Federal Income Tax Turns 100

Now that everyone has endured the anxiety and exasperation that accompanies Tax Day, it is an appropriate time to sit back and contemplate just how we got to this point in our country’s revenue raising history. It is especially appropriate this year because 2013 marks the centennial of the passage of the 16th Amendment to the United States Constitution, which provides the federal government with the authority to levy an income tax on the citizenry.

Taxes have always been a contentious issue between governments and the people whom they govern. Generally speaking, this contentiousness has centered on a single, but incredibly complex, issue: how equitably is the burden of taxation to be shared by all members of a given society. Famously, Americans of the Colonial period so strongly objected to a perceived inequity in the British government’s tax policy that they decided they would be better off not being a part of that government. As further evidence of the colonists’ dislike of iniquitous tax burdens, it should be remembered that the Articles of Confederation, which was drafted during the American Revolution, did not include any provisions allowing the central government to levy taxes. The Confederation Congress could only request money from the individual states. Not surprisingly, these requests were frequently ignored, or only partially fulfilled, so that central government functions, like the maintenance and operation of the Continental Army, were woefully underfunded.

A few years later, the Framers of the U.S. Constitution sought to remedy this funding problem by including, in Article 1, Section 8 of the venerable document, a clause giving Congress the “power to lay and collect taxes, duties, imposts, and excises, to pay the debts and provide for the common defense and general welfare of the United States…..” Over the course of the nation’s history, the interpretation of this authorization has been pretty straight forward and without much controversy. However, what comes next has proven to be a whole other story; one that has generated a firestorm of debate among legislators, judges, politicians, constitutional scholars, and ordinary taxpaying citizens. The remainder of the clause reads, “but all duties, imposts and excises shall be uniform throughout the United States.” To muddy the situation even further, in clause 4 of Section 9, it is stated that “No capitation, or other direct tax shall be laid unless in proportion to the census…….” As the nation grew during the 19th century, and the revenue needs of the federal government expanded, the obvious questions began to be asked in relation to taxation: How is the idea of “uniformity” to be defined in practice? And what exactly is a “capitation, or other direct tax”?

Revenue from tariffs placed on imported goods was sufficient to keep the federal government adequately funded during the first half of the 19th century, but the enormous military costs of the Civil War altered revenue needs dramatically. In response, Congress enacted the nation’s first income tax in 1861. This new law imposed a 3% tax on annual incomes between $600 and $10,000, and a 5% tax on incomes between $10,000 and $50,000. The Federal income tax remained in place, with various fluctuations in tax rates, until 1872 when Congress, unburdened by war costs but beset by an outcry of public disapproval, let it expire.

In 1894, Congress again passed an income tax law mostly in response to the growing Populist complaint that the federal government’s economic policies were tilted unfairly in favor of the wealthiest Americans. This law became short-lived, however, when, in 1895, the United States Supreme Court ruled in the case of Pollock v. Farmers’ Loan and Trust Co. that a federal income tax was unconstitutional. The court’s decision hinged on the argument that a tax on income was indeed a “direct tax” and, by its very nature, could not, in any practical manner, be allocated either uniformly or in proportion to the census.

Although it took more than 10 years after the Pollock case, progressive minded politicians and reformers eventually came to the conclusion that the only way to enact an income tax was to amend the Constitution. In July 1909, the 16th Amendment was passed by the U.S. Senate 77-0, and received approval in the House by a vote of 318 to 14. In August, Alabama became the first state to ratify the amendment. The ratification process slowed considerably at that point, but, eventually, in February 1913, the amendment received approval by the constitutionally prescribed ¾ of the state legislatures. It officially took effect on February 25, 1913, after having been certified by Secretary of State, Philander C. Knox. The text of the amendment read: “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.”

The Revenue Act of 1913 was the public law that fleshed out into detail the intent of the 16th Amendment. It had been sponsored in the House by Alabama Representative, Oscar Underwood, and was signed into law by President Woodrow Wilson on October 13, 1913. The law created a graduated tax rate system with a low margin of 1% on incomes between $3,000 and $20,000, and had a top margin of 7% on incomes above $500,000. By comparison, the 2013 rates have a low margin of 10% on incomes below $8,900 and a top margin of 39.6% on incomes above $400,000.

The development of tax policy in the United States has both been influenced by, and, in turn, had a profound influence upon the nation’s economic, political, and legal institutions. Anyone interested in learning more about this development can benefit from the resources available at the Birmingham Public Library. In addition to books on taxation issues, pertinent material is also available on constitutional history and the constitutional amendment process. Those wanting to get an idea of the way taxation issues were covered by the contemporary press will be pleased to know that the library has an substantial retrospective collection of newspapers, magazines and journals (many of which date back to the 19th century), as well as online databases that provide full text access to periodicals.

Jim Murray
Business, Science & Technology/Social Sciences Department
Central Library