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Happy Birthday to the Sixteenth Amendment

2 min readBy: Joseph Bishop-Henchman

Yes, 96 years ago, the 36th state (New Mexico) ratified the Sixteenth Amendment and it became part of the U.S. Constitution. Later that month, February 1913, U.S. Secretary of State Philander C. Knox (pictured right) proclaimed that the Sixteenth Amendment to the U.S. Constitution had been ratified. In the fall, Congress passed the first income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code. The Sixteenth Amendment reads:

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. among the several States, and without regard to any census or enumeration.

Even prior to the Amendment, the Constitution gives the federal government the power to tax pretty much anything, with three caveats: (1) federal duties, imposts, and excises must be uniform throughout the U.S.; (2) no federal direct taxA direct tax is levied on individuals and organizations and cannot be shifted to another payer. Often with a direct tax, such as the personal income tax, tax rates increase as the taxpayer’s ability to pay increases, resulting in what’s called a progressive tax. es may be imposed unless it is proportional to population; and (3) no federal taxes can be imposed on exports from a state. In 1894, the Supreme Court ruled that the income tax is a direct tax, and consequently, while the federal government can impose it, it has to be imposed proportional to each state’s population.

This was viewed as a non-starter, so progressives in both parties in the early part of the twentieth century pushed for a constitutional amendment to allow for a direct and unapportioned federal income tax. In 1909, hoping to blunt momentum pushing Congress to challenge the Court and pass an income tax anyways, President Taft signed into law a corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. (of 1%), and proposed a constitutional amendment to allow collection of an income tax.

Many histories have been written about the subsequent events, and there are those who still think the Sixteenth Amendment never got the necessary ratifications by state legislatures, and that Knox is a villain. (Don’t use that as an excuse not to pay your taxes, though!) Nevertheless, Secretary Knox’s proclamation has been taken at its word by reviewing courts, and the federal income tax is with us now.

In 1913, the federal income tax top rate was 7 percent, imposed on income over $500,000 ($10.7 million in 2008 dollars). One didn’t even pay the bottom 1 percent rate until you had taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. over $3,000 ($64,000 in 2008 dollars). The form and instructions that year were only 4 pages. Within just a few years, though, the top rate was at 77%, and of course, we know how long the forms and instructions are now.

Happy Birthday, Sixteenth Amendment! Thanks for everything.