Our Income tax rate in 1916 was 1%–What happened?

I have written several postings related to Various topics including the military, Voting, the economy, religion and etc in America. A list of links have been provided at bottom of this article for your convenience. This article will, however address additional issues in these topics.

I know I am going to be “flammed” on the following statements. Everybody knows it is illegal to force someone to have sex without their consent. It is called rape. SO why is it legal for the government to figuratively speaking rape us year in and year out by charging us exorbitant income tax rates? In 1913, the 16^th Amendment authorized an income tax—a policy that began the following year.

The 16th Amendment

“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.“

At the time, there were only seven tax brackets and a majority of Americans fell into the lowest one which stood at a mere one percent. It encompassed all Americans who made, in today’s dollar equivalent, up to $459,000 annually. The Revenue Act of 1916 began the practice of adjusting tax rates and income scales. The original income tax was 1% for the bottom bracket, which was comprised of income up to $20,000, and 7% for the top bracket, which was comprised of income over $500,000. The Revenue Act raised the top bracket to $2,000,000 and raised the tax rates to 2% for the bottom bracket and to 25% for the top bracket rate.

It has not stopped since the top level even went to 94%. How do we consistently allow this to happen. There is no reason for the usurious rates that we are being charge by not only the Federal Government but many of our states as well. I frankly don’t think I am getting my money’s worth. I am paying well over a third of my income in taxes of some kind. I just think of how quickly I could have my mortgage paid off if I could take all that money that is taken away from me every year and actually apply it to my household expenses.

I came across an article on the history of taxes, of which I will include the rest of it below.

What is Income Tax: An income tax is a direct tax which is levied on the net income of private individuals and corporate profits. Income tax systems range from a flat tax to extensive progressive tax systems. Here, we take a close look at the tax history in the United States.

Tax History – An Introduction

Taxes have generally been around since the beginning of civilization or history. The earliest known tax was implemented in Mesopotamia over 4500 years ago, where people paid taxes throughout the year in the form of livestock (the preferred currency at the time). The ancient world also had estate taxes and taxes. The earliest recorded evidence of a death tax came from ancient Egypt, where they charged a 10% tax on property transferred at time of death in 700 BC.

Since then, the way we pay taxes has changed significantly. However, some ancient taxes have survived across history and persisted into the modern world. In 2006, China eliminated what was the oldest, still-existing tax in the world. It was an agricultural tax that had been created 2,600 years ago and was only eliminated in order to improve the well-being of rural farmers in China.

A History of Taxes in the United States

It’s hard to believe, but America was founded to avoid high taxation.

In the United States, the tax system has evolved dramatically throughout the nation’s history. Originally, there wasn’t an income tax and tariffs provided the main source of revenue for the government. New taxes were often introduced during times of war to raise additional revenue, but they were generally allowed to expire once the war was over.

Taxation in the United States’ history can be traced back to Colonial America when the colonists were heavily taxed by Great Britain on everything from tea to newspapers. In 1765, the Stamp Act even specified that all legal and business documents were required to bear a stamp, showing that the appropriate tax had been paid. Most colonists objected to this form of taxation since they had no political voice or input about the creation of new taxes. This gave rise to the slogan “no taxation without representation.” Since the King of England continued to ignore demands by the colonists to abolish these taxes, some colonists participated in protests, such as what became known as the Boston Tea Party.

Income Taxes in America

The history of income tax in America is an unusual one. The first federal income tax was created in 1861 during the Civil War as a mechanism to finance the war effort. In addition, Congress passed the Internal Revenue Act in 1862 which created the Bureau of Internal Revenue, a predecessor to the modern day IRS. The Bureau of Internal Revenue placed excise taxes on everything from tobacco to jewelry. Following the end of the Civil War, the income tax did not have substantial support and was repealed in 1872.

In 1894, Congress passed the Wilson-Gorman tariff which established a tax rate of 2% for annual income over $4,000, but it was overturned by the Supreme Court in 1895. In the early 20th century, the income tax enjoyed renewed support and, in February of 1913, the Sixteenth Amendment to the Constitution was ratified, granting Congress the power to tax personal income. The new system collected the income tax at the source, as it is done today, where taxes are initially withheld before the income reaches the recipient. In 1914 the Bureau of Internal Revenue released the first income tax form, called Form 1040. This still remains the main income tax form and it has been modified and re-issued almost every year since then (learn about the evolution of Form 1040). The first year was a test run where people simply sent in their forms to have them checked by the bureau for accuracy without paying any taxes. By 1915, both members of Congress and the public began to voice concerns about the complexity of the income tax form, stating that it was difficult for some to prepare and file their returns…..The Revenue Act raised the top bracket to $2,000,000 and raised the tax rates to 2% for the bottom bracket and to 25% for the top bracket rate.

