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Sixteenth Amendment

SIXTEENTH AMENDMENT

The Sixteenth Amendment to the U.S. Constitution reads:

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.

Congress passed the Sixteenth Amendment to the U.S. Constitution in 1909, and the states ratified it in 1913. The ratification of the amendment overturned an 1895 U.S. Supreme Court decision that had ruled a 2 percent federal flat tax on incomes over $4,000 unconstitutional (pollock v. farmer's loan & trust co., 157 U.S. 429, 15 S. Ct. 673, 39 L. Ed. 759). Article I of the Constitution states that "direct taxes shall be apportioned among the several states … according to their respective numbers." By a 5–4 vote, the Court in Pollock held that the new income tax was a direct tax insofar as it was based on incomes derived from land and, as such, had to be apportioned among the states. Because the law did not provide for apportionment, it was unconstitutional.

The decision was unpopular and took the public by surprise because a federal income tax levied during the u.s. civil war had not been struck down. Critics contended that the conservative majority on the Pollock Court was seeking to protect the economic elite. Industrialization had led to the creation of enormous corporate profits and personal fortunes, which could not be taxed to help pay for escalating federal government services. The democratic party made the enactment of a constitutional amendment a plank in its platform beginning in 1896.

The language of the Sixteenth Amendment addressed the issue in Pollock concerning apportionment, repealing the limitation imposed by article I. Soon after the amendment was ratified, Congress established a new personal income tax with rates ranging from 1 to 7 percent on income in excess of $3,000 for a single individual.

further readings

Jensen, Erik M. 2001. "The Taxing Power, the Sixteenth Amendment, and the Meaning of 'Incomes'." Arizona State Law Journal 33 (winter).

Oring, Mark, and Steve Hampton. 1994. "Cheek v. United States and the Tax Protest Movement: An Historical Reassessment of the Sixteenth Amendment." University of West Los Angeles Law Review 25 (annual).

cross-references

Apportionment; Income Tax.

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Sixteenth Amendment

SIXTEENTH AMENDMENT


Proposed in Congress on July 12, 1909, and ratified February 3, 1913, the Sixteenth Amendment to the U.S. Constitution gives the federal government (specifically, the U.S. Congress) authority to levy and collect income taxes. The amendment states that incomes may be taxed "from whatever sources derived" and without regard to population. In other words, it is up to Congress to determine the level at which citizens of the country are taxed, and this may be done without apportionment among the individual states.


One hundred years before the Sixteenth Amendment was approved, Congress had begun eyeing income tax as a way to collect funds for government use. Lawmakers first considered levying an income tax to help pay for the War of 1812 (18121814), which the new republic fought against Great Britain over shipping disputes. During the American Civil War (18611865) Congress imposed an income tax for the first time, charging workers and businessmen between three and five percent of their earnings and establishing (in 1862) a Bureau of Internal Revenue to administer the tax program. The war over, income taxes were phased out. In 1894, responding to increasing economic and political pressures, the legislature again passed an income tax law (two percent on all incomes over $4,000), as part of the Wilson-Gorman Tariff Ac, but the law was struck down by the U.S. Supreme Court, which declared it unconstitutional in the case of Pollock v. Farmers' Loan and Trust Company (1898). In the early 1900s the idea of an income tax received widespread political support for the first time. Progressive politicians could see that the nation's wealth was poorly distributed, as the gap between rich and poor was growing wider. Conservative politicians worried that the government would not be able to respond to a national emergency if it lacked resources. These political factions found a single voice in favor of a graduated income tax (a tax based on level of incomethose who earn more, pay higher taxes). To circumvent the U.S. Supreme Court it was necessary for Congress to propose an amendment to the Constitution. In ratifying the amendment the states gave Congress the authority to set rates and collect income tax.

Tax rates have fluctuated ever since the passage of the Sixteenth Amendment, reaching their highest mark during World War II (19391945), when the rate soared to 91 percent. The war effort also brought the innovation of automatic withholdings: Taxes were deducted directly from paychecks. In 1953 the Bureau of Internal Revenue was dramatically reorganized to create the Internal Revenue Service (IRS). Over the decades tax laws (collectively called the Tax Code) have become increasingly complex, prompting a recent movement in favor of a flat (versus the graduated) tax, where all taxpayers are charged at the same rate.

