by Diane Rufino
The 16th Amendment states: “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 Sixteenth Amendment, which gave the American people the affliction of confiscatory income taxes, is 100 years old this year. It was ratified on February 3, 1913.
One hundred years of affliction is a long time. The time has come for tax reform…. No, the time has come for a tax revolution.
The IRS, which is in charge of collecting the income tax revenue, is 138 years old. It was created by President Abraham Lincoln in 1862. It has gone from being an agency that terrorizes citizens over their tax returns to an agency that terrorizes citizens based on their speech and political viewpoint. Wouldn’t it be nice if the American people, being in charge of their government, could walk into the massive IRS building in DC and deliver the line that has made Donald Trump famous: “You’re Fired!”
The Sixteenth Amendment was proposed in 1909 and adopted in 1913. The proposal of a constitutional amendment to give Congress the power to impose an income tax began as a scheme of political maneuvering that went horribly awry. In fact, the proponents, House and Senate Republicans who were in a battle for a new tariff bill, proposed the amendment as a political trick and expected the proposal to be killed by the States during the ratification phase, thereby making a popular and political statement that the American people in general do not want an income tax. But the plan backfired. A brief overview of the history of the income tax, including the Sixteenth Amendment in the United States is provided below.
The Founding Fathers had rejected income taxes, as well as any other direct taxes, unless they were apportioned to each state according to population. At the time of our founding, wealth was measured in terms of property rather than income. Property was the goal of freedom. One exercised his inalienable rights to “pursue” happiness and obtain property. Our founders didn’t talk much in terms of “income.” They rejected the income tax entirely, but when they spoke of taxes they recognized the need for uniformity and equal protection to all citizens. “All duties, imposts and excises shall be uniform throughout the United States.” “Direct Taxes shall be apportioned among the several States.” “No direct tax shall be laid, unless in proportion to a census.” This is what the US Constitution reads. Then, the 14th Amendment promised “equal protection of the laws” to all citizens. The principle behind the progressive income tax – the more you earn, the larger the percentage of tax you must pay – would have been appalling to the founders. They recognized that, in James Madison’s words, “the spirit of party and faction” would prevail if Congress could tax one group of citizens and confer the benefits on another group.
In Federalist No. 10, Madison asked, “What are the different classes of legislators but advocates and parties to the causes which they determine?” He talked about political factions, the reasons for them, the “mischiefs” presented by them, and apportionment of taxes. He wrote, most prophetically:
“A faction is a number of citizens, whether amounting to a majority or a minority of the whole, who are united and actuated by some common impulse of passion, or of interest, adversed to the rights of other citizens, or to the permanent and aggregate interests of the community.
There are two methods of curing the mischiefs of faction: the one, by removing its causes; the other, by controlling its effects.
There are again two methods of removing the causes of faction: the one, by destroying the liberty which is essential to its existence; the other, by giving to every citizen the same opinions, the same passions, and the same interests.
It could never be more truly said than of the first remedy, that it was worse than the disease. Liberty is to faction what air is to fire, an aliment without which it instantly expires. But it could not be less folly to abolish liberty, which is essential to political life, because it nourishes faction, than it would be to wish the annihilation of air, which is essential to animal life, because it imparts to fire its destructive agency.
The second expedient is as impracticable as the first would be unwise. As long as the reason of man continues fallible, and he is at liberty to exercise it, different opinions will be formed. As long as the connection subsists between his reason and his self-love, his opinions and his passions will have a reciprocal influence on each other; and the former will be objects to which the latter will attach themselves. The diversity in the faculties of men, from which the rights of property originate, is not less an insuperable obstacle to a uniformity of interests. The protection of these faculties is the first object of government. From the protection of different and unequal faculties of acquiring property, the possession of different degrees and kinds of property immediately results; and from the influence of these on the sentiments and views of the respective proprietors, ensues a division of the society into different interests and parties.
The latent causes of faction are thus sown in the nature of man; and we see them everywhere brought into different degrees of activity, according to the different circumstances of civil society. A zeal for different opinions concerning religion, concerning government, and many other points, as well of speculation as of practice; an attachment to different leaders ambitiously contending for pre-eminence and power; or to persons of other descriptions whose fortunes have been interesting to the human passions, have, in turn, divided mankind into parties, inflamed them with mutual animosity, and rendered them much more disposed to vex and oppress each other than to co-operate for their common good. So strong is this propensity of mankind to fall into mutual animosities, that where no substantial occasion presents itself, the most frivolous and fanciful distinctions have been sufficient to kindle their unfriendly passions and excite their most violent conflicts. But the most common and durable source of factions has been the various and unequal distribution of property. Those who hold and those who are without property have ever formed distinct interests in society. Those who are creditors, and those who are debtors, fall under a like discrimination. A landed interest, a manufacturing interest, a mercantile interest, a moneyed interest, with many lesser interests, grow up of necessity in civilized nations, and divide them into different classes, actuated by different sentiments and views. The regulation of these various and interfering interests forms the principal task of modern legislation….
The apportionment of taxes on the various descriptions of property is an act which seems to require the most exact impartiality; yet there is, perhaps, no legislative act in which greater opportunity and temptation are given to a predominant party to trample on the rules of justice. Every shilling with which they overburden the inferior number, is a shilling saved to their own pockets.”
So, our founders took the view that taxation of wealth by the government should be equal and apportioned.
Before the Civil War, the government received most of it revenue through tariffs (that is, taxing goods as they came into the ports). The South, being an agricultural community, relied heavily on imports and therefore generated most of the tariff revenue for the government (at least 70%). But then came the war, which meant ports were blockaded, ships were sunk, and in general, there was little money to spend on things that were not considered essential, and hence, there was almost no revenue from tariffs. Besides, the southern states had seceded and formed a new county and so their tariff revenue did not go to the federal government. So during the Civil War, Congress decided to try an income tax. It devised a really clever plan to get people to pay. It made the tax returns public. Essentially what would happen was this: If your neighbor saw you driving around on a brand new plow, he’d inquire through the public record how much he reported on his income tax. In order to avoid scrutiny and accusations, the rich would pay their required taxes. And in fact, the income tax fell almost exclusively on the rich.