The Revenue Act of 1916 also created what is widely considered the predecessor to the modern estate tax. At first, the maximum rate was set at 10% for estates greater than $5 million. However, the rate increased the following year to 22% for estates valued at between $8 and $10 million and 25% for estates valued at over $10 million. By 1924, the top rate was 40% for estates valued at over $10 million.

In order to support the war effort in WWI, the lowest bracket’s marginal tax rate was increased to six percent and the overall number of tax brackets increased. Tax cuts after the war became important drivers of economic success in the “Roaring 20’s.” However, the top marginal rate began to increase during the Great Depression and WWII. In 1945, the top tax bracket hit 94 percent—a rate that remains an all-time high to this day. The Revenue Act of 1941 set the tax at 77% on estates valued over $50 million. In comparison, the lowest bracket of the estate tax, which was comprised of estates valued under $5,000, only rose from 1% to 3% over the same time period.

Historical Income Tax Rates

Historic Lowest and Highest Tax Rates (1913-2005)

Look at a detailed overview of income tax rates and income tax brackets and you will find that income tax rates continued to change throughout history and decades. The tax rate for the bottom income tax bracket grew, peaking at 22.2% in 1952. However, the lowest tax bracket at that point was comprised of individuals earning up to $4,000. The bracket size itself peaked in 2001 at $45,200. The tax rate for the top bracket also continued to grow, peaking at 94% in 1944 and 1945.

At that time the bracket was for individuals making over $400,000. Over the last decade, the rate for the bottom tax bracket, which is individuals earning less than about $15,000, has been set at 10%. The rate for the top bracket, which is individuals earning around $350,000, is at 35%. Calculate your latest income tax rate based on your income.

Marginal US Income Tax Rates

An historic overview of Marginal Income Tax Rates in the US

Tax Policy Center

Tax Code History and Tax Law Page Growth

The modern tax code is often described as complicated which is why tax code reform remains a popular issue among politicians. Ronald Reagan, along with Congress, reformed the tax code twice during his two terms in office—once in 1981 and again in 1986. His reform provided the largest tax cut in U.S. history at the time. While Reagan wasn’t the first or the last to reform the tax code (nearly every recent president has attempted to reform the tax code in one way or another), his tax reform was considered historic. More recently, Bill Clinton lowered taxes for the middle class in the 1990’s and George W. Bush provided another massive tax cut for all income levels in 2001.

While these reforms reduced taxes, they did not drastically simplify the tax code, keeping the issue a common topic of conversation among politicians. Despite the complicated workings of the federal income tax, it can provide people with many tax breaks and tax deductions, some of them being quite unusual tax situations.

In 2017, former president Donald Trump passed the Tax Cuts and Jobs act, or TCJA, which was set to last through 2025. This act significantly helped lower income taxpayers while making many other changes, including a single rate change to corporate taxes. This tax reform was the largest overhaul of the tax system in the thirty years prior to its enactment. The act nearly doubled the standard deduction, reformed itemized deductions, increased the Child Tax Credit, and aimed to make taxes simpler for American Citizens.

Number of Words in the Tax Code (1955-2005)

The U.S. tax code has grown tremendously over the years. For Tax Year 2021, the tax code contains nearly 10,000 sections. The instructions for the Form 1040 alone speak to the expansive growth of the tax code over its history. In 1913, the tax code could be printed on a single page, while modern tax codes can take up to 174 pages. However, the modern tax code is much more broad and complex than its 1913 counterpart, featuring categories for employment taxes, financing of election campaigns, coal industry health benefits, and the trust fund code. This incredible growth can be attributed to both expansions and revisions that are made to patch up tax loopholes. Over the past 10 years, it is estimated that the tax code has been amended or revised over 4,000 times.

Wishful thinking, always a temptation, is hazardous. Example: An awful lot of people think the income tax as it applies to private-sector wage earners is illegal—even unconstitutional—and they assume that if they can only come up with the right legal arguments, judges will strike down the tax and make America a free society once more. Some of those people are in prison today.

