Happy Birthday to the Sixteenth Amendment

February 3, 2009

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 tax code. The Sixteenth 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.

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 taxes 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 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 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.

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