The financial requirements of the Civil War prompted the first American income tax in 1861. On August 5, Lincoln imposed the first federal income tax by signing the Revenue Act of 1861. Strapped for cash with which to pursue the Civil War, Lincoln and Congress came up with a tax scheme to impose a 3% tax on annual incomes exceeding $800. The Revenue Act’s language was broadly written to define income as gain “derived from any kind of property, or from any professional trade, employment, or vocation carried on in the United States or elsewhere or from any source whatever.” (Interestingly, according to the US Treasury Department, the comparable minimum taxable income in 2003, after adjustments for inflation, would have been approximately $16,000). By 1862, however, the United States government realized that the war would not end quickly, and that revenue gained by this income tax would not be sufficient. So the tax was repealed and replaced by another income tax, one of a progressive nature, in the Revenue Act of 1862.
Thus, it was the Revenue Act of 1862 that introduced the first progressive income tax in America.
The First Progressive Income Tax –
The Revenue Act of 1862 proved to be more effective at raising money to fund the War. It contained three main provisions: (i) it established the office of the Commissioner of Internal Revenue, a department in charge of the collection of taxes; (ii) it levied excise taxes on many (a majority of) every day goods and services; and (iii) it introduced the first progressive tax. Indeed, this new tax reflected the taxpayers’ “ability to pay” by separating citizens into multiple categories and taxing accordingly:
For individuals whose annual incomes were less than $600, no tax was collected.
For individuals whose annual incomes were greater than $600 and less than $10,000, a percentage of 3% of total income was demanded in tax.
For individuals whose annual incomes were greater than $10,000, a percentage of 5% of total income was demanded in tax.
The act also stated that in order to assure timely collection, income tax was “withheld at the source.”
After the war when the need for federal revenues decreased, Congress, in the Revenue Act of 1870, let the tax law expire in 1873. However, one of the challenges to the validity of this tax finally reached the Supreme Court in 1880. The challenge was brought by a taxpayer. In Springer v. United States, the taxpayer contended that the income tax on his professional earnings and personal property income violated the “direct tax” requirement of the Constitution; that is, that is needed to be apportioned among the states. The Supreme Court concluded that the income tax was not a “direct tax” but rather an “excise tax,” and hence did not need to be apportioned. The tax was upheld. [Excise taxes are taxes on the on the sale, or production for sale, of specific goods within a country. Excises are distinguished from customs duties, which are taxes on importation. Typical examples of excise duties are taxes on gasoline and other fuels, and taxes on tobacco and alcohol (sometimes referred to as sin tax].
Although the Revenue Act of 1862 was allowed to expire, government had already gotten a taste of the revenue that could be generated by taxing the income of American citizens, It wouldn’t be long before it looked once again to American purses. During the years of Reconstruction and rebuilding the nation, the growing industrial and financial markets of the eastern US generally prospered. But the farmers of the south and west suffered from low prices for their farm products, while they were forced to pay high prices for manufactured goods. Throughout the 1870′s and 1880′s, farmers formed various political organizations such as the People’s (Populist) Party and the National Farmers’ Alliance) and advocated for a graduated income tax to relieve them of their tax burden. And so, in 1894, a Democratic-led Congress passed the Wilson-Gorman tariff (a high tariff bill) which imposed the first peacetime income tax. The rate was 2% on income over $4000, which meant fewer than 10% of households would pay any income tax. The purpose of the tax was to make up for revenue that would be lost by tariff reductions. This was a controversial provision at the time and it was almost immediately struck down by the Supreme Court in 1895, in a case called Pollock v. Farmers Loan & Trust Company. Once again, a taxpayer challenged the legality of the income tax. In Pollock, a taxpayer sued the corporation in which he owned stock, contending that they should never have paid the income tax because it was unconstitutional. In this case, the tax was paid on income from land, and Mr. Pollock argued that since a tax on real estate is a direct tax, then a tax on the income from such property must be a direct tax as well. Since the Constitution prohibited a “direct tax” unless certain conditions are met, Pollock argued that the income tax should be declared unconstitutional. (The “direct tax” argument had also been used by Mr. Springer in 1880, but because the income tax had been expired for eight years at that point, it is believed that the Court just wasn’t interested in looking closely at the wording in the Constitution and making distinctions between the different types of taxes).
The Court in Pollock held that the income tax was a direct tax and as such, it had to be apportioned among the states according to their populations, as the Constitution sets forth in Article I, Section 2, clause 3 and in Article I, Section 9, clause 4. Since the tax at issue was not apportioned, it was struck down as unconstitutional.
The provisions at issue in the Pollock (and Springer) cases are as follows: Article I, Section 2, clause 3: “Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be determined by adding to the whole Number of free Persons, including those bound to Service for a Term of Years, and excluding Indians not taxed, three fifths of all other Persons.” Article I, Section 8, clause 1 provides that “all duties, imposts, and excises shall be uniform throughout the United States.” Article I, Section 9, clause 4 provides that “no capitation, or other direct tax shall be laid, unless in proportion to a census or enumeration herein before to be taken.” Section 2 of the Constitution deals with the House of Representatives specifically. Section 8 gives to Congress certain enumerated powers. And Section 9 lists what is prohibited to Congress.
How does apportionment work, as per Article I, Section 2, clause 3? How would an “apportioned” income tax work? If an income tax is subject to apportionment, a state with one-tenth the national population, for example, has to bear one-tenth the aggregate tax liability, regardless of the state’s financial condition. Suppose the populations of Iowa and Maine were equal, but Iowa’s per capita income were twice Maine’s. The rates for an apportioned income tax would have to be twice as high in Maine, the poorer state, as in Iowa.