See also: Flat Tax Provision, Pollock v. Farmers' Loan and Trust Company, Progressive Tax, Regressive Tax

the congress shall have 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.

sixteenth amendment, u.s. constitution

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Sixteenth Amendment

Sixteenth Amendment

The Congress shall have 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.

The Sixteenth Amendment grants Congress the right to place a tax on the incomes of both individuals and corporations. Before the amendment, Congress had the right to levy taxes on states, but not on individuals. Article I, Section 10 of the Constitution states that all taxes must be apportioned (divided up) among the states, which meant that each state had to be taxed equally. Adjustments were made for states with larger or smaller populations, but, in general, Congress did not have the constitutional right to tax individuals. Only states had the right under the Constitution to tax their citizens. Therefore, for Congress to levy a national individual income tax, the Constitution had to be amended.

Ratification Facts

Proposed:

Submitted by Congress to the states on July 12, 1909.

Ratification:

Ratified by the required three-fourths of states (thirty-six of forty-eight) on February 3, 1913. Declared to be part of the Constitution on February 25, 1913.

Ratifying States:

Alabama, August 10, 1909; Kentucky, February 8, 1910; South Carolina, February 19, 1910; Illinois, March 1, 1910; Mississippi, March 7, 1910; Oklahoma, March 10, 1910; Maryland, April 8, 1910; Georgia, August 3, 1910; Texas, August 16, 1910; Ohio, January 19, 1911; Idaho, January 20, 1911; Oregon, January 23, 1911; Washington, January 26, 1911; Montana, January 30, 1911; Indiana, January 30, 1911; California, January 31, 1911; Nevada, January 31, 1911; South Dakota, February 3, 1911; Nebraska, February 9, 1911; North Carolina, February 11, 1911; Colorado, February 15, 1911; North Dakota, February 17, 1911; Kansas, February 18, 1911; Michigan, February 23, 1911; Iowa, February 24, 1911; Missouri, March 16, 1911; Maine, March 31, 1911; Tennessee, April 7, 1911; Arkansas, April 22, 1911 (after having rejected it earlier); Wisconsin, May 26, 1911; New York, July 12, 1911; Arizona, April 6, 1912; Minnesota, June 11, 1912; Louisiana, June 28, 1912; West Virginia, January 31, 1913; New Mexico, February 3, 1913.

Origins of the Sixteenth Amendment

The idea of a graduated income tax was not new when it was submitted to Congress in 1909. For centuries, churches and other religious organizations had asked members to give a percentage of their income. This donation of part of one’s income (often 10 percent) is called tithing, and it enabled members to give according to their individual financial situations..

During the Middle Ages, some rulers in Italy collected a tax on incomes. From 1799 to 1816, the British Parliament set up a temporary income tax to finance British wars against Napoleon Bonaparte (1769-1821). (Napolean was the French emperor who was waging war against much of Europe and the Mediterranean countries at that time.) The British finally started a permanent income tax in 1874.

In the United States, the first income tax appeared as the Civil War Income Tax of 1862. The United States was engaged in the Civil War, and it was turning out to be a very expensive conflict. Salmon P. Chase, the secretary of the treasury at the time (who later became chief justice of the U.S. Supreme Court), came up with the idea of taxing incomes as an fair way of dividing up the expense of the war.

Many states had adopted an income tax as a temporary measure to pay the cost of the war. Secretary Chase’s plan was also meant to be temporary. The income tax he envisioned would raise money and involve individual citizens in the war effort. Secretary Chase’s tax was a graduated tax that included a $600 exemption, meaning that a taxpayer did not have to pay tax on the first $600 of his or her income. Six hundred dollars was a lot of money in 1862, but Chase persuaded citizens to accept his tax proposal by assuring them that only the very wealthy would end up paying much money.

Reasons for taxing incomes

Setting up an income tax was an attempt to make taxation fair. The idea behind taxing incomes was that those who made more money would pay more tax. Those who earned less money would pay little or no income tax. This type of taxation is called a progressive, or graduate, tax.

A regressive tax (also known as sales tax) is one for which everyone pays the same percentage of the cost of goods. Regressive taxes are harder on poor people, because they take a bigger portion of a small income than they do a large income. For example, a 5 percent sales tax on a $100 item adds $5 to the price of the item. To a cashier at a fast food restaurant, $5 might represent an hour of work. A lawyer who charges $250 an hour would hardly notice an additional $5.