It would be nice if their wish came true. But it’s not going to happen, for reasons I will discuss here. This is another example of Richman’s Maxim: There’s no shortcut to a free society. Since there will be no magic bullet, we will have to advance freedom the old-fashioned FEE way, by becoming as knowledgeable and articulate in our advocacy as possible in order to attract those who hunger to understand freedom. Nothing less will do.

So what about the income tax? There is no shortage of arguments that the income tax is illegal, even unconstitutional. It’s been said to violate the Fifth Amendment guarantee against self-incrimination, that it’s really voluntary, that Federal Reserve Notes aren’t money, and on and on. Most curious is the argument that the income-tax law was never intended to tax wages and salaries earned in the private sector because the lawmakers knew such a tax would be unconstitutional. There are several variations on this theme, and here I can discuss only the broad issues. (Admittedly this leaves me open to the charge that I have not addressed a particular variation. But they all suffer from a similar flaw.)

Let there be no misunderstanding over what I am about to say: The income tax is immoral on many levels. It permits the government nearly unlimited access to the people’s wealth. It opens the door to inquisitorial intrusion into their private affairs. And it introduces such complexity into the law that everyone is a potential criminal.

Three strikes—why isn’t it out?

Alas, something can be immoral and yet legal and constitutional. That’s the fix we’re in.

Some people argue that the Sixteenth Amendment to the Constitution is unconstitutional. But the Constitution sets up a virtually open-ended, if onerous, amendment process. The framers excluded only three subjects from amendment (the importation of slaves and apportionment of direct taxes, which expired in 1808, and equal state representation in the Senate). An amendment to the Constitution therefore cannot logically be unconstitutional. (An unrelated argument is that the Amendment was not properly ratified by the states. Needless to say, the courts established by the Constitution disagree.)

Some legal critics of the tax accept the Amendment, but argue that it is misunderstood and therefore the 1913 income-tax law has been wrongly applied to private-sector wages and salaries. But the misunderstanding is in the people who make this argument. Let’s get straight why the Amendment was proposed. It is widely believed that the U.S. Supreme Court in 1895 declared income taxation in itself unconstitutional, making the Amendment necessary if the feds were to grab part of our paychecks. This is wrong. The Supreme Court’s 1895 Pollock ruling did not strike down the principle of income taxation. All it did was declare taxation of income from real and personal property unconstitutional when it is not apportioned among the states. Taxing wages and salaries was fine as far as the Court was concerned. The only reason it struck down the entire law was that the justices assumed that Congress did not intend that only wages and salaries be taxed.

To understand the Court’s reasoning we have to take up the distinction between direct and indirect taxation. The Constitution requires that direct taxes be apportioned according to the populations of the states, while indirect taxes must be uniform throughout the states. This seems straightforward, until you appreciate that the framers had no clear idea what’s a direct tax and what’s an indirect tax. Such heavyweights as James Madison, Alexander Hamilton, and Fisher Ames couldn’t agree. In America income taxation has long been regarded as indirect, a kind of excise. But in England it has always been regarded as direct.

The Court in 1895 confirmed that income taxation usually is indirect and therefore does not require apportionment, only uniformity. But it found an exception. Taxing income from real and personal property, the Court said (dubiously), is like taxing the property itself, and so, in effect, is direct taxation—thus requiring apportionment. Since the law passed by Congress in 1894 did not contain an apportionment clause, that part was held unconstitutional, and so the whole thing fell.

The Sixteenth Amendment had one purpose: to eliminate the apportionment rule when the source of the income being taxed turns what looks like an indirect tax into a direct tax. That’s why the Amendment says: “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.” (Emphasis added.)

Ever since, the courts have emphasized that the Amendment gave the federal government no new power to tax. All it did was remove from consideration the source of income being taxed and thereby eliminate a restriction on Congress’s taxing power.

The income-tax law passed in 1913 under the newly ratified Amendment was upheld by the Supreme Court in 1916 in the Brushaber case. Here the Court embraced the broadest possible interpretation of the federal taxing power—a power that, the Court said, predates the Sixteenth Amendment. The Court said: “That the authority conferred upon Congress by 8 of article 1 ‘to lay and collect taxes, duties, imposts and excises’ is exhaustive and embraces every conceivable power of taxation has never been questioned. . . . And it has also never been questioned from the foundation . . . that there was authority given, as the part was included in the whole, to lay and collect income taxes. . . .” The Court went on to acknowledge: “the conceded complete and all-embracing taxing power”; “the complete and perfect delegation of the power to tax”; “the complete and all-embracing authority to tax”; and “the plenary power [to tax]” (emphasis added).

