itself out of the Great Depression, or landed on the Moon without the revenue base from the income tax. That’s not to say federal money is always well spent, but for myself I can’t say my taxes would have gone to a greater good in my own hands. Although various makers of beer may disagree.