A progressive income tax allows someone with a low income to pay a smaller percentage than someone with a higher income. The percentage to be paid increases in steps, or what is known as “income brackets.” A progressive tax allows individuals to pay what they can. To many, this arrangement is more fair than a regressive tax that would expect everyone to pay the same amount regardless of individuals’ income.

Before Income Taxes

In the early days of the United States, there were few taxes. In fact, until 1817 there were no internal taxes at all. The new U.S. government raised the money it needed by adding taxes onto the price of goods. Taxes on imported goods are called tariffs, and taxes on domestic goods are called excise taxes. Governments still charge tariffs and excise taxes in the twenty-first century.

Tariffs raise revenue (income) for the government, but they also serve another purpose—to raise the price of imported goods. Items imported from other countries are often cheaper than those produced in the United States. Adding a tariff increases the price of the imported goods and helps domestically produced products compete with them. In the 1700s and 1800s, tariffs caused disagreements among people in different parts of the country.

In the North, there were many factories that produced consumer goods (like woven cloth or farm tools). The factory owners were happy about the tariffs. Tariffs made the price of imports go up. These increased prices let northern-made products compete with imports. Even the workers in the factories benefited from the tariffs. If more people bought domestically produced goods, there were more factories.

In the West and South, by contrast, people depended on farming. They received no benefit from the higher prices of imported manufactured goods. They did not work in the factories that made manufactured goods, nor did they sell the goods. They only bought them. Using tariffs to raise the prices on imported products did not do the farmers any good at all.

However, even certain goods produced in the United States were taxed with an added fee called an excise tax. Excise taxes were a kind of sales tax. They were often placed on luxury items, such as tobacco, alcohol, and sugar. The excise tax began in seventeenth-century Holland and was used in Dutch colonies in the Americas, such as New York. Excise taxes were soon widely used by governments to raise money throughout both Europe and the colonies. Later, it was used by the United States when the country was formed.

While the federal government used tariffs and excise taxes to raise money, state governments used another kind of tax: the property tax. A property tax charged a fee to those who owned land. The more the land was worth, the higher the tax charged. The property tax was a progressive tax that was fair in more ways than the tariffs and excise taxes.

Tariffs and excise taxes were regressive taxes that just added a flat fee to certain items, which increased their price the same amount for both rich and poor. The property tax was considered to be fairer because wealthier people usually owned more valuable property. Therefore, they paid more taxes than the poor.

However, property tax created a division between those who lived on farms and ranches, and those who lived in the cities. In the mid-1800s, the Industrial Revolution was underway. More and more factories were built in cities. Factories drew people in from the countryside to work in the new manufacturing jobs. Factory workers became urban dwellers who rented rather than owning property—and consequently did not pay property taxes. Farmers and other rural landowners felt it was unfair to tax their property, especially since the factory workers and owners paid few taxes on the money they made.

Creating a New Kind of Tax

The Income Tax Act of 1862 set up a Bureau of Internal Revenue, with a commissioner of Internal Revenue at its head. The commissioner assessed and collected income taxes. He enforced the new tax by prosecuting those who refused to pay by taking their money or property as payment.

In 1862, people were taxed in much the same way they are in the 2000s. Those who made less than $600 per year paid no tax. Above $600, there were tax “brackets” that corresponded to different levels of income—the higher one’s income, the higher one’s tax. Wealthy people who made over $10,000 a year paid a flat 3 percent tax on their incomes.

Even such a limited income tax was very effective in raising money. However, the Income Tax Act of 1862 was only a temporary law designed so that the United States could pay off its enormous Civil War debts. When the act expired in 1870, there was much debate over whether to renew the income tax.

Wealthy people favored other kinds of taxation. A small excise tax on tobacco or a tariff on imported goods did not affect them very much. A tax on their rising incomes did. However, poor and working middle-class people thought that an income tax was a fair way to raise money. The poor did not actually get money from the taxes on the rich, but they did get more services from the government. Tracing a line between these two positions, Congress passed limited income tax bills in 1870 and 1871. In 1872, the wealthy business owners finally won the debate, and the income tax lapsed.

Income Tax and the Populist Party

After the Civil War, farmers and other rural dwellers from the West and South felt more and more that their interests were being overlooked in favor of the industrialists from the big cities that were largely in the North. They formed “Farmers’ Alliances”—groups where they could talk about their grievances and make political plans.

