Posted by: ushistoryfiles | October 23, 2011

Everyone’s Favorite Topic: Taxes

            In total there are twenty-seven Amendments to the U.S. Constitution.  The first ten are known as the Bill of Rights and were adopted shortly after the adoption of the Constitution.  As the United States has grown as a nation, the Constitution has been amended over the years until there are currently twenty-seven Amendments.  Some of them can be grouped together such as the amendments related to Civil Rights, the 13th, 14th, and 15th or with voting rights such as the 19th, 23rd, and 26th.   But no Amendment has been held in as much disdain as the 16th Amendment which gives the Congress the power to lay and collect taxes.[1]

            Funding the U.S. Government through some sort of revenue was indeed necessary.  Prior to the Civil War, the government funded itself largely through import duties and excise taxes.[2]  It was during the Civil War that the U.S. Government needed a further source of income to help finance the war effort.  In fact, in the years leading up to the Civil War, the U.S. Government ran a deficit four consecutive times.[3]  So in 1861, Republicans proposed an income tax of 3 percent on incomes over eight hundred dollars.[4]  This is not surprising as Abraham Lincoln and the Whig Party, which was absorbed by the Republican Party on the 1850s, “thought in terms of an integrated nation” where the different classes could be “harmonized in economic complementarity” allowing for, “individual autonomy” to flourish.[5]  In 1862, the Revenue Act of 1862 would see an even more progressive structure with a tax of 3 percent on incomes of ten-thousand dollars after a six hundred dollar deduction with the rate changing to 5 percent on incomes over ten-thousand.[6]

            The idea of an income tax was well debated through the 1870s and 1880s as the issues would be between higher or lower tariffs and/or an income tax of some sort.  There was general agreement that the inequalities of the tariff system needed to be replaced with a fairer income tax.[7]  The issue would come to a legal head when the Wilson-Gorman Tariff Act of 1894 would reduce tariff rates and impose a 2 percent income tax on incomes over four thousand dollars.[8]  Farmers’ Loan & Trust Company, in accordance with the law, indicated that it would pay the tax on behalf of shareholders and report the names of the shareholders on whose behalf they were acting.  On Charles Pollock sued the company and the case made its way to the U.S. Supreme Court.[9]

            The U.S. Constitution prior to the Sixteenth Amendment was not silent on taxes.  Article 1, Section 2, states, “Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers”.[10]  Article 1, Section 8, give the Congress the power to “lay and collect Taxes”, and Section 9 further defines that power including the provision that a direct tax must be in proportion to the census.[11]  It was this provision (Article 1, Section 9) that would have bearing in Pollock v. Farmers’ Loan & Trust Co.

            The Court would rule, in 1895, that a tax on dividend income was indeed a direct tax and that under the Constitution taxes would have to be formulated “so that the amount collected from each state corresponded to that state’s population”.[12]  That would mean that the revenue collected from each state would have to be equal, so the rates that individuals would be charged would vary due to the population of each state: the higher the population the lower the rate.  This would create not only a convoluted tax structure, but also eliminate the progressivity of attaching a tax rate to income as now the rate would be attached to state populations.[13]

            In 1909, William Howard Taft, supporting the idea of an income tax, requested that Congress create a constitutional amendment rather than a law that might have to pass a Supreme Court test.  It would take nearly four years, but on February 3, 1913, the Amendment was ratified.[14]  Subsequent generations would argue over the fairness of the progressiveness of the tax, but the Sixteenth Amendment answered the question of its constitutionality.


[1] The Amendments to the US Constitution at: http://www.ushistory.org/documents/amendments.htm

[2] James McPherson, Battle Cry of Freedom. (New York: Oxford University Press, 1988),  442.

[3] Ibid., 442.

[4] Ibid., 443.

[5] Daniel Walker Howe, What Hath God Wrought: The Transformation of America, 1815-1848. (New York: Oxford University Press, 2007), 597.

[6] Arthur A. Ekrich, Jr., “The Sixteenth Amendment: A Historical Background,  The Cato Journal, v.1, no.1 (Spring 1981), 163.

[7] John D. Buenker, “The Ratification of the Federal Income Tax Amendment”, The Cato Journal, v.1, no.1 (Spring 1981), 186.

[8] Robert H. Wiebe, The Search for Order, 1877-1920, (New York: Hill and Wang, 1967), 92.

[9] Ekrich, 168.

[10] Linda R. Monk, The Words We Live By, Your Annotated Guide to the Constitution. (New York: Hyperion, 2003), 18.

[11] Ibid., 21-22.

[12] Akhil Reed Amar, America’s Constitution: A Biography, (New York: Random House, 2005),  406.

[13] Ibid., 406.

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Responses

  1. Very interesting article on the origin of the income tax. Well researched.

  2. I love studying history and about the congress. I like the comments about the income tax. Especially like reading about that since I am a CPA.


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