That was just in one paragraph!

Later in the opinion we find this: “[T]he all-embracing taxing authority possessed by Congress, including necessarily therein the power to impose income taxes. . . ” (emphasis added).

In the succeeding 90 years, no Supreme Court has contradicted the holding in Brushaber.

Facing the Facts

Where does this leave liberty’s advocates? First, we have to face the facts. Like it or not, the U.S. Constitution empowers the Congress to levy any tax it wants. Anyone is free to come up with a contrary interpretation, but the constitutionally endowed courts have spoken. Reading one’s libertarian values into the Constitution is futile. For better or worse, the Constitution means what the occupants of the relevant constitutional offices say it means. The battle over the taxing power occurred long ago—in 1787 between the Federalists and Antifederalists, before the Constitution was ratified. Under the Articles of Confederation, Congress had no power to tax; it could only ask the states to raise money. When the Constitutional Convention proposed to give the central government that fearsome power, the Antifederalists objected, predicting that terrible things would issue from such power. As one Antifederalist warned, “By virtue of their power of taxation, Congress may command the whole, or any part of the property of the people.” Alas, the Antifederalists lost. We will get nowhere if we pretend that this history does not exist.

Confiscatory taxation (but I repeat myself) will never be abolished through arguments that are too clever by half. When the people and their political culture (the real constitution) demand removal of this government burden, it will be removed. Therefore, if freedom is to be won, it will only be through the sort of painstaking educational activities that FEE has engaged in for 60 years.

History and Purpose of the Amendment

The 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.” “The 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. The 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 . . . .”

Understanding the 16th Amendment

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.)

1913

The year the first permanent federal income tax was levied.

Federal Income Tax Prior to the 16th Amendment

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.

16th Amendment Definition FAQs

What Does the 16th Amendment Say?

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.”

What Did the 16th Amendment Accomplish?

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.

According to the 16th Amendment, What Is the Definition of Income?

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.”

Did the 16th Amendment Really Pass?

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.

Why is the Sixteenth Amendment Important?

The Sixteenth Amendment, ratified in 1913, played a central role in building up the powerful American federal government of the twentieth century by making it possible to enact a modern, nationwide income tax. Before long, the income tax would become by far the federal government’s largest source of revenue. This Amendment was part of a wave of federal and state constitutional amendments championed by Progressives in the early twentieth century. The Amendment reversed an 1895 Supreme Court decision that had made a nationwide income tax effectively impossible by invoking what today seems an arcane distinction between “direct” and “indirect” taxes.

The Taxing Clause in Article I, Section 8, grants Congress the broad “Power To lay and collect Taxes, Duties, Imposts and Excises,” but Article I also provides (twice) that a “direct” tax must be apportioned among the states on the basis of population. This means that if a tax is a “direct” tax, a state with one-tenth of the national population must bear one-tenth of the total liability. It doesn’t matter whether one state has lots of whatever is being taxed (such as valuable land) and another state has very little—the states have to bear the burden according to population. That requirement makes direct taxation cumbersome, and often impossible.

For other taxes—the so-called “indirect” taxes—there is no apportionment rule. The Constitution requires only that “all Duties, Imposts and Excises shall be uniform throughout the United States.” This is a relatively easy requirement to satisfy: what’s taxed and the tax rates mustn’t vary from state to state. In the nineteenth century, most of the government’s revenue came from “duties, imposts and excises” on consumption of various goods.

Thus, whether a tax is direct or indirect has mattered—a lot. So what is a “direct tax”? At a minimum, it includes “capitations” (specifically mentioned in the Constitution and generally understood to be lump-sum head taxes—each person pays the same) and also taxes on land. The Framers thought these were “direct.” But that may be it. An early Supreme Court case, Hylton v. United States (1796), approving an unapportioned tax on carriages, said as much, and in the nineteenth century the Supreme Court upheld several other kinds of unapportioned taxes against constitutional challenges. In Springer v. United States (1881), the Court even approved the unapportioned Civil War income tax. (Continue reading from Constitution Center)

Abolish the Income Tax As We Know It?