The first Farmers’ Alliance formed in 1877. A group of farmers in Texas facing hard economic times met to discuss their problems. Similar alliances soon formed all over Texas. By 1886, there were 2,000 alliances with 100,000 members in Texas alone. Alliances also formed in Georgia, Tennessee, Kansas, the Dakotas, and other places in the rural United States.

By the 1890s, the farmers’ situation was becoming more and more desperate. The prices for equipment and goods they needed to buy were going up, but the prices they could get for their crops were going down. In 1891, representatives from the various state alliances met in a national convention in Cincinnati. By 1892, members of the farmers’ alliances were so disgusted with the prevailing parties (Republican and Democrat) that they met again in Omaha and picked their own candidate for president.

The Populist, or People’s, Party, as they now called themselves, wanted to change many things, but their major goal was “to restore the government of the Republic to the hands of the ’plain people,’ the class with which it originated.” They also wanted: to reform currency by minting more coins and printing more paper money; to elect U.S. senators by direct vote of the people (see the Seventeenth Amendment); an eight-hour work day; pensions; immigration reform; as well as to reform (change) other laws. They also wanted a progressive, graduated income tax.

The Populist movement was so powerful that it began to make the other major parties take note of their demands. In the 1892 presidential election, James Weaver the Populists’ first candidate for president, received over one million votes. During this same election, the Democratic Party took on some of the most important Populist issues, among them, the income tax.

In 1894, William Jennings Bryan, a Democratic congressional representative from Nebraska, designed a simple two percent income tax on all income over $4,000 per year. The measure became part of a larger tax bill known as the Wilson-Gorman Tariff Act of 1894. Bryan was a persuasive speaker and gave a dramatic speech to support his tax bill. “Of all the mean [cheap] men I have ever known,” he said, “I have never known one so mean that I would be willing to say of him that his patriotism was less than 2 percent deep!” Bryan’s tax bill passed.

The Populists transferred most of their support to the Democrats and faded from sight as a political force. However, their influence is seen in much of the liberal legislation of the late nineteenth and early twentieth centuries. One such piece of legislation is the Sixteenth Amendment.

Heading Toward an Amendment

The victory of the 1894 tax bill was short lived. Determined to fight the government’s taxing of their incomes, many wealthy people and corporations sued the government for charging this tax. They claimed that the new tax was unconstitutional, and said it violated Article I, section 10 of the Constitution. This section states that all taxes must be distributed equally among all the states. On May 20, 1895, the United States Supreme Court agreed in Pollock v. Farmers Loan & Trust Co., and ruled that the income tax was unconstitutional.

In Pollock by a narrow majority of 5-4, the Court ruled that the income tax law violated Article I, Section 9, of the Constitution, which provides: "No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken." Chief Justice Melville Fuller and his colleagues in the majority reasoned that this new tax was a direct tax not apportioned by state population.

At this point, Congress realized that the Constitution would have to be amended before an income tax could be instituted. Because so many people felt strongly about the tax and how it should be implemented, it took a long time before Congress could even agree to propose an amendment. Thirty-three different amendments were suggested and rejected for one reason or another before the final wording was approved by Congress in 1909.

After Congress approved the proposed amendment, it was time to send it to the states for ratification. The amendment passed quickly in the South and West where the income tax had always been popular. Things took longer in the industrialized North. But by the end of February 1913, Delaware became the thirty-sixth state to ratify the Sixteenth Amendment, the last state needed to make the amendment part of the U.S. Constitution. William Howard Taft was president when Congress approved the amendment, but it was Woodrow Wilson who signed it into law. His doing so brought to a close the long process that had first started in 1895.

Taxing crime

The first act based on the Sixteenth Amendment included the words “lawful business” to describe the kind of income taxable under the new law. In 1921, Congress passed the Revenue Act of 1921. This act removed the word “lawful,” and allowed the government to tax all income—even that from illegal enterprises. The first case to test this new taxation on illegal businesses was United States v. Sullivan (1927) .

Manly S. Sullivan was a businessman who sold illegal liquor. He was caught and prosecuted for his crime, but he hoped to avoid an additional charge of tax evasion. He claimed that since the Fifth Amendment gave him the right not to incriminate himself (that is, not to accuse himself of a crime), he did not have to publicly admit his illegal income in order to pay taxes on it. The Supreme Court, under Chief Justice Oliver Wendell Holmes, disagreed with Sullivan’s argument. The Court ruled that he was required to pay taxes on the money he received from his illegal business.

