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The 16th Amendment to the U.S. Constitution was ratified in 1913 and allows Congress to levy a tax on income from any source without apportioning it among the states and without regard to the census.
- The 16th Amendment to the U.S. Constitution was ratified in 1913 and allows Congress to levy a tax on income from any source.
- The change was generally supported by States in the South and West.
- Prior to the 16th Amendment, the constitution required direct taxes to be proportionate to each state's population. Most Federal revenues came from tariffs and excise taxes.
- The first national income tax was enacted in 1894 but was struck down by the Supreme Court in the case of Pollock v. Farmers' Loan & Trust Co. (1895). The 16th Amendment was passed in response to this court case.
- The income tax is now the largest source of Federal government revenue.
The text of the 16th Amendment is as follows:
The Congress shall have the 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.
Congress passed a joint resolution calling for the amendment on July 1909, and Alabama ratified it a month later. The amendment came into force when the states of Delaware, Wyoming, and New Mexico ratified it on Feb. 3, 1913.
The first permanent federal income tax was levied in 1913: the schedule consisted of seven brackets, with rates ranging from 1%, on the first $20,000 of income, to 6% on income exceeding $500,000. The government raised a total of $28.3 million. (These figures are not adjusted for inflation.)
The year the first permanent federal income tax was levied.
Congress had imposed income taxes prior to the ratification of the 16th Amendment. The Revenue Act of 1862 charged citizens earning more than $600 per year 3% of their income, while those making over $10,000 paid 5%. The tax was collected in order to fund the Civil War; rates were raised in 1864, but the law was allowed to expire in 1872. For the most part, however, the federal government raised most of its revenue from excise taxes and tariffs prior to 1913.
Congress attempted to impose another national income tax, of 2% on earnings in excess of $4,000, in 1894. The tax was challenged in court by a Massachusetts resident named Charles Pollock, and the Supreme Court ruled in his favor in Pollock v. Farmers' Loan & Trust Co. in 1895, striking down the tax.
The rationale for the ruling comes from Article I, section 2, clause 3 of the Constitution:
Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers ...
In U.S. constitutional law, a "direct tax" is a tax on property "by reason of its ownership."
In Pollock, the Supreme Court ruled that this description applied to income from the plaintiff's 10 shares of the Farmers' Loan & Trust Co., and by extension to all interest, dividends, and rents derived from the property. (The Court did not rule that income from labor was a direct tax, so that could, in theory, have been subject to federal, unapportioned income taxes.) In order to levy a direct tax, Congress would have had to apportion it among the states, assigning each one an amount to raise based, for example, on its representation in the House of Representatives.
The 16th Amendment removed that requirement. The change was supported primarily by states in the South and West, where the tariffs that were at that time the primary source of income for the federal government exacerbated an already steep rise in the cost of living.
The text of the 16th Amendment states that "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 allowed Congress to enact the first nationwide income tax, which is now the Federal government's largest source of revenue. Prior to that point, most Federal revenue came from tariffs.
The 16th Amendment refers to "incomes from whatever source derived," allowing broad interpretation of the meaning of "income." In later cases, the Supreme Court clarified income to mean “gain derived from capital, from labor, or from both combined,” including “profit gained through a sale or conversion of capital assets.”
The House of Representatives passed the 16th Amendment on July 12, 1909, after a five-hour debate, according to the U.S. House of Representatives, with a vote of 318 in favor and 14 against. The Senate approved the resolution with a vote of 77-0. However, the amendment was not ratified by the required number of states until four years later, in 1913.
Death and taxes! The origin of the modern income tax began with ratification of the Sixteenth Amendment to the U.S. Constitution. The amendment authorized Congress to institute a graduated income tax on the earnings of American workers. This power thus enabled the passage of the Revenue Act of 1913. Read more about it!
The information in this guide focuses on primary source materials found in the digitized historic newspapers from the digital collection Chronicling America.
The timeline below highlights important dates related to this topic and a section of this guide provides some suggested search strategies for further research in the collection.
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.
Annotations
INCOME TAXThe ratification of the Sixteenth Amendment was the direct consequence of the Court’s 1895 decision in Pollock v. Farmers’ Loan & Trust Co. holding unconstitutional Congress’s attempt of the previous year to tax incomes uniformly throughout the United States. A tax on incomes derived from property, the Court declared, was a “direct tax,” which Congress, under the terms of Article I, § 2, and § 9, could impose only by the rule of apportionment according to population. Scarcely fifteen years earlier the Justices had unanimously sustained the collection of a similar tax during the Civil War, the only other occasion preceding the Sixteenth Amendment in which Congress had used this method of raising revenue.
During the years between the Pollock decision in 1895 and the ratification of the Sixteenth Amendment in 1913, the Court gave evidence of a greater awareness of the dangerous consequences to national solvency that Pollock threatened, and partially circumvented the threat, either by taking refuge in redefinitions of “direct tax” or by emphasizing the history of excise taxation. Thus, in a series of cases, notably Nicol v. Ames, Knowlton v. Moore, and Patton v. Brady, the Court held the following taxes to have been levied merely upon one of the “incidents of ownership” and hence to be excises: a tax that involved affixing revenue stamps to memoranda evidencing the sale of merchandise on commodity exchanges, an inheritance tax, and a war revenue tax upon tobacco on which the hitherto imposed excise tax had already been paid and that was held by the manufacturer for resale.
Under this approach, the Court found it possible to sustain a corporate income tax as an excise “measured by income” on the privilege of doing business in corporate form. The adoption of the Sixteenth Amendment, however, put an end to speculation whether the Court, unaided by constitutional amendment, would persist along these lines of construction until it had reversed its holding in Pollock. Indeed, in its initial appraisal of the Amendment, it classified income taxes as being inherently “indirect.” “[T]he command of the Amendment that all income taxes shall not be subject to apportionment by a consideration of the sources from which the taxed income may be derived, forbids the application to such taxes of the rule applied in the Pollock Case by which alone such taxes were removed from the great class of excises, duties and imports subject to the rule of uniformity and were placed under the other or direct class.” “[T]he Sixteenth Amendment conferred no new power of taxation but simply prohibited the previous complete and plenary power of income taxation possessed by Congress from the beginning from being taken out of the category of indirect taxation to which it inherently belonged . . . .”
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Justia › US Law › US Codes and Statutes › US Constitution Annotated › Sixteenth Amendment -- Income Tax › Income Subject to Taxation
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.
Annotations
Building upon definitions formulated in cases construing the Corporation Tax Act of 1909, the Court initially described income as the “gain derived from capital, from labor, or from both combined,” inclusive of the “profit gained through a sale or conversion of capital assets”; in the following array of factual situations it subsequently applied this definition to achieve results that have been productive of extended controversy.