A few years after the income tax amendment was ratified, the United States entered World War I. As in the Civil War, Congress turned to the income tax to quickly raise large amounts of revenue. In 1917, Congress lowered the standard exemption to $1,000 for individuals thus expanding the taxpayer pool. At the same time, the lawmakers increased the base tax rate from 1 percent to 2 percent. Those earning over $1 million were taxed at the unheard of rate of 50 percent (this rose to 77 percent by the end of the war).

With the income tax increases, federal receipts climbed from under $1 billion in 1917 to nearly $4 billion in 1918. At war’s end, about 60 percent of federal tax money came from the income tax. It replaced tariff duties and excise taxes as the main source of revenue for the U.S. government. Tax rates were reduced after the war. But Congress had discovered how easy it was to pump enormous amounts of money into the U.S. treasury.

Today, more than 80 years after the ratification of the 16th Amendment, the income tax has changed dramatically. Unlike 1913, most Americans today must pay some federal income tax. Instead of the $71 million collected in 1913, the federal government currently collects over $500 billion in income taxes each year (plus another $117.5 billion from corporations). The 15-page tax code has expanded to more than 1,000 pages. And today, more people grumble about paying income taxes.

Some critics call for replacing the complicated graduated income tax with a much simpler “flat tax.” Others want to abolish the federal income tax entirely in favor of a form of national sales tax. But the fundamental question is the same today as it was in 1913: What is the best way to tax Americans?

For Discussion and Writing

Why do you think the income tax was much more popular in 1913 than it is today?
What part has the 16th Amendment played in the expansion of the federal government in the 20th century?
What is the difference between a “regressive” and a “progressive” tax?
Which of the following income taxes—a, b, or c—do you think is the most fair? Explain your answer.

a. everyone pays the same amount, e.g. $5,000.

b. everyone pays a flat rate, e.g. 15 percent.

c. everyone pays a progressive rate, e.g. $1–20,000 = 5 percent,
X $20,001–100,000 = 15 percent, $100,000 and up = 25 percent.

A C T I V I T Y

What is the Best Tax System?

Outlined below are three different ways to tax Americans in order to finance the federal government. For the purposes of this activity, assume that each would be the only federal tax in place and that each would produce an equal amount of revenue. Form small groups to evaluate the advantages and disadvantages of all three types of taxes. After doing this, each group should decide which tax system is the best and report its conclusion, with reasons, to the rest of the class.

In evaluating the three taxes, consider the following criteria: “progressivity” vs. “regressivity,” simplicity vs. complexity, effect on consumer prices, and overall fairness.

Graduated Income Tax

Income tax reporting forms, exemptions, deductions, and regulations have grown increasingly complicated since 1913. Under the existing graduated income tax, those with higher incomes pay higher tax rates.

Flat Tax

A flat-tax proposal by economists Robert E. Hall and Alvin Rabushka of Stanford University’s Hoover Institution would establish a single income tax rate of 19 percent for all individuals regardless of what they earn. No tax would be paid on the first $25,000 earned by a family of four. But virtually all deductions, including mortgage interest, would be eliminated. Tax returns would be completed on a simple single-page form easily processed by the IRS.

Value Added Tax

Most European countries raise substantial amounts of revenue with a value added tax (VAT). This is a form of national sales tax collected by the government at every stage that a good is produced and distributed. Manufacturers and businesses add the cost of the tax to the price that the consumer finally pays. Some European countries have a VAT rate of nearly 40 percent. To equal federal revenue now raised by the graduated income tax, the United States would have to have a VAT rate of at least 25 percent. This would show up in substantially higher consumer prices, although some products like basic food items could be exempted or taxed at lower rates. While collecting the VAT from manufacturers and businesses would probably expand the IRS bureaucracy, individuals would have no annual tax returns to file or income tax to pay.

Conclusion

I know that the 16th Amendment did not stipulate a rate limit for taxation, however when they were trying to get support for it in the states there were promises made about the limit for these taxes. Thanks to subsequent revenue acts the rate topped out at 94%. Nobody in their right mind would never have voted for taxes this high. Why in the hell would you even bust your asses to make good, if the country took that much of your income? Well we no this never happened and that is why the IRS came about. By setting the tax rates at unsustainable levels tax loopholes become popular. So began the whole tax lawyer and accountant industry. Millionaires pay all these professionals tons of money so they can get out of paying taxes, while the average joe can’t afford these professionals, so they bear the runt of the taxes. They must have known this was going to be the case when they set the levels so high. The wealthy never seem to bear the burden of government spending. This is the case because most politicians either start off rich or end up being rich by the time they retire, so they have to protect their money as well.