Probably the most famous tax evasion case involving someone in illegal business was that of Al Capone, a notorious gangster in the 1920s who ran much of Chicago’s illegal business. The Federal Bureau of Investigation (FBI) estimated his $105 million income in 1927 came from illegal activities such as selling alcohol, dealing in prostitution and running gambling rings. However, the FBI was unable to gather enough evidence to prosecute him for those crimes. Instead, Capone was finally caught and convicted of income tax evasion and was sentenced to eleven years in prison.

The Tax that Grew and Grew

Though several different Congresses had fought, argued, and worked hard to pass an income tax amendment, the early income tax only accounted for a small part of the federal government’s revenue. This was partly due to a low tax rate, and partly to a high exemption (the amount of income not subject to taxation) .

The 1913 income tax was the first under the new amendment. It taxed people with an income over $3000, $4000 for married couples. The lowest taxable income rate was 1 percent; the highest rate was 7 percent (on incomes over $500,000). In 1918, income taxes collected from U.S. citizens amounted to over $1 billion for the first time. By 1920, the figure was $5.4 billion.

Until 1943, there was not a dependable way to assess how much income tax people owed and no effective way to collect that tax. The system depended largely on voluntary compliance. Even if people had every intention of paying, poor and low-income working people often did not have enough extra money to pay their tax bills.

In 1943, the United States was involved in World War II. There were many expenses that went along with waging war, and lawmakers searched for ways to increase revenues from income tax. The idea they came up with was called “withholding.” This process involved subtracting money for taxes from a person’s pay; the withheld amount was sent to the government before the person received the paycheck. President Franklin Roosevelt vetoed Congress’s proposal for withholding taxes. He felt that it would be too hard on low-income people, but the law passed anyway.

Withholding taxes greatly increased the number of people paying taxes. For example, in 1935 there were 4 million taxpayers. Just ten years later, in 1945, the number of taxpayers climbed to 42.7 million. The revenue from income tax also rose. It rose from $1 billion in 1918, to $43 billion by 1943. By 1999, income tax revenues ballooned to $508.4 billion and showed no signs of decreasing.

Ever since the Civil War Income Tax of 1862, politicians have persuaded the American people to accept the income tax. They have assured them that, with low percentages and high exemptions, it would affect only the richest taxpayers. Withholding changed all that. What started as a fairly minor tax that mostly affected the wealthy had become everybody’s tax.

The Ever-Changing Tax Code

Amending the Constitution to allow an income tax was just the start of creating the modern American income tax. The Internal Revenue Code, also called the U.S. Tax Code, is the book of laws that actually spells out the details of the income tax. While the Sixteenth Amendment gave Congress the right to ask citizens to pay an income tax, it is the Tax Code laws that determine exactly how to implement that tax.

The code was expanded and changed many times; by 2007, it had reached over 2,000 pages in length. The Tax Code explains in detail exactly which income is taxable and at what rate. It also outlines which expenses and purchases taxpayers can deduct from their income in order to lower their taxes. These laws are very complicated because they need to describe in detail every deduction, credit, subsidy, and exemption. In fact, tax laws and forms are so complex that by 1991, 40 percent of all taxpayers hired professional tax people to do their taxes for them.

Other ways to use the Tax Code

Make it simple with a flat tax.

Many taxpayers feel that the Tax Code is just too complex and must be simplified. One suggestion that politicians have offered is the “flat tax.” The flat tax is the opposite of a graduated tax. Instead of paying a percentage of one’s income that gradually increases as one earns more, all taxpayers would pay the same “flat” tax rate. This might simplify the process of paying taxes, but many argue that it would remove the basic fairness of the graduated income tax, in which those who earn more pay a higher percentage.

Using the Tax Code for financial “rewards.”

The Tax Code has another function. Lawmakers can actually use the Tax Code to encourage people to make certain decisions in their lives. For instance, people who own houses are allowed to deduct part of the cost of buying a house from their income so that they pay less tax. There is not a similar deduction for those who rent a house or apartment. In this way, the government encourages people to become homeowners and financially rewards them for buying a house. There are many ways the government can use the financial reward of a tax deduction to enforce the government’s own values or to help business.

