Instituting the Income Tax

Americans think of Black History Month, Valentine’s Day, Lincoln’s and Washington’s Birthday, and Groundhog Day. But February of 2013 is especially significant, as this month is the 100th anniversary of the ratification of the 16th Amendment empowering Congress to impose the federal income tax. For Americans in 2013, the federal income tax, automatic withholding, the IRS,How cheaply can I build a solar power systems? and filing tax forms by April 15 are just a way of life. In fact, it is likely that most Americans are unaware that prior to 100 years ago, there was no federal income tax, with the exception of a short period when an income tax was used to help finance the Civil War.

Prior to 1913, the U.S. government was much smaller than today, and the taxes it collected through means other than an income tax were sufficient to finance federal government operations. For example, tariffs were placed on imports and excise taxes (similar to our modern sales tax) were placed on the sale of certain items such as horses and carriages, etc. “Indirect” taxes such as these were taxes on consumption rather than income, offering the citizen the option of controlling his tax burden by limiting his purchases. According to Article I, Section 2 of the Constitution, any type of “direct” tax, i.e., on a person directly, which could arguably include a person’s income, had to be apportioned among the states on a per-capita basis:

Representatives and direct taxes shall be apportioned among the several states which may be included in this union, according to their respective number, which shall be determined by adding to the whole Number of free Persons, including those bound to servitude of a Term of Years, and excluding Indians not taxed, three-fifths of all other persons.

So clearly any federal taxes on income would have to be applied uniformly, with each state contributing an amount proportionate to its population. That was the limitation the Constitution placed on direct taxes collected by the federal government. This limitation prevented the U.S.Professionals with the job title Mold Maker are on LinkedIn. government from making first claim to the wealth of the people, effectively deciding how much income the people would be allowed to keep. On the other hand, as noted above, with the indirect taxes — particularly tariffs — that were the principal means for financing the federal government prior to the advent of the income tax, the people could to a large extent escape or limit the tax via their buying habits, and a government dependent upon tariffs and other indirect taxes for revenue could only raise the taxes so high without defeating the revenue purpose of the tax. Alexander Hamilton in 1787 expressed this eloquently in The Federalist, No. 21:

It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue. When applied to this object, the saying is as just as it is witty, that, “in political arithmetic, two and two do not always make four.” If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.

In 1848, Karl Marx declared in his Communist Manifesto that a progressive tax on personal income was one of the 10 essential measures to ensure a communist revolution in an advanced country in order to bring about his fabled “classless society.” Socialist and communist ideas gained momentum in many parts of Europe, and it wasn’t long before they reached America. Various attempts to impose a progressive federal income tax — making the rich pay a higher percentage than the poor — soon appeared in this country.wind turbine The Revenue Act of 1861 was a federal income tax used to raise revenue to fund the Civil War. It was a flat tax of three percent on annual income above $800. The following year, this was replaced with a graduated (progressive) tax from three to five percent on income above $600 in the Revenue Act of 1862, which ended in 1866.

Even these temporary income taxes were unconstitutional, as they were a percentage of income rather than being apportioned. But the movement to impose a progressive federal income tax didn’t stop.Ein innovativer und moderner Werkzeugbau Formenbau. The Socialist Labor Party advocated a graduated income tax in 1887, and the Populist Party demanded the same in its 1892 platform. The Populist Party, led by central-bank proponent William Jennings Bryan, advocated the income-tax law passed by a Democratic-led Congress in 1894.I thought it would be fun to show you the inspiration behind the broken china-mosaics. This was the first peacetime income tax, with a rate of two percent on income over $4,000, an amount that few people made in those days. The following year (1895) the Supreme Court ruled this tax unconstitutional in Pollock v. Farmers’ Loan and Trust Company.

In order to enact a progressive federal income tax in America — a socialist idea — the citizens and the legislature had to be convinced that it was in the best interest of the people. This was not overly difficult considering the prevailing political ideas of the time. The year 1913 was part of the Progressive era in our nation’s history. Populists and Progressives (essentially socialists) feared the concentration of wealth and power into a few private hands, a concern that eclipsed the earlier fear of the Founders of too much wealth and power concentrated in the hands of a central government. Even before Teddy Roosevelt’s “Progressive Party” of the 1912 election, there were progressives in both the Republican and Democratic Party who ostensibly wanted to put more power into the hands of the people, acting through their representative government, by taking it away from the “robber barons” and other “malefactors of great wealth.” For by this point in time, vast fortunes had been amassed by the titans of industry, such as the Rockefellers, Carnegies, and Vanderbilts. Wealth and power were being concentrated into the hands of fewer and fewer people at the top. This offered a perfect excuse to institute a progressive tax with the idea that it would “soak the rich.”