I actually think that or tax laws have fostered much of the graft that is present in our country, that and the prohibition amendment, which gave the Mob a foothold in our country. Prior to prohibition they were just small time criminals, prohibition made them into very powerful individuals indeed. The more we try to correct problems the worse they become. So now we are not only paying huge amounts of taxes we are giving a good part of this money to other countries as well.

Resources

efile.com, “Income Tax History.”; informationstation.org, “Deep Dive: History of the Income Tax.”; fee.org, “Is the Income Tax Unconstitutional?” By Sheldon Richman; en.wikipedia.com, “Sixteenth Amendment to the United States Constitution.” By wikipedia editors; en.wikipedia.org, “Revenue Act of 1916.” By Wikipedia editors; law.justia.com, “History and Purpose of the Amendment.”; investopedia.com, “16th Amendment.” By Will Kelton; westportlibrary.libguides.com, “Why is the Sixteenth Amendment Important?“;

Addendum

Sixteenth Amendment to the United States Constitution

The Sixteenth Amendment (Amendment XVI) to the United States Constitution allows Congress to levy an income tax without apportioning it among the states on the basis of population. It was passed by Congress in 1909 in response to the 1895 Supreme Court case of Pollock v. Farmers’ Loan & Trust Co. The Sixteenth Amendment was ratified by the requisite number of states on February 3, 1913, and effectively overruled the Supreme Court’s ruling in Pollock.

Prior to the early 20th century, most federal revenue came from tariffs rather than taxes, although Congress had often imposed excise taxes on various goods. The Revenue Act of 1861 had introduced the first federal income tax, but that tax was repealed in 1872. During the late nineteenth century, various groups, including the Populist Party, favored the establishment of a progressive income tax at the federal level. These groups believed that tariffs unfairly taxed the poor, and they favored using the income tax to shift the tax burden onto wealthier individuals. The 1894 Wilson–Gorman Tariff Act contained an income tax provision, but the tax was struck down by the Supreme Court in the case of Pollock v. Farmers’ Loan & Trust Co. In its ruling, the Supreme Court did not hold that all federal income taxes were unconstitutional, but rather held that income taxes on rents, dividends, and interest were direct taxes and thus had to be apportioned among the states on the basis of population.

For several years after Pollock, Congress did not attempt to implement another income tax, largely due to concerns that the Supreme Court would strike down any attempt to levy an income tax. In 1909, during the debate over the Payne–Aldrich Tariff Act, Congress proposed the Sixteenth Amendment to the states. Though conservative Republican leaders had initially expected that the amendment would not be ratified, a coalition of Democrats, progressive Republicans, and other groups ensured that the necessary number of states ratified the amendment. Shortly after the amendment was ratified, Congress imposed a federal income tax with the Revenue Act of 1913. The Supreme Court upheld that income tax in the 1916 case of Brushaber v. Union Pacific Railroad Co., and the federal government has continued to levy an income tax since 1913.

Income taxes before the Pollock case

Until 1913, customs duties (tariffs) and excise taxes were the primary sources of federal revenue.^[3] During the War of 1812, Secretary of the Treasury Alexander J. Dallas made the first public proposal for an income tax, but it was never implemented.^[4] The Congress did introduce an income tax to fund the Civil War through the Revenue Act of 1861.^[5] It levied a flat tax of three percent on annual income above $800. This act was replaced the following year with the Revenue Act of 1862, which levied a graduated tax of three to five percent on income above $600 and specified a termination of income taxation in 1866. The Civil War income taxes, which expired in 1872, proved to be both highly lucrative and drawing mostly from the more industrialized states, with New York, Pennsylvania, and Massachusetts generating about sixty percent of the total revenue that was collected.^[6] During the two decades following the expiration of the Civil War income tax, the Greenback movement, the Labor Reform Party, the Populist Party, the Democratic Party and many others called for a graduated income tax.^[6]

The Socialist Labor Party advocated a graduated income tax in 1887.^[7] The Populist Party “demand[ed] a graduated income tax” in its 1892 platform.^[8] The Democratic Party, led by William Jennings Bryan, advocated the income tax law passed in 1894,^[9] and proposed an income tax in its 1908 platform.^[10] Proponents of the income tax generally believed that high tariff rates exacerbated income inequality, and wanted to use the income tax to shift the burden of funding the government away from working class consumers and to high-earning businessmen.^[11]

