Why We Pay Federal Income Tax: A Short History.

Antietam Battlefield (1862) in Maryland.  It was during the Civil War that Americans paid income tax for the first time.
Antietam Battlefield (1862) in Maryland. It was during the Civil War that Americans paid income tax for the first time.
The main U.S. Treasury Building, Washington, D.C.
The main U.S. Treasury Building, Washington, D.C.
The I.R.S. building, Washington. D.C.
The I.R.S. building, Washington. D.C.
Abraham Lincoln. The Great Emancipator is also the Father of the U.S. Income Tax.
Abraham Lincoln. The Great Emancipator is also the Father of the U.S. Income Tax.

Every April Americans think of at least two things: procrastination or ways to maximize an income tax return. There’s no amendment in the Constitution to protect us from this one. Quite the opposite – there’s an amendment that mandates we pay it. While the U.S. Constitution did a pretty good job of protecting citizens from the government with the Bill of Rights, it’s clear that there were a few trump cards that the Framers threw in there – namely the ability to amend the Constitution. The Sixteenth Amendment of the Constitution has become established law. Ratified in 1913, the Sixteenth Amendment gives Congress the power to levy an income tax without regard to Census results or apportioning it among the states.

In the early days of the United States the government raised revenues mostly by excise taxes, tariffs, duties, and poll taxes. In summary, and excise tax is a tax on something you buy, a tariff is a tax levied on imports or exported goods (and services), and strongly associated with protectionism, and a poll tax is a tax on the person, also known as the ‘head’ tax often associated with voting. The last category, the poll tax, was used to disenfranchise the poor, usually blacks in the South, since they could not front the money to pay the poll tax. While no such thing exists today, U.S. citizens and residents typically pay money for things such as passports, birth certificates, and drivers licenses. These are the modern equivalents of poll taxes.

The origin of the Federal income tax is rooted in the Civil War. During the Civil War, the government needed to raise money and passed the Revenue Act of 1861 which was a 3% flat tax on income above $800 ($17,679 in 2008 dollars). A year later the Revenue Act of 1862, also signed by President Abraham Lincoln, changed the flat tax into a progressive (graduated) income tax. Anyone earning income of $600 or more was taxed at 3%. Income of $10,000 ($220,993 in 2008 dollars) and over was taxed at 5%. This was the first income tax levied in the United States. About thirty years later, in 1894, the Wilson-Gorman Tariff was passed by Congress. This was the first peacetime income tax and it levied a 2% rate on income over $4000. Its imposition was justified to make up for lost tariff revenues after the 1893 Panic, which set off the worst depression in U.S. history. A year after the Wilson-Gorman Tariff was passed, the United States Supreme Court had to step in and make a ruling. In Pollock v. Farmers Loan & Trust Co. (1895) the Supreme Court ruled in favor of Pollock, who sued Farmers Loan and Trust because they agreed to pay the tax under the Wilson-Gorman tariff, and in addition provide the names to the revenue department in the U.S. Treasury of their members who held policies. Pollock owned only a few shares of stock in the company, and lost in the lower courts at first. The outcome of the case presaged the need to amend the Constitution. By the Supreme Court’s reasoning, in Pollock v. Farmers Loan and Trust, taxes on income, interest, and dividends were direct taxes. This violated the Constitution (Article 1, Section 2) which says that direct taxes must be apportioned among the several States … according to their respective Numbers.

The outcome, or problem, with the Supreme Court’s ruling in Pollock v. Farmers Loan and Trust was that since the taxes derived from the rents, dividends, and interests were considered direct taxes, they were required to be apportioned per the Constitution. Apportionment of these income taxes, however, was considered impractical, but at the same time the Court upheld Congress’ power to impose taxes on property. At the heart of the problem was the impracticality of taxing individual wages but not earnings from property. This eventually led to the Sixteenth Amendment, ratified in 1913, which allowed Congress to levy income taxes without apportionment among the States or based on the Census. At the same time it overruled Pollock v. Farmers Loan and Trust. The Sixteenth Amendment was followed by the Revenue Act of 1913 which imposed income taxes, not apportioned according to states’ populations and set the Amendment into law. In the 1916 Supreme Court case Brushaber v. Union Pacific Railroad the Court upheld the Revenue Act of 1913. Frank R. Brushaber, the plaintiff, argued the Revenue Act of 1913 was a violation of the 5th Amendment, which prohibited the government from taking property without due process. Brushaber was a stockholder in the Union Pacific Railroad and sued the railroad in an effort to prohibit it from paying the tax. Like it or not the federal income tax is established law and it won't go away anytime soon or would probably require a Constitutional Amendment to overturn. Unfortunately 40% of Americans do not pay federal income tax.

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