This series has four easy 5 minute installments. This first installment: Constitution Amended for Income Tax.
A century later the income tax has become a major fact of our personal lives and our national experience. Its initial attractions were fairness for the individual and stability of revenues for the government. Its purposes have expanded since. Officials have openly used the tax to influence individual’s behavior. Tax consequences are now a routine part of individual’s decisions. A multi-billion dollar industry has arisen to advise the citizenry and prepare their tax returns. Lately, the tax has added a new function entirely unrelated to government revenues: financial disclosure. Banks and other lenders now routinely demand tax forms and reject loan applications for insufficient taxable income. Tax planning now involves which deductions to forgo in order to elevate taxable income to lender requirements. Adding the disclosure function to the revenue function of the income tax return has been an indirect source of added tax revenues to the government. While this is the state of the income tax today, the story below is how it was viewed at the time.
This selection is from The Income Tax of 1913 from The Quarterly Journal of Economics, Volume 28 by Joseph A. Hill published in 1913. For works benefiting from the latest research see the “More information” section at the bottom of these pages.
Joseph A. Hill was a statistician who wrote widely and authoritatively on governmental mathematics issues.
Place: Washington, D.C.
During the year 1913 a most amazing event happened. The United States amended its Constitution by peaceful means. Indeed the Constitution was twice amended; for, having passed the sixteenth amendment in February, permitting an income tax, the States, just to show what they could do when aroused to it, passed the seventeenth amendment in May, authorizing the direct election of United States senators by the people.
Amending the United States Constitution is so difficult and cumbrous a proceeding, that it had not previously been accomplished for over a century, except by the throes of the terrible Civil War. The original Constitution had twelve amendments added to it before it was fully established in running order in 1804. The thirteenth, fourteenth, and fifteenth amendments were added after 1865 to prohibit slavery. They were forced upon the unwilling Southern States. From 1804 to 1913 no amendment was put through by the regular process. Yet in that time efforts to amend were made on over one hundred and forty occasions. Men had grown discouraged at last; they said that amendment was impossible. The cumbrous system which has thus so long blocked all change was that Congress must by a two-thirds vote in each House agree to submit an amendment to the States. These must then pass upon the new law, each in its own legislature. If three-fourths of the legislatures approved, the amendment was to be accepted. Few of the proposed changes ever won a two-thirds vote in both Congressional Houses; and of those few not one had ever appealed to the necessary overwhelming majority of State legislatures. The Senatorial amendment passed Congress several years ago, and had long been knocking rather hopelessly at legislative doors. Then the Income Tax amendment appeared. Congress passed it almost hurriedly in a spasm of progressiveness in 1909. Then came the great sweep of progressive policies to victory in the elections of 1912; and legislatures everywhere awoke to the universal insistence on the Income Tax. All the States but six approved the amendment; and one of the last acts of President Taft during his administration was to proclaim its adoption. The popular amendment swept along in its train the Senatorial change; and the latter, though still opposed by most of the old South, was ratified by all the rest of the States except Rhode Island and Utah. So it also became law.
Nothing illustrates better the “tyranny of the dead hand” in the United States than the history of the income tax. The Constitution laid it down that no head tax or other direct tax should be imposed except by apportioning it among the several States on the basis of their population. No more effective barrier to any system of direct taxation could possibly have been devised. It would seem clear that the main intention of this Constitutional provision was not merely to protect the people of the smaller States, but to force the United States Government to depend for its revenue upon indirect taxes. Such, at any rate, has been its effect. Legal ingenuity, however, can get round anything. The Supreme Court decided as long ago as 1789 that an income tax was not a direct tax, and need not, therefore, be apportioned among the States. During the Civil War, though not, curiously enough, until every other source of taxable wealth had pretty well run dry, an income tax was actually imposed by three separate Acts of Congress, the Act of 1864 levying a tax of 5 per cent. on all incomes between $600 and $5,000, and of 10 per cent. on all incomes above $5,000. The tax continued to be collected up to 1872, when it was repealed.
The constitutional character of the tax, when levied without apportionment among the States of the Union, was once more fully argued out in the Supreme Court, which in 1880 reaffirmed its decision of 1789, that a tax on incomes was not a direct tax. Some fifteen years later, however, the question emerged again, and in a crucial form. The Democrats came into power in 1893, and proceeded to reduce the tariff, relying upon a tax of 2 per cent. on all incomes of over $4,000 to make good the expected loss of revenue. The Supreme Court in 1895 shattered all their fiscal plans and policies by pronouncing the income tax to be a direct tax, and therefore incapable of being levied, except in strict proportion to the population of the various States, and therefore, in effect, incapable of being levied at all.
That decision, in all its absurdity, has stood ever since. Its consequences were to deny to the United States Government the right to tax incomes, to restrict it still further to customs duties as virtually its sole source of revenue, to deprive it of a power that might one day be vital to the safety of the Union, and to exhibit it in a condition of feebleness that was altogether incompatible with any rational conception of a sovereign State. It is true that the Supreme Court has changed not only its personnel, but its spirit, and its whole attitude toward questions of public policy, since 1895. It has more and more allowed the influence of the age and the necessities of the times and the clear demands of social and economic justice to moderate its decisions; and had the question of an income tax been brought before it any time in the last five years, it would probably have reversed its judgment of 1895. But President Taft was undoubtedly right when he urged, in 1909, that the risk of another adverse decision was too great to be run, and that the safer course was to proceed by way of an amendment to the Constitution.
The mere passing of the Income Tax amendment did not, however, establish an income tax. It merely authorized the government to do this at will. President Wilson’s administration was prompt to take the matter up. The Democrats, in conjunction with their reduction of the tariff, needed a new source of revenue. So in October of 1913 the Income Tax law was passed. In theory an Income Tax is obviously the most just of all taxes. It summons each citizen to pay for the government in proportion to his wealth; and his wealth marks roughly the amount of government protection that he needs. In practice, however, the working out of an income tax is so complex that every grumbler can find in its intricacies some cause of complaint. The present tax is therefore described here by an expert statistician, Mr. Joseph A. Hill, the United States Government official at the head of the Division of Revision and Results of the Census Bureau in Washington.
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