The 16th Amendment to the Constitution of the United States, authorizing Congress’s ability to levy income taxes, was officially proclaimed on Feb. 25, 1913. Originally, the Constitution had said that any direct tax must be apportioned (divided) among the states in proportion to their population. Courts generally interpreted a “direct tax” to mean either a tax levied on a person regardless of his or her income or wealth, or a tax on a person’s property. For a long time, Congress refrained from imposing an income tax, so the constitutionality of such a tax remained uncertain. Congress passed the nation’s first income tax law in 1861 to fund the American Civil War. The tax was repealed in 1872 because the war had ended and Congress no longer needed as much revenue.
Towards the end of the 1800’s, the Populist movement pushed for the passage of a new income tax law. Congress passed such a law in 1894. However, in the case Pollock v. Farmers’ Loan and Trust Company, the Supreme Court ruled the law unconstitutional because it taxed income derived from property, such as rent. The Court considered the taxing of income earned from property to be equivalent to taxing property directly. The Court’s ruling still allowed taxes to be collected from other types of income. In 1909, Congress passed a law to impose a tax on the incomes of corporations. The Supreme Court held this law to be constitutional.
Supporters of an individual income tax wanted to avoid future legal challenges and began the process of amending the Constitution. In order to amend the Constitution, three-fourths of the states must approve the amendment. With the ratification by Delaware, Wyoming, and New Mexico on Feb. 3, 1913, enough states had ratified the amendment to make it a part of the Constitution. Only six states never ratified the amendment—Connecticut, Florida, Pennsylvania, Rhode Island, Utah, and Virginia. The amendment 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.”
The 16th Amendment overturned the Supreme Court’s decision in the Pollock case. Congress could now set taxes on any type of income without the taxes being in proportion to state population. The same year that the amendment took effect, Congress lowered tariffs and imposed a graduated income tax ranging from 1 percent to 7 percent. The tax applied only to the wealthiest Americans. However, the income tax rate greatly increased with the start of World War I (1914-1918). Today, the income tax raises more money for the federal government than any other source of revenue.
Portion of current 1040 tax form (© Mark Oleksiy, Shutterstock)
Until the last few hundred years, income taxes were rare among the countries of the world. Today, most countries collect income tax. There are several reasons why the United States and other countries have only relatively recently adopted the income tax. At the time the United States gained its independence, most people worked on small farms or were slaves on large plantations. By the 1900’s, much of the population was employed in factories and other large industries. The disparity in income had become much greater, and many people thought a graduated income tax would shift the tax burden away from the people who were struggling in the new economic environment. Governments had also taken on a larger role in directing the economy and required more revenue to fund their programs. An income tax also represents a shift away from other sources of revenue. Governments of developing countries tend to rely more heavily on tariffs and excise taxes for their funding. Some advocates of the income tax argued that replacing tariffs with an income tax would better promote international trade. Finally, implementing an income tax requires advanced record keeping. Administering an income tax would have been considerably more difficult in older times.