Over the years, the Tax Code has been changed to reflect the political atmosphere of the times. In 1982, for example, a conservative Republican administration led the way to large tax cuts for the wealthiest individuals and corporations. The tax rate for the highest income brackets was cut from 70 percent to 50 percent. The Tax Reform Act of 1986 continued to cut even more, and the rate dropped from 50 percent to 28 percent—much lower than the original 70 percent. On the other side, in the mid-1990s, a more liberal Democratic administration increased the Earned Income Credit, which is a payment from the government to help very low income taxpayers.

Tax Resistance

Americans have a long history of refusing to pay taxes as a way of protesting a government’s policies. The Boston Tea Party of December 1773 was an early example of American tax resistance. Rather than paying a tax they considered unfair, patriotic colonists boarded ships and threw imported tea into the Boston harbor.

In western Massachusetts in 1780, Daniel Shays led a large group of farmers and other working people who protested harsh penalties for debts and non-payment of taxes. These tax protesters were angry enough to arm themselves and fight for better conditions. After several clashes with government militia “Shays Rebellion,” as it was called, was stopped. Daniel Shays was pardoned, but more than a dozen of those who had marched with him were hanged. These kinds of public demonstration allowed protesters to publicize their cause in a dramatic way and to gain support from other like-minded people.

The income tax is a personal—even intrusive—tax. The government demands to know intimate details about the lives and work of taxpayers and requires people to give the government part of their hard-earned income. From the time the income tax became a permanent part of U.S. life in 1913, some have refused to pay their income tax. These people are called tax evaders.

Some tax evaders have based their resistance solely on principle. Some have never approved of the direct connection between the people and the federal government. They believe that the federal government was never meant to have as much power as it does. They speak of the evils of what they call “big government” or an overly powerful federal government that comes in and tells the state and the individual what they must do. Some people also oppose other federally enforced programs, such as the integration of schools. One such group is the Freemen of Montana.

The Freemen came to national notice in the spring of 1996. A group of eleven Freemen occupied a ranch in Montana. They held federal agents off with firearms and explosives for 81 days before they were finally arrested. The Freemen do not believe in the authority of the United States government. They set up their own government with their own courts.

They quote parts of the United States Constitution, the Bible, and the Magna Carta (England’s charter of citizens’ rights). They believe these documents give them the authority to act independently of the U.S. government. They refuse to engage with the government at all: they do not pay taxes, and they do not obtain driver’s licenses, social security numbers, or building permits. They even refuse to use zip codes on their mail.

Another group that opposes the income tax is the Libertarian Party, which was formed in 1972. Libertarians believe in severely limiting the functions of the federal government. Their plan would cut the budget by two-thirds; end all government programs except the military, police, and prisons; open all borders; and abolish the income tax. Since 1972, they have backed political candidates at all levels of government, even the presidency.

But tax protesters reside at the other end of the political spectrum as well. Some refuse to pay their taxes because they feel too much of their money goes for military spending. The earliest protests came from religious groups, such as Quakers or Mennonites. One of the most famous resisters is the writer Henry David Thoreau. He went to jail in 1846 because he refused to pay a poll tax that raised money for the Mexican-American War. Thoreau wrote many books, two of the best known are Civil Disobedience and Walden, or Life in the Woods.

Each time the country increases its spending on the military, the number of pacifist (people against the use of force) tax resisters increase. In the mid-1980s military spending rose dramatically. The National War Tax Resistance Coordinating Committee estimated that between 10,000 and 20,000 Americans refused to pay part or all of their income tax.

The Tax We Love to Hate

The Civil War Income Tax of 1862 was first introduced in the United States as a fairly small tax to increase the country’s income during the war. Even after the Sixteenth Amendment legalized a permanent income tax, the income tax did not supply the largest part of the government’s revenue. The nation’s major source of income came from the tariffs and excise taxes that were the traditional taxes in Europe.

Hard economic times hit the United States during the 1930s, and the U.S. government depended more on income tax for raising money. With the beginning of World War II in 1941, and the introduction of income tax withholding in 1943, the importance of the income tax as the federal government’s source of income continued to increase. By 1997, income taxes collected from citizens provided 85 percent of the revenue that funds the U.S. federal government, making it even more truly a government “by the people.”

When April 15—the federal due-date for paying taxes—rolls around each year, most taxpayers complain a lot. They may spend hours hunched over piles of complex forms. Comedians on TV make jokes, and post office employees’ work overtime as long lines of grumpy last minute taxpayers try to get their tax returns in by the deadline. Even though many taxpayers resent sending hard-earned money to the government, all governments must collect taxes. It is hoped that citizens see the benefits of their tax payments in the services they receive from their government.

