Blame the 16th Amendment for Federal Income Taxes
From the colonists dumping tea into the Boston Harbor to the current tax code changes that Congress just adopted, few topics are as controversial as taxes in America.
After the United States Supreme Court said, “no” to an income tax, the progressive era Congress adopted the 16th Amendment, and it was ratified in 1913.
U.S. Constitution on Taxes
Under the U.S. Constitution, Congress was authorized to levy taxes on the American people. Article I, Section 8, Clause 1 states:
Pursuant to Article 1, Section 2:
Despite the above constitutional provisions, there were few taxes in the early days of the United States. The country largely generated revenue by levying taxes on goods, such as tobacco, sugar and carriages.
Rise and Fall of the First Federal Income Tax
To help finance the Civil War, Congress issued an “income tax” that directly taxed people based on their own individual incomes—irrespective of how populated their home state was.
The first federal income tax law, the Revenue Act of 1861, levied a flat tax of three percent on annual income in excess of $800. Similar statutes followed, which proved to be an effective way to generate revenue for the federal government.
In 1862, the office of Commissioner of Internal Revenue was established. The new federal agency was tasked with assessing, levying and collecting income tax, as well as enforcing tax laws. If taxes were not paid, the commissioner had the right to seize assets, much like the modern Internal Revenue Service (IRS).
After the Civil War taxes expired, political support continued for a federal income tax among Democrats, progressives and populists. Pursuant to the first peacetime income tax, the Income Tax Act of 1894 established that any “gains, profits and incomes” in excess of $4,000 were to be taxed at two percent for a period of five years.
Not everyone supported the tax, including wealthy industrialists. Charles Pollock, a stockholder in Farmers’ Loan & Trust Company, pursued his legal challenge all the way to the U.S. Supreme Court.
In Pollock v. Farmers Loan & Trust Co., 157 U.S. 429 (1895), a divided U.S. Supreme Court held that federal taxes on interest, dividends and rents violated Article 1 of the U.S. Constitution because they were not apportioned according to representation. While the Court acknowledged that apportionment was a burdensome task, the Court noted that the requirement was intended “to restrain the exercise of the power of direct taxation to extraordinary emergencies, and to prevent an attack upon accumulated property by mere force of numbers.”
As Justice John Marshall Harlan noted in his dissenting opinion, the practical result was that the federal government could not raise money through federal income taxes without amending the Constitution.
“It practically decides that, without an amendment of the Constitution—two-thirds of both Houses of Congress and three-fourths of the States concurring—such property and incomes can never be made to contribute to the support of the national government,” he wrote.
The decision spurred the adoption of the 16th Amendment, which officially created a federal income tax.
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Donald Scarinci is the founding partner of Scarinci Hollenbeck with law offices in New York and New Jersey. His practice focuses on representing public entities and businesses that interact with government. He lectures on Constitutional law and edits the award-winning Constitutional Law Reporter.
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