How is direct tax supposed to based on a census, as per Article I, Section 9, clause 4? If the government desired to raise $10 million and New York had 20% of the total U.S. population at that time, then New York would be required to raise $2 million. If New York had 1 million residents, each resident would owe $2 in taxes. Obviously, a tax based on income could not achieve such proportionality, since incomes differed across individuals.
By the turn of the century, the progressive movement was entrenched in politics. It was the era of social unrest. The movement began after the Reconstruction era (the 1890′s) in order to modernize society to the new industrial age. The movement was based on the assumption that the old principles of our founding were no longer adequate and so it sought to reform society and the role of government by addressing certain economic, political, and cultural issues. The common view of the Progressive movement, aside from the dismantling of traditional institutions and founding principles, was that government would need to grow and be actively involved in these reforms at every level. Furthermore, it held that the existing constitutional system was too constrained and outdated and must be transformed into a dynamic, evolving instrument to effect social change. Another theme was that the focus of government on the rights of the individual would have to be surrendered to seek the best for society as a whole. In certain aspects, such as basic rights and protections for factory workers, the movement helped government serve society well. But in many other aspects, such as the movement’s inherent hostility and resentment of the wealthy and its need to increase taxation to seek social justice, government veered sharply from its constitutional course.
At the same time, as public sentiment was changing, so did the complexion of the Supreme Court. The idea of using a tax to “soak the rich” began to take root among liberals in both major parties. Several times the Democrats introduced bills to provide a tax on higher incomes but each time the conservative branch of the Republican party killed it in the Senate. The Democrats used this as evidence that the Republicans were the “party of the rich” and should be thrown out of power.
In a speech on April 14, 1906, President Theodore Roosevelt endorsed a progressive estate tax:
“It is important to this people to grapple with the problems connected with the amassing of enormous fortunes, and the use of those fortunes, both corporate and individual, in business. We should discriminate in the sharpest way between fortunes well-won and fortunes ill-won; between those gained as an incident to performing great services to the community as a whole, and those gained in evil fashion by keeping just within the limits of mere law-honesty.
Of course no amount of charity in spending such fortunes in any way compensates for misconduct in making them. As a matter of personal conviction, and without pretending to discuss the details or formulate the system, I feel that we shall ultimately have to consider the adoption of some such scheme as that of a progressive tax on all fortunes, beyond a certain amount either given in life or devised or bequeathed upon death to any individual — a tax so framed as to put it out of the power of the owner of one of these enormous fortunes to hand on more than a certain amount to any one individual; the tax, of course, to be imposed by the National and not the State Government. Such taxation should, of course, be aimed merely at the inheritance or transmission in their entirety of those fortunes swollen beyond all healthy limits.”
In 1907, he stepped up his campaign for several progressive additions to the nation’s tax system. In his message to Congress on December 7, he urged lawmakers to consider an income tax:
“When our tax laws are revised the question of an income tax and an inheritance tax should receive the careful attention of our legislators. In my judgment both of these taxes should be part of our system of Federal taxation. I speak diffidently about the income tax because one scheme for an income tax was declared unconstitutional by the Supreme Court; while in addition it is a difficult tax to administer in its practical working, and great care would have to be exercised to see that it was not evaded by the very men whom it was most desirable to have taxed, for if so evaded it would, of course, be worse than no tax at all; as the least desirable of all taxes is the tax which bears heavily upon the honest as compared with the dishonest man. Nevertheless, a graduated income tax of the proper type would be a desirable feature of Federal taxation, and it is to be hoped that one may be devised which the Supreme Court will declare constitutional.”
The inheritance tax was even more desirable, Roosevelt continued. Not only did it serve the cause of social justice, but it had been upheld by the federal courts:
“The inheritance tax, however, is both a far better method of taxation, and far more important for the purpose of having the fortunes of the country bear in proportion to their increase in size a corresponding increase and burden of taxation. The Government has the absolute right to decide as to the terms upon which a man shall receive a bequest or devise from another, and this point in the devolution of property is especially appropriate for the imposition of a tax. Laws imposing such taxes have repeatedly been placed upon the National statute books and as repeatedly declared constitutional by the courts; and these laws contained the progressive principle, that is, after a certain amount is reached the bequest or gift, in life or death, is increasingly burdened and the rate of taxation is increased in proportion to the remoteness of blood of the man receiving the bequest.”
Roosevelt rejected arguments that an estate tax would penalize thrift.
“A heavy progressive tax upon a very large fortune is in no way such a tax upon thrift or industry as a like would be on a small fortune. No advantage comes either to the country as a whole or to the individuals inheriting the money by permitting the transmission in their entirety of the enormous fortunes which would be affected by such a tax; and as an incident to its function of revenue raising, such a tax would help to preserve a measurable equality of opportunity for the people of the generations growing to manhood. We have not the slightest sympathy with that socialistic idea which would try to put laziness, thriftlessness and inefficiency on a par with industry, thrift and efficiency; which would strive to break up not merely private property, but what is far more important, the home, the chief prop upon which our whole civilization stands. Such a theory, if ever adopted, would mean the ruin of the entire country–a ruin which would bear heaviest upon the weakest, upon those least able to shift for themselves. But proposals for legislation such as this herein advocated are directly opposed to this class of socialistic theories. Our aim is to recognize what Lincoln pointed out: The fact that there are some respects in which men are obviously not equal; but also to insist that there should be an equality of self-respect and of mutual respect, an equality of rights before the law, and at least an approximate equality in the conditions under which each man obtains the chance to show the stuff that is in him when compared to his fellows.”