Recent Controversy Over Income and the Sixteenth Amendment

In August 2006, a three-judge panel of the U.S. Circuit Court of Appeals for the District of Columbia determined in Murphy v. IRS that a woman suing her former employee for emotional distress should not have to pay federal income taxes on damages for such distress because it was not income within the meaning of the Sixteenth Amendment. Congress had passed a law providing that employees must pay income tax on awards they receive for nonphysical injuries, such as damages for loss of reputation. Marrita Murphy, who allegedly suffered retaliation from her former employer after reporting on labor violations, contended that Congress did not have the power to tax the monies she received for her nonphysical injuries. One of her arguments was that the federal tax law provision violated the Sixteenth Amendment. To the surprise of many, the federal appeals court agreed with her—at least initially.

“The Sixteenth Amendment simply does not authorize the Congress to tax as ‘incomes’ every sort of revenue a taxpayer may receive,” the appeals court reasoned. According to the court, the framers of the Sixteenth Amendment did not consider monies for physical and nonphysical injuries as income within the meaning of the amendment. However, in July 2007, the same three-judge panel ruled in a rehearing that even though the employee’s award was not income within the meaning of the Sixteenth Amendment, Congress can still tax emotional distress awards under Congress’s broad powers under Article I, Section 8 of the Constitution, which provides: "Congress shall have power to lay and collect taxes, duties, imposts and excises…."

The Effects of the Sixteenth Amendment

The Sixteenth Amendment was the final result of a long process involving generations of American lawmakers who worked to create effective forms of taxation. It has had far-reaching effects.

It gave the federal government a consistent source of revenue—something all governments need in order to pay their operating expenses. The burden of paying taxes is divided between the people so that theoretically everyone pays based on what they earn. Income tax also gives citizens a personal reason to participate in their national government, because the money Congress spends comes directly from the people. Citizens may be more actively concerned about government spending and tax laws. They may pay more attention to what their elected representatives do about spending and express their opinions by voting for candidates whom they believe will use their money wisely.

From Salmon Chase’s first income tax proposal in 1862 to President Woodrow Wilson’s signing of the Sixteenth Amendment in 1913, income tax was meant to be positive—to make the necessary evil of taxation as fair as possible. Future generations of taxpayers will continue to make changes in the tax code as they continue trying to balance the people’s happiness and success with the public good.

FOR MORE INFORMATION

Books

Adams, Charles. Those Dirty Rotten Taxes: The Tax Revolts That Built America. New York: Free Press, 1998.

Englebrecht, Ted D., et al. Federal Taxation: Comprehensive Topics. Chicago, IL: CCH, 2007.

Freeland, James J., et al. Fundamentals of Federal Income Taxation: Cases and Materials. New York: Foundation Press, 2006.

Lehman, Jeffrey, and Shirelle Phelps, eds. West’s Encyclopedia of American Law. Farmington Hills, MI: Thomson Gale, 2004.

Morin, Isobel V. Our Changing Constitution: How & Why We Have Amended It. Brookfield, CT: Millbrook Press, 1998.

Nwanna, Gladson. The History of Federal Income Tax and Facts the IRS Wants You to Know: An Annotated Guide for Students and Adults. Florence, KY: Frontline Press, 2005.

Periodicals

Birnbaum Jeffrey H. “A Tax Protest that Doth Protest Too Much, Wethinks.” Fortune 139 (May 24, 1999), p. 326.

Brown, Dorothy A. “Race and Class Matters in Tax Policy.” Columbia Law Review 107 (April 2007): 790–831.

Germain, Gregory L. “Taxing Emotional Injury Recoveries: A Critical Analysis of Murphy v. Internal Revenue Service .” Arkansas Law Review 60 (2007).

Jensen, Erik M. “Interpreting the Sixteenth Amendment (By Way of the Direct-Tax Clauses).” Constitutional Commentary 21 (Summer 2004): 355–50.

Maier, Scott A., and John D’Amico. “Parting with Property Prior to Divorce.” New Jersey Law Journal (June 29, 2007).

Zelenak, Lawrence A. “Radical Tax Reform, the Constitution, and the Conscientious Legislators”, Columbia Law Review 99 (April 1999): 833–55.

Web sites

Find Law for Legal Professionals. “U.S. Constitution: Sixteen Amendment.” (accessed August 22, 2007).

