U.S. Federal Income Tax Is Authorized Summary

  • Last updated on November 10, 2022

Ratification of the Sixteenth Amendment to the U.S. Constitution authorized the collection of a federal income tax, preparing the way for the federal government’s eventual collection of per-capita taxes to supplement spending programs.

Summary of Event

On August 10, 1909, Alabama became the first state to ratify the Sixteenth Amendment to the U.S. Constitution. In 1911, twenty-two additional states approved ratification, and the requirement that a three-fourths majority of states ratify the amendment was met on February 3, 1913, when Delaware, New Mexico, and Wyoming threw their support behind the amendment. On February 25, 1913, Secretary of State Philander C. Knox certified that the amendment was officially a part of the Constitution. By March 4, most of the remaining states had voted to ratify; Rhode Island, Utah, Connecticut, and Florida voted against ratification, and Pennsylvania and Virginia took no action. New York, the last state to ratify in 1911, did so on July 12. Only a year earlier, New York governor Charles Evans Hughes had argued that the amendment empowered the federal government to tax income from state and municipal bonds, eroding part of the state’s income base. In addition, New York’s past income tax payments, then current per-capita and total income, and its business interests also made its passage of the amendment unlikely. Income tax (U.S.) Sixteenth Amendment (U.S. Constitution) [kw]U.S. Federal