The Bailey Bill –
In 1909, progressives in Congress were talking once again about enacting an income tax. They were going to attempt, once again, to attach a provision for an income tax to a tariff bill. President William Howard Taft had called Congress into a special session in 1909, shortly after his inauguration, to discuss the issue. He wanted Congress to address tariff reform. House of Representatives immediately passed a tariff bill sponsored by Sereno E. Payne (R-NY), the House Majority Leader, which called for reduced tariffs, but including an inheritance tax to make up for lost revenue. However, the Senate quickly substituted a bill, written by Senator Nelson W. Aldrich (D-RI), Senate Majority Leader and chairman of the Senate Finance Committee, which called for fewer reductions and more increases in tariffs. Aldrich was a long-time advocate of protective tariffs. His answer was to increase the amount of duty items. The problem, however, was that there was an impending budget deficit that had to be addressed. A protracted debate ensued, and progressive Republicans maneuvered to add an income tax amendment to the Aldrich bill. In April, Senators Joseph W. Bailey, a populist Democrat from Texas, and Albert B. Cummins, a progressive Republican from Iowa, introduced separate versions of an income tax provision. A compromise version was reached between the two – which became known as the Bailey-Cummins amendment – for inclusion in the Senate bill. In response to this amendment, Senator Aldrich defiantly declared: “There will be no income tax, no inheritance tax, no stamp tax, and no corporation tax!” It soon became evident, however, that the opposition, comprised of Democrats and progressive Republicans from the Midwest, had enough votes to force the issue in the Senate and thereby enact an income tax. Seeking to avoid that humiliation, Aldrich met with President Taft.
In a message to a joint session of Congress on June 16, Taft first reiterated his support for tariff reform but warned of an impending budget deficit. On June 16, in a joint message to Congress, Taft In order to fend off Congress’ proposed initiative for an income tax but yet provide for a mechanism to raise the revenue necessary (while making tariff reduction possible!), Taft recommended that Congress enact a tax of 2% on the income of a corporation “for the privilege of carrying on or doing business as a corporation in the United States.” (Taft predicted – accurately, as it would later turn out – that the Supreme Court would view the corporate tax as an “excise” tax and not a “direct tax”). In his message, President Taft also endorsed the idea for a constitutional amendment that would grant Congress authority to impose a progressive income tax.
The debate in Congress was whether to include the income tax provision (Bailey-Cummins amendment) or the corporate tax provision in the tariff bill. This was June. Progressive Republicans (also known as “insurgent” Republicans) were joining the Democratic block in support of the income tax. Their position on income tax was summed up by comments made by Rep. William Sulzer (D-NY) on the House floor:
“I am now, always have been, and always will be in favor of an income tax, because, in my opinion, an income tax is the fairest, the most just, the most honest, the most democratic, and the most equitable tax ever devised by the genius of statesmanship. . . . At the present time nearly all the taxes raised for the support of the Government are levied on consumption—on what the people need to eat and to wear and to live: on the necessities of life; and the consequence is that the poor man, indirectly, but surely in the end, pays practically as much to support the Government as the rich man—regardless of the difference of incomes. This system of tariff tax on consumption, by which the consumers are saddled with all the burdens of Government, is an unjust system of taxation, and the only way to remedy the injustice and destroy the inequality is by a graduated income tax that will make idle wealth as well as honest toil pay its share of the taxes needed to administer the National Government.”
The showdown by Democrats and Progressives regarding the Bailey amendment was perhaps intentionally orchestrated. The theory was that after the regular Republicans rejected the bill, the Democrats could then point a finger at them and claim, for political purposes, that Republicans rejected the Bailey bill to protect their corrupt wealthy corporate friends. They would use the rejection as proof of such an alignment between Republicans and the wealthy.
The conservative Republicans knew what the Democrats were up to and they launched a counter move. Facing an embarrassing loss on the income tax issue, regular Republicans in the Senate decided to make a political maneuver, capitalizing on the endorsement of a constitutional amendment made by President Taft. They proposed a constitutional amendment that would impose an income tax on the rich. The theory behind their plan was that when the States refused to ratify the amendment, the Republicans could use that failure as proof that the people, through their State legislatures, were against the idea of a new income tax. They could then use that argument to defeat the Bailey Bill, for how could Congress approve an income tax against the rich after the people, through their state legislatures, had spoken on the issue. Conservative Republicans were sure they did their homework. They were most certain that it could and would be defeated when it went to the states for ratification. They calculated that there were more than enough conservative states to defeat the 3/4 majority that were required under Article V to approve an amendment.
Senator Norris Brown (R-NE) was the first to propose an income-tax amendment to the Constitution, on June 17, 1909, but it was rejected. On June 28, Senator Aldrich submitted a proposal (Senate Joint Resolution 40). It authorized Congress 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.” It passed the Senate by a vote of 77 to 0, with 15 members abstaining. On July 12, the proposal passed in the house, by a vote of 318 to 14. The resolution proposing the 16th Amendment therefore passed the 61st Congress and was submitted to the state legislatures.
Once the amendment was submitted, it was clear that it had more support than was anticipated. Rep. Sereno Payne, a conservative Republican, was so concerned and was so convinced that their plan would backfire that he took to the House floor, denounced the resolution that he himself introduced in the House, and made a last-ditch effort to appeal to Congress:
“As to the general policy of an income tax, I am utterly opposed to it. I believe with William Gladstone that it tends to make a nation of liars. I believe it is the most easily concealed of any tax that can be laid, the most difficult of enforcement, and the hardest to collect; that it is, in a word, a tax upon the income of honest men and an exemption, to a greater or lesser extent, of the income of rascals; and so I am opposed to any income tax in time of peace…I hope that if the Constitution is amended in this way the time will not come when the American people will ever want to enact an income tax except in time of war.”
Not all states were initially in favor of an amendment. The gamble that the conservative Republicans were taking at first seemed to pay off. Many states realized that the imposition of a federal income tax would mean the rise of a federal revenue bureaucracy that extended from Washington, D.C., throughout the country and into the personal and business transactions of every American and every business. Private transactions would no longer be private; government would be able to monitor what everyone was doing.
