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.
At the founding of our nation, the framers decided not to allow the federal government to assess income or other direct taxes unless they were apportioned according to population. A direct tax is simply any tax that is paid directly to the federal government by the individual. Commonplace today, these types of taxes were frowned upon when the nation began. Instead of income or other direct taxes, the founders thought that indirect taxes – sales taxes, import duties and the like – were legitimate means for the federal government to raise money.
The consensus of the founders was that the power of direct taxation would shift the dynamic between the individual and the state in a powerful and oppressive way. With direct taxing power, it was feared that Congress could assess a tax on all persons with no limits on the amount. Whether assessed as a percentage or a fixed amount, these taxes couldn’t be readily avoided or evaded by the citizens. For instance, a person couldn’t simply not engage in the behavior that was subject to taxation the way you could with a sales tax or other transaction style tax. A direct tax could apply to income, land, cattle, securities transactions etc. and force people to either pay the tax or have their property confiscated. In addition, with Congress’ power of the purse over the army and the militia, the people would be powerless to prevent collection.
Although not consistently, the Supreme Court struck down several attempts by Congress to establish so-called “direct” taxes. However, during one critical period – the Civil War – the Supreme Court upheld a temporary income tax established to fund the war effort. The Revenue Act of 1861 levied a flat tax of 3% on annual income above $800 (or roughly $20,000 in today’s dollars)
In 1893, after the war was over and the temporary tax expired, Congress adopted another income tax law. In this case, the Congress attempted to assess a federal tax on income derived from real estate. In 1895, in Pollock v. Farmer’s Loan and Trust, the Supreme ruled that the income tax was unconstitutional. This view prevailed through the turn of the century.
Historians suggest that the growing needs of the Federal Government necessitated a regular and more lucrative revenue source and increasingly politicians in both parties eyed the direct or income tax as a solution. Nevertheless, it wasn’t until 1909 that the effort to push for an amendment began.
President William Taft sent a formal message to Congress requesting that an amendment be adopted that would allow Congress to have this power once and for all. The Senate approved the Sixteenth Amendment unanimously 77-0 and the House approved it by a vote of 318-14. After being ratified by 36 states in February of 1913, it became law. Ultimately, 42 of the 48 states would ratify the amendment.
Within a few years, it had become the principal source of income for the federal government. Nevertheless, its impact wasn’t obvious. In the beginning, hardly anyone had to file a tax return because the tax did not apply to the vast majority of the people in the U.S. For example, in 1939, 26 years after the Sixteenth Amendment was adopted, only 5% of the population, counting both taxpayers and their dependents, was required to file returns. Today, nearly all adults and even some youths must file an annual income tax form.
Horace Cooper is a legal commentator and a senior fellow with The Heartland Institute