Before Pollock v. Farmers’ Loan & Trust Co., all income taxes had been considered to be indirect taxes imposed without respect to geography, unlike direct taxes, that have to be apportioned among the states according to population.^[12]^[13]

The Pollock case

In 1894, an amendment was attached to the Wilson–Gorman Tariff Act that attempted to impose a federal tax of two percent on incomes over $4,000 (equal to $125,000 in 2021).^[14] The federal income tax was strongly favored in the South, and it was moderately supported in the eastern North Central states, but it was strongly opposed in the Far West and the Northeastern States (with the exception of New Jersey).^[15] The tax was derided as “un-Democratic, inquisitorial, and wrong in principle”.^[16]

In Pollock v. Farmers’ Loan & Trust Co., the U.S. Supreme Court declared certain taxes on incomes, such as those on property under the 1894 Act, to be unconstitutionally unapportioned direct taxes. The Court reasoned that a tax on income from property should be treated as a tax on “property by reason of its ownership” and so should be required to be apportioned. The reasoning was that taxes on the rents from land, the dividends from stocks, and so forth, burdened the property generating the income in the same way that a tax on “property by reason of its ownership” burdened that property.

After Pollock, while income taxes on wages (as indirect taxes) were still not required to be apportioned by population, taxes on interest, dividends, and rental income were required to be apportioned by population. The Pollock ruling made the source of the income (e.g., property versus labor, etc.) relevant in determining whether the tax imposed on that income was deemed to be “direct” (and thus required to be apportioned among the states according to population) or, alternatively, “indirect” (and thus required only to be imposed with geographical uniformity).^[17]

Members of Congress responded to Pollock by expressing widespread concern that many of the wealthiest Americans had consolidated too much economic power.^[19] Nonetheless, in the years after Pollock, Congress did not implement another federal income tax, partly because many Congressmen feared that any tax would be struck down by the Supreme Court.^[20] Few considered attempting to impose an apportioned income tax, since such a tax was widely regarded as unworkable.^[21]

Adoption

An income tax amendment to the Constitution was first proposed by Senator Norris Brown of Nebraska. He submitted two proposals, Senate Resolutions Nos. 25 and 39. The amendment proposal finally accepted was Senate Joint Resolution No. 40, introduced by Senator Nelson W. Aldrich of Rhode Island, the Senate majority leader and Finance Committee Chairman.^[24] The amendment was proposed as part of the congressional debate over the 1909 Payne–Aldrich Tariff Act; by proposing the amendment, Aldrich hoped to temporarily defuse progressive calls for the imposition of new taxes in the tariff act. Aldrich and other conservative leaders in Congress largely opposed the actual ratification of the amendment, but they believed that it had little chance of being ratified, as ratification required approval by three quarters of the state legislatures.^[25]

On July 12, 1909, the resolution proposing the Sixteenth Amendment was passed by the Congress^[26] and was submitted to the state legislatures. Support for the income tax was strongest in the western and southern states, while opposition was strongest in the northeastern states.^[27] Supporters of the income tax believed that it would be a much better method of gathering revenue than tariffs, which were the primary source of revenue at the time. From well before 1894, Democrats, Progressives, Populists and other left-oriented parties argued that tariffs disproportionately affected the poor, interfered with prices, were unpredictable, and were an intrinsically limited source of revenue. The South and the West tended to support income taxes because their residents were generally less prosperous, more agricultural and more sensitive to fluctuations in commodity prices. A sharp rise in the cost of living between 1897 and 1913 greatly increased support for the idea of income taxes, including in the urban Northeast.^[28] A growing number of Republicans also began supporting the idea, notably Theodore Roosevelt and the “Insurgent” Republicans (who would go on to form the Progressive Party).^[29] These Republicans were driven mainly by a fear of the increasingly large and sophisticated military forces of Japan, Britain and the European powers, their own imperial ambitions, and the perceived need to defend American merchant ships.^[30] Moreover, these progressive Republicans were convinced that central governments could play a positive role in national economies.^[31] A bigger government and a bigger military, they argued, required a correspondingly larger and steadier source of revenue to support it.