Richard E. Byrd, speaker of the Virginia House of Delegates, voiced his concerns on March 3, 1910, during the debate on whether to ratify the 16th Amendment:
“It means that the state must give up a legitimate and long established source of revenue and yield it to the Federal government. It means that the state actually invited the Federal government to invade its territory, to oust its jurisdiction and to establish Federal dominion within the innermost citadel of reserved rights of the Commonwealth. This amendment will do what even the 14th and 15th Amendments did not do — it will extend the Federal power so as to reach the citizens in the ordinary business of life. A hand from Washington will be stretched out and placed upon every man’s business; the eye of a Federal inspector will be in every man’s counting house.
The law will of necessity have inquisitorial features, it will provide penalties. It will create a complicated machinery. Under it, businessmen will be hauled into courts distant from their homes. Heavy fines, imposed by distant and unfamiliar tribunals, will constantly menace the taxpayer. An army of Federal inspectors, spies and detectives will descend upon the state. They will compel men of business to show their books and disclose the secrets of their affairs. They will dictate forms of bookkeeping. They will require statements and affidavits. On the one hand the inspector can blackmail the taxpayer and on the other, he can profit by selling his secret to his competitor.
When the Federal government gets a strangle hold on the individual businessman, state lines will exist nowhere but on the maps. Its agents will everywhere supervise the commercial life of the states…. I am not willing by any voluntary act to give up revenue which the State of Virginia herself needs, nor to surrender that measure of state’s rights which was, and the construction of the Federal courts have permitted to remain.”
Much to everyone’s surprise, the amendment was ratified by one state legislature after another, and on February 25, 1913, with the certification by Secretary of State Philander C. Knox (Woodrow Wilson had just taken office), the Sixteenth amendment took effect. “Soaking the Rich” was clearly a popular policy. “Shifting the growing burden of federal finance to the wealthy” make a lot of sense to those who, at the time, were sure they weren’t in the income bracket that would be targeted. The end run of the Republican leadership did indeed backfire.
As James Madison had feared, the seeds of class warfare were sown in the strategy of different rates for different incomes.
Not only were conservative Republicans burned by their attempt to end Congress’ scheming for a progressive income tax by in fact ensuring that such a tax would become the law of the land, but the Payne-Aldrich Tariff Act of 1909 was also passed and signed by President Taft on August 5, 1909. (The corporate tax was reduced to 1% by the time the bill was signed)
[As a side note, the bill hurt Taft greatly, and in fact, would have disastrous consequences for the Republican Party in general. Lowering the tariff caused a big split in the party by pitting producers (manufacturers and farmers) against merchants and consumers. Failure to address tax reform was another sore spot. The debate split the Republican Party into Progressives and Old Guards and led the split party to lose the 1910 congressional election. Two years later, with the 1912 presidential election, the tariff issue continued to split votes amongst Republicans in most states, resulting in Democratic candidate Woodrow Wilson being elected. That was the election where Teddy Roosevelt returned to politics to "save the Republican party from Taft" by running for president under the new political party he created, the Progressive Party - commonly called the "Bull Moose." He had entered the race too late and Taft has already secured the GOP nomination].
It turns out that Sixteenth Amendment was Congress’ way to get around the Pollock decision (much the way the 14th Amendment got around the Dred Scott decision) and enact an income tax, progressive in nature, without having to worry about whether the tax is classified as “direct” or not and whether it needs to be apportioned among the states on the basis of population.
It should be noted that there is credible evidence to suggest that the 16th Amendment was not properly and legally ratified pursuant to the requirements set out in Article V of the US Constitution (the “Amendment Process”). See the Appendix for a summary of this evidence, as researched by Bill Benson.
How the Income Tax Grew –
On April 21, 1913, the House Committee on Ways and Means, chaired by Rep. Oscar W. Underwood (D-AL), took up consideration of a revenue bill, which included tariff reductions as well as an income tax. The Underwood bill (H.R. 3321) was heartily approved by the Democratic-controlled House but reached opposition in the Senate. While the bill was clearly a Democratic bill, it was the Democrats and regular Republicans that wanted the most modest progressive tax rates. It was the progressives, on the other hand, that wanted higher rates. For the conservative (regular) Republicans and the vast majority of Democrats, wealth redistribution of any significance was not among the sanctioned uses. When Robert La Follette, the progressive Republican from Wisconsin proposed a maximum individual income tax of 10% and an inheritance tax reaching 75%, John Sharp Williams (D-MS) protested that “the object of taxation is not to leave men with equal incomes after
you have taxed them.” Explaining that the Democrats had no such radical intentions for the power to impose an income tax, Williams declared:
“No honest man can wage war upon great fortunes, per se. The Democratic party never has done it, and when the Democratic party begins to do it, it will cease to be the Democratic party and become the Socialistic party of the United States; or better expressed, the Communistic Party of the United States.”
Neither traditional Democrats nor regular Republicans were willing to use income taxation to redistribute wealth. Such a radical policy was repudiated by all but a handful of Progressives and Populists on the fringe. Senator Henry Cabot Lodge (R-MA) warned that “it will be an evil day for us when we enter on confiscation of property under the guise of taxation.” The income tax of 1913 was intended to raise revenue to finance tariff reduction and not to level incomes or to destroy the wealthy as a class. According to those representatives who looked at the income tax objectively, they believed it was only fair that the wealthy pay the bulk of the income tax because they benefited most from the high tariffs. In other words, they felt it was only “equitable” that they should contribute their “fair share” of the cost of government via the federal income tax.
On October 3, the Underwood bill was signed into law by President Woodrow Wilson. It enacted the first income tax – a minor income tax – under the authority of the new constitutional amendment. After decades of political controversy and conflict, the federal government once again had an income tax. To be sure, this was a minor levy. Most federal revenue still came from the tariff and federal excise taxes (especially those on alcohol and tobacco products). Corporations were subject to a flat tax of 1%, with no exemption allowed and for individuals, a tax of 1% was imposed on income above $3,000 for single taxpayers (and above $4,000 for married couples). Those were very generous exemptions, as fewer than 4% of families had an annual income
of $3,000 in 1913. As a result, less than 1% of the population (or 2% of households) was subject to income taxation the first year of the new tax regime. With regard to the progressive aspect of the tax, there was a surtax of 1% imposed on income above $20,000 and 6% on incomes above $500,000. Thus, the maximum marginal rate reached 7% on income above $500,000. In 1913, there were very few taxpayers in that upper bracket. The tax provided for only a handful of exemptions, exclusions, and deductions, and the same tax rate applied to both earned and unearned income.
