While that power now is set forth in the United States Constitution, it was not an original part of that founding document. It is the result of the 16th Amendment, which 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.” Article I, section 9, of the Constitution was modified by Amendment 16.
But the 16th Amendment wasn’t the first time Americans were subjected to an income tax.
The first time
Funding the Civil War prompted the first American income tax in 1861. At first, Congress placed a flat 3-percent tax on all incomes over $800 and later modified this principle to include a graduated tax. Congress repealed the income tax in 1872, but the concept did not disappear.
Growing industrial and financial markets of the eastern United States generally prospered after the war. Farmers in the South and West, on the other hand, were getting less for their produce but paying for the manufactured goods they purchased. Over the next 25 years, farmers formed political organizations such as the Grange, the Greenback Party, the National Farmers’ Alliance, and the People’s (Populist) Party. All of these groups advocated many reforms considered radical for the times — including a graduated income tax.
In 1894, as part of a high tariff bill, Congress enacted a 2-percent tax on income over $4,000. The tax was almost immediately struck down by a five-to-four decision of the Supreme Court, even though the court had upheld the constitutionality of the Civil War tax as recently as 1881. Farm organizations cited this decision as an example of an alliance of government and business against farmers. A return of general prosperity around the turn of the 20th century softened the demand for reform.
Democratic Party platforms consistently included an income tax plank, and the progressive wing of the Republican Party also espoused the concept.
Political maneuvering that went awry
In 1909, progressives in Congress again attached a provision for an income tax to a tariff bill. Conservatives, hoping to kill the idea for good, proposed a constitutional amendment enacting such a tax — believing an amendment would never receive ratification by three-fourths of the states. They were wrong. On Feb. 25, 1913, with the certification by Secretary of State Philander C. Knox, the 16th Amendment took effect.
Few paid at first
Yet in 1913, due to generous exemptions and deductions, less than 1 percent of the population paid income taxes at the rate of only 1 percent of net income.
(Information excerpted from Milestone Documents in the National Archives [Washington, DC: National Archives and Records Administration, 1995] pp. 69–73.)
Sources: The United States Archives; www.ourdocuments.gov.