Opposition to the Sixteenth Amendment was led by establishment Republicans because of their close ties to wealthy industrialists, although not even they were uniformly opposed to the general idea of a permanent income tax. In 1910, New York Governor Charles Evans Hughes, shortly before becoming a Supreme Court Justice, spoke out against the income tax amendment. Hughes supported the idea of a federal income tax, but believed the words “from whatever source derived” in the proposed amendment implied that the federal government would have the power to tax state and municipal bonds. He believed this would excessively centralize governmental power and “would make it impossible for the state to keep any property”.^[32]

Between 1909 and 1913, several conditions favored passage of the Sixteenth Amendment. Inflation was high and many blamed federal tariffs for the rising prices. The Republican Party was divided and weakened by the loss of Roosevelt and the Insurgents who joined the Progressive Party, a problem that blunted opposition even in the Northeast.^[33] In 1912, the Democrats won the presidency and control of both houses of Congress. The country was generally in a left-leaning mood, with a member of the Socialist Party winning a seat in the U.S. House in 1910 and the party’s presidential candidate polling six percent of the popular vote in 1912.

Three advocates for a federal income tax ran in the presidential election of 1912.^[34] On February 25, 1913, Secretary of State Philander Knox proclaimed that the amendment had been ratified by three-fourths of the states and so had become part of the Constitution.^[35] The Revenue Act of 1913, which greatly lowered tariffs and implemented a federal income tax, was enacted shortly after the Sixteenth Amendment was ratified.^[36]

Ratification

According to the United States Government Publishing Office, the following states ratified the amendment:^[37]

Alabama: August 10, 1909
Kentucky: February 8, 1910
South Carolina: February 19, 1910
Illinois: March 1, 1910
Mississippi: March 7, 1910
Oklahoma: March 10, 1910
Maryland: April 8, 1910
Georgia: August 3, 1910
Texas: August 16, 1910
Ohio: January 19, 1911
Idaho: January 20, 1911
Oregon: January 23, 1911
Washington: January 26, 1911
Montana: January 27, 1911
Indiana: January 30, 1911
California: January 31, 1911
Nevada: January 31, 1911
South Dakota: February 1, 1911
Nebraska: February 9, 1911
North Carolina: February 11, 1911
Colorado: February 15, 1911
North Dakota: February 17, 1911
Michigan: February 23, 1911
Iowa: February 24, 1911
Kansas: March 2, 1911
Missouri: March 16, 1911
Maine: March 31, 1911
Tennessee: April 7, 1911
Arkansas: April 22, 1911, after having previously rejected the amendment
Wisconsin: May 16, 1911
New York: July 12, 1911
Arizona: April 3, 1912
Minnesota: June 11, 1912
Louisiana: June 28, 1912
West Virginia: January 31, 1913
Delaware: February 3, 1913

Ratification (by the requisite 36 states) was completed on February 3, 1913, with the ratification by Delaware. The amendment was subsequently ratified by the following states, bringing the total number of ratifying states to forty-two^[38] of the forty-eight then existing:

New Mexico: (February 3, 1913)
Wyoming: (February 3, 1913)
New Jersey: (February 4, 1913)
Vermont: (February 19, 1913)
Massachusetts: (March 4, 1913)
New Hampshire: (March 7, 1913), after rejecting the amendment on March 2, 1911

The legislatures of the following states rejected the amendment without ever subsequently ratifying it:

The legislatures of the following states never considered the proposed amendment:

The Court stated that “although the ‘Congress cannot make a thing income which is not so in fact’, … it can label a thing income and tax it, so long as it acts within its constitutional authority, which includes not only the Sixteenth Amendment but also Article I, Sections 8 and 9.” The court ruled that Ms. Murphy was not entitled to the tax refund she claimed, and that the personal injury award she received was “within the reach of the Congressional power to tax under Article I, Section 8 of the Constitution” even if the award was “not income within the meaning of the Sixteenth Amendment”. See also the Penn Mutual case cited above.

On April 21, 2008, the U.S. Supreme Court declined to review the decision by the Court of Appeals.

Revenue Act of 1916

The United States Revenue Act of 1916, (ch. 463, 39 Stat. 756, September 8, 1916) raised the lowest income tax rate from 1% to 2% and raised the top rate to 15% on taxpayers with incomes above $2 million. (Previously, the top rate had been 7% on income above $500,000.) The Act also instituted the federal estate tax.^[1]

The entry of the United States into World War I greatly increased the need for revenue.

An excess profits tax was introduced and the modern estate tax was imposed.

The act was applicable to incomes for 1916.

Common Sense and Ramblings In America