All that would change over the next 100 years. Even more dramatically, it would require only a few years for the federal income tax to become the chief source of income for the government, far outdistancing tariff revenues. The age of big government had officially begun.
The Underwood Act defined taxable income as:
“….. subject only to such exemptions and deductions as are hereinafter allowed, the net income of a taxable person shall include gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, businesses, trade, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in real or personal property, also from interest, rent, dividends, securities, or the transaction of any lawful business carried on for gain or profit, or gains or profits and income derived from any source whatever…”
And the Act then provided, in part:
An income tax of 1% on individual income over $3,000 (or $4,000 for married couples), up to incomes of $20,000.
A progressive surtax ranging from 1% to 6%, depending on income.
Returns for the new tax were to be kept secret
Exemptions for charitable organizations (using language from the 1894 and 1909 tariff bills with regard to charitable purpose – Under these statutes, tax exemption was granted to “any corporation or association organized and operated exclusively for religious, charitable, or educational purposes…” In other words, these organizations were to be considered “non-profits”; Under the 1913 bill, tax-exempt organizations could earn tax-free income from both mission-related activities and commercial business activities that were unrelated to the purpose for which they were exempt, as long as they used the net profits for exempt purposes. That would change with the Revenue Act of 1950)
Income taxes to be collected at the source, meaning that some kinds of income would be taxed before it reached the taxpayer, as with the modern system of tax withholding.
The Bureau of Internal Revenue established a Personal Income Tax Division to collect the new tax. (Recall that the IRS has its roots in the Lincoln administration. The position of Commissioner of Internal Revenue, within the Treasury Department, was created by the Revenue Act of 1862).
In general, it established the modern federal income tax system
When the Act was passed and sent out to the people, Congress predicted confidently that “all good citizen will willingly and cheerfully support and sustain this, the fairest and cheapest of all taxes.” And indeed it was harmless at first. The first tax ranged from merely 1% on the first $20,000 of taxable income and was only 7% on incomes over $500,000. Who could complain? (How harmless was this tax? Famed author, Cleon Skousen, put it this way: “If the tax was expressed in 1994 dollars, this sentence (above) would read, ‘the first tax ranged from merely 1% on the first $298,000 of taxable income and was only 7% on incomes above $7,460,000.’”)
In the beginning, hardly anyone had to file a tax return because the tax did not apply to the vast majority of America’s work-a-day citizens. As mentioned above, when the tax was first imposed, only 1% of the population was subject to a federal income tax. In 1939, twenty-six years after the Sixteenth Amendment was adopted, only 5% of the population, counting both taxpayers and their dependents, was required to file returns. In 1994, more than 80% of the population were required to file and pay. Today, it is 50% of the population.
Those who support this scheme of taxation are exactly what our Founders warned us about. Thomas Jefferson wrote: “To take from one, because it is thought his own industry and that of his father’s has acquired too much, in order to spare to others, who, or whose fathers, have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, the guarantee to everyone the free exercise of his industry and the fruits acquired by it.”
Today, it is still a popular idea to tax the wealthy so that the less fortunate can live easier and more comfortably with their more modest salaries and without having any income tax liability. For example, 82% of Democrats polled in 2011 supported raising taxes on millionaires (compared to 54% of Republicans). In 2008, 58% of Americans (mind you, 48-49% weren’t required to pay income taxes) thought it was a good idea to raise taxes for the wealthy (by wealthy, they meant those who have an income in excess of $250,000) in order to pay for “new government programs and tax cuts for those making less money,” as well as to help lower the nation’s deficit.
As our Founders would frown upon that mindset if they were here today, they would surely comment: Those who don’t respect the rights of others don’t deserve it for themselves.
American economist Thomas Sowell has written quite a lot about this mindset of allowing the government to arbitrarily decide what is considered “poverty” and what is considered “wealth.” When that happens, of course, classes of people are treated differently. Different sets of standards and rules apply, which is not what “Equal Protection of Laws” is all about. Even worse, Sowell writes, is allowing the people themselves to decide when others should be taxed. That is exactly what Founders like James Madison labored to avoid. He referred to a democracy as “mob rule.” He, as well as the other Founders, understood that individual rights could never be secure in a pure democracy. A republic – a constitutional republic – would be the system of choice.
A republic is representative government ruled by law (specifically, the US Constitution). That’s why we say that we are a nation of laws and not of men. A democracy, on the other hand, is government ruled by the will of the majority (mob rule; “mobocracy”). Benjamin Franklin defined it as: “A democracy is two wolves and a lamb voting on what to have for lunch. Liberty is a well-armed lamb contesting the vote!” And Thomas Jefferson defined: “A democracy is nothing more than mob rule, where fifty-one percent of the people may take away the rights of the other forty-nine.”
A republic recognizes the unalienable rights of individuals (which no majority rule can violate) while democracies are only concerned with the wants or needs of a majority group. Social justice is easier to pursue when there is mob rule or when the rule of law disintegrates.
In a constitutional republic as ours, lawmaking is a slow, deliberate process, requiring approval (and surviving scrutiny) from all three branches of government, in order that cool heads prevail and the fairest laws are produced. In a democracy, laws are passed by majority polls or voter referendums. 50% plus 1 vote (ie, the majority) is enough to take away anything away from the 50% minus 1 vote (ie, the minority). For purposes of this article, a perfect example would be this: If 51% of the people don’t pay taxes and want to keep up that lifestyle or even want more from those 49% that pay taxes, they can easily vote a tax increase. Income is no longer a protected property right in the United States, thanks to the Sixteenth Amendment, so in effect, taxation is subject to mob rule. And to the conscience of every elected official in Washington DC.
History records that democracies always self-destruct when the non-productive majority realizes that it can vote itself handouts from the productive minority by electing the candidate promising the most benefits from the public treasury. These candidates, in order to remain popular, must adopt ever-increasing tax and spend policies to satisfy the ever-increasing desires of the majority. As taxes increase, the incentive to produce decreases, causing many of the once productive to drop out and join the non-productive. When there are no longer enough producers to fund the legitimate functions of government and the socialist programs, the democracy inevitably collapses due to economic depression and chaos, and almost always, it is followed by some sort of dictatorship or socialist/communist regime. Prior to its decline (around 100-44 BC), Roman emperors couldn’t meet the demands of its poor They taxed heavily to provide “bread and circuses” (free grain, gladiator games) to the poor and the disillusioned – those who no longer valued historic Roman civic virtues. This system of state bribery worked for awhile; it placated them so that they wouldn’t riot and cause problems for the Emperor. “For the People who once upon a time took an interest in military command, high civil office, the legions, and the state of the republic, they now restrain themselves and anxiously hope for just two things: bread and circuses.” But in the end, the policies disillusioned too many Romans and the empire simply wasn’t worth fighting for any longer.
Back to Thomas Sowell and his views regarding the government’s power to arbitrarily decide what is considered “poverty” and what is considered “wealth” for purposes of re-distribution… On that subject, he wrote:
“Leaders of the left in many countries have promoted policies that enable the poor to be more comfortable in their poverty. But that raises a fundamental question: Just who are ‘the poor’? … ‘Poverty’ once had some concrete meaning — not enough food to eat or not enough clothing or shelter to protect you from the elements, for example. Today it means whatever the government bureaucrats, who set up the statistical criteria, choose to make it mean. … Most Americans with incomes below the official poverty level have air-conditioning, television, own a motor vehicle and, far from being hungry, are more likely than other Americans to be overweight. But an arbitrary definition of words and numbers gives them access to the taxpayers’ money. This kind of ‘poverty’ can easily become a way of life, not only for today’s ‘poor,’ but for their children and grandchildren. Even when they have the potential to become productive members of society, the loss of welfare state benefits if they try to do so is an implicit ‘tax’ on what they would earn that often exceeds the explicit tax on a millionaire. If increasing your income by $10,000 would cause you to lose $15,000 in government benefits, would you do it? In short, the political left’s welfare state makes poverty more comfortable, while penalizing attempts to rise out of poverty.”
“Soaking the Rich” or Re-distribution of Wealth? –
So, did the income tax actually “soak the rich” as the slogan described? The wealthy, especially the super-wealthy, had anticipated the adoption of a progressive federal income tax and had created a clever device to protect their riches. It was called a “charitable foundation.” The idea was to co-sign the ownership of wealth, including stocks and securities, to a foundation and then get Congress and the state legislatures to declare all such charitable institutions exempt from taxes. By setting up boards which were under the control of these wealthy benefactors they could escape the tax and still maintain control over the disposition of their fabulous fortunes.
In fact, long before the federal income tax was in place, multimillionaires such as John D. Rockefeller, J.P. Morgan, and Andrew Carnegie had their foundations set up and operating. What they needed to do was make certain that the tax bill passed by Congress contained a provision specifically exempting their treasure houses from taxation. And sure enough, the Underwood bill included such a provision (Section 2, paragraph G). The bill borrowed language from the 1894 and the 1909 tariff bills, both of which provided exemptions for charitable organization. Under these statutes, tax exemption was granted to “any corporation or association organized and operated exclusively for religious, charitable, or educational purposes…” In other words, these organizations were to be considered “non-profits.” Under the 1913 bill, charitable (non-profit) organizations could earn tax-free income from both mission-related activities and commercial business activities that were unrelated to the purpose for which they were exempt, as long as they used the net profits for exempt purposes. (That would change with the Revenue Act of 1950; In 1950, Congress established the “unrelated business income tax,” or UBIT, which would be imposed on any activity that was not “regularly carried on” and “substantially related” to the organization’s charitable purpose).
Section 2, paragraph G provides: “Provided, however, that nothing in this section shall apply…to any corporation or association organized and operated exclusively for religious, charitable, scientific or educational purposes.” This magical provision locked up the riches of the super wealthy for all of their foundations were specifically designed to qualify under one or more of these categories.
Within a few years, President Woodrow Wilson would hijack the income tax to pay for WWI. He would tax the very wealth at 67% and then up to 77%. On April 2, 1917, he stood before a joint session of Congress, requesting a declaration of war. This, of course, led to an even greater need for additional revenue. The debate over taxing versus borrowing to finance the war raged over several months across the country. Taxes would have to be increased. But what taxes should be imposed, and by how much? Once again the question was raised as to whether to broaden the tax base or raise the rates on the wealthiest. The War Revenue Act of 1917 imposed a 2% tax on individual incomes over $1,000 (or $2,000 for married couples), featured graduated surtaxes reaching as high as 67% (63% on incomes over $1 million and 67% on incomes over $2 million), and increased a variety of excises and duties (including on automobiles). It also added an additional tax of 4% to the existing corporate income tax. Revenue grew exponentially. In the years prior to 1917, the Bureau of Internal Revenue (BIR) took in an average of about $281 million. In the years following the War Revenue Act of 1917, the average was $2.78 billion…. ten times the amount of tax revenue!
The Agency grew dramatically; it had to. The number of income tax returns that were filed after the Act of 1917 increased by over 1000%.
In his famous “Politics is Adjourned” address to a joint session of Congress on May 27, 1918, President Wilson
made a strong pitch for more revenues. He urged: “Our financial program must sustain it to the utmost. Our financial program must no more be left in doubt or suffered to lag more than our ordnance program or our ship program, or our munitions program or our program for making millions of men ready.” In defense of the new taxes requested on war profits, he said the American people were not just willing to send their men to possible death overseas, but “to bear any burden or undergo any sacrifice” to win the war including taxes. “We need not be afraid to tax them, if we lay taxes justly.” If the American people know that the burden is being distributed equally, he went on, “they will carry it cheerfully and with a sort of solemn pride.” Wilson made it sound almost as if Americans were actually seeking a tax increase in order to feel the joy of sacrificing their hard earned money for a righteous cause.