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Sixteenth Amendment

Sixteenth Amendment

On February 25, 1913, the Sixteenth Amendment to the U.S. Constitution was ratified, which required Americans to pay income tax. It took nearly four years of debate to get this amendment passed.

The idea of paying income tax was not new in 1913. As far back as the War of 1812 the concept of using taxation to fund a federal issue was considered. The war ended before the tax levy could be legalized, and the question of taxation did not come up again until the American Civil War (1861–65).

The Internal Revenue Act of 1862 taxed incomes in a progressive manner. This meant that the higher the income, the higher the tax. Those with incomes up to ten thousand dollars paid a 3 percent tax; those who earned more than that annually paid a 5 percent tax. Although rates fluctuated the law was in effect until 1872, when Congress let it expire. Business owners were unhappy with the tax and pressured lawmakers for change, since they viewed it as being penalized for being successful.

In 1894 Congress passed the Wilson-Gorman Tariff Act, which imposed a 2 percent tax on all annual incomes over four thousand dollars. The law was declared unconstitutional the following year, however, in violation of the Constitution's prohibition of direct taxation.

Many citizens fought for the adoption of income taxation. It was an easy way to raise money that could be used for any number of things. The main concern was that the bulk of the country's wealth lay in the hands of just a few people. This was seen as a threat to democracy, and the income tax could reverse that trend. Conservatives opposed the use of taxation as a means for the redistribution of wealth.

As it became apparent that the income tax measure might become reality, a Constitutional amendment was submitted to the states in 1909. The back-and-forth fighting over the issue continued into the second decade of the twentieth century. In the end only five states rejected passage of the amendment.

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Sixteenth Amendment

SIXTEENTH AMENDMENT

The Sixteenth Amendment was designed to circumvent pollock v. farmers ' loan and trust co. (1895), in which the Supreme Court had held that a federal tax on income from property was a direct tax on that property and therefore invalid for want of apportionment among the states on the basis of population (Article I, sections 2 and 9). Following Pollock, powerful political forces continued to press for an income tax to replace the regressive consumption taxes then employed to finance the federal government. Indeed, an amendment might have been unnecessary, given the Supreme Court's philosophical shift in Flint v. Stone Tracy Co. (1911), upholding a corporate income tax as an excise on doing business in corporate form, not a tax on property.

Although there was sentiment for challenging Pollock by reenacting a personal income tax, President william howard taft urged a constitutional amendment. The Sixteenth Amendment was speedily passed and ratified in 1913. It provides: "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."

Since the enactment of a new income tax statute in 1913, only a single Supreme Court decision has held an income tax provision unconstitutional. eisner v. macomber (1920) ruled that a stock dividend of common stock on common stock was not "income" because the element of "realization" was lacking. Macomber has been greatly undermined by subsequent cases, such as Helvering v. Bruun (1940) which treated the return of a lessor's property to him at the termination of a lease as a realization of income. Indeed, the current Court would probably dispense entirely with any constitutional requirement of a realization (or alternatively view a stock dividend as a realization). In Helvering v. Griffiths (1943) three dissenters would have overruled Macomber but the majority held that the constitutional issue had not been presented by the statute.

Eisner v. Macomber also purported to define "income" for constitutional purposes as "the gain derived from capital, from labor, or from both combined." This definition proved far too narrow; in Commissioner v. Glenshaw Glass Co. (1955), the Court rejected all considerations of source, holding a windfall constitutionally taxable as income.

Unlike Macomber, modern decisions go to considerable lengths to uphold the constitutionality of income tax provisions. For example, the lower courts upheld an income tax provision that taxed mutual insurance companies on their gross receipts in Penn Mutual Indemnity Co. v. Commissioner (1976). Because no deductions were allowed, the tax might have been levied even though the taxpayer had no gain. Similarly, lower courts have upheld a Code section that values property received for services by ignoring value-depressing restrictions on the property (Sakol v. Commissioner, 1978). Although the Supreme Court has not had occasion to confirm these broad holdings, the modern approach to claims of constitutional invalidity of tax statutes is to uphold them as indirect taxes or alternatively to define "income" with sufficient breadth to accommodate the provision in issue within the Sixteenth Amendment.

Michael Asimow
(1986)

Bibliography

Paul, Randolph 1954 Taxation in the United States. Boston: Little, Brown.

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