And so, the Revenue Act of 1918 (which actually passed in early 1919) increased taxes further. Corporations were given an exemption of $2,000, but rates were raised to 12% on net taxable income and the surcharge on the highest incomes was increased to 77%. The income tax now occupied a central place in the federal revenue system. In 1916, income taxes had been providing 16% of federal revenue, but from 1917 to 1920, that percentage ranged as high as 58%. The tax was now a pillar of federal finance. Still, however, it remained a narrow levy on the American people. In 1920, only 5.5 million returns showed any tax due.
By 1919, there was a clear and broad consensus that held that steep wartime tax rates were unsustainable. Even Wilson himself finally agreed, and in his State of the Union that year, he suggested the possibility of reducing taxes. A series of tax cuts (called Mellon tax cuts, for Andrew Mellon, the Treasury Secretary at the time) began in 1921, as legislators from both parties set about revising the wartime tax system. In the end, the tax cuts in the Revenue Act of 1921 were generally a disappointment for everyone and actually included a hike in the corporate tax rate.
Herbert Hoover and Franklin D. Roosevelt, using the excuses of depression and war, permanently enlarged the income tax. Under Hoover, the top rate was hiked from 24 to 63%. Under Roosevelt, the top rate was again raised – first to 79% and later to 90%. [If he had his way, in 1941, a 99.5% marginal tax rate of 99.5% would have been imposed on all incomes over $100,000. That was his proposal. After that proposal failed, Roosevelt issued an executive order to tax all income over $25,000 at the astonishing rate of 100%. Congress later repealed the order, but still allowed top incomes to be taxed at a marginal rate of 90%].
It was one thing to impose taxes but another to collect them. The collection process was greatly facilitated in 1943 by a device created by President Franklin D. Roosevelt to pay the costs of WWII. It was the tax withholding provision, also called “withholding from wages and salaries.” In other words, income tax would be collected at the source – collected at the payroll window before it was paid to the taxpayer. Economists point out that this device, more than any other single factor, shifted the tax from its original design as a tax on the wealthy to a tax on the masses – mostly the middle class.
In 1946, Beardsley Ruml, then the chairman of the Federal Reserve Bank of New York, wrote an article in American Affairs in which he explained the real function of the income tax. The article was entitled “Taxes for Revenue Are Obsolete.” Ruml theorized that with the Federal Reserve, an institution and mechanism were in place to provide the federal government with a constant and virtually unlimited flow of dollars. That, of course, is inflationary, so Ruml believed that income taxes served the purpose of dampening inflation by lowering demand, a measure achieved by reducing the purchasing power of the masses by taking money out of their paychecks.
That was but one purpose of taxation, according to Ruml. The other was the redistribution of wealth from one class of citizens to another. Though done under the banner of social justice and equality, the real purpose was to supplant the decisions of a free people in a free market with the rule of the masters of a planned economy. As Ruml put it in his own words:
“The second principal purpose of federal taxes is to attain more equality of wealth and of income than would result from economic forces working alone. The taxes which are effective for this purpose are the progressive individual income tax, the progressive estate tax, and the gift tax. What these taxes should be depends on public policy with respect to the distribution of wealth and of income. These taxes should be defended and attacked in terms of their effect on the character of American life, not as revenue measures.”
T. Coleman Andrews, who served as Commissioner of the IRS for nearly 3 years during the early 1950s, made the following remarks after his resignation in 1955:
“Congress, in implementing the Sixteenth Amendment, went beyond merely enacting an income tax law and repealed Article IV of the Bill of Rights, by empowering the tax collector to do the very things from which that article says we were to be secure. It opened up our homes, our papers and our effects to the prying eyes of government agents and set the stage for searches of our books and vaults and for inquiries into our private affairs whenever the tax men might decide, even though there might not be any justification beyond mere cynical suspicion.
The income tax is bad because it has robbed you and me of the guarantee of privacy and the respect for our property that were given to us in Article IV of the Bill of Rights. This invasion is absolute and complete as far as the amount of tax that can be assessed is concerned. Please remember that under the Sixteenth Amendment, Congress can take 100% of our income anytime it wants to. As a matter of fact, right now it is imposing a tax as high as 91%. This is downright confiscation and cannot be defended on any other grounds.
The income tax is bad because it was conceived in class hatred, is an instrument of vengeance and plays right into the hands of the communists. It employs the vicious communist principle of taking from each according to his accumulation of the fruits of his labor and giving to others according to their needs, regardless of whether those needs are the result of indolence or lack of pride, self-respect, personal dignity or other attributes of men.
The income tax is fulfilling the Marxist prophecy that the surest way to destroy a capitalist society is by steeply graduated taxes on income and heavy levies upon the estates of people when they die.
[As matters now stand, if our children make the most of their capabilities and training, they will have to give most of it to the tax collector and so become slaves of the government. People cannot pull themselves up by the bootstraps anymore because the tax collector gets the boots and the straps as well.]
The income tax is bad because it is oppressive to all and discriminates particularly against those people who prove themselves most adept at keeping the wheels of business turning and creating maximum employment and a high standard of living for their fellow men.
I believe that a better way to raise revenue not only can be found but must be found because I am convinced that the present system is leading us right back to the very tyranny from which those, who established this land of freedom, risked their lives, their fortunes and their sacred honor to forever free themselves…”
Taxation today is clearly used as a scheme of wealth distribution. In his bid for the presidency in 2008 and again in 2012, Obama talked about increasing taxes on the wealthy. His favorite line was: “We can restore the American dream where everyone gets a fair shot, everyone does their fair share, and everyone plays by the same set of rules.” He was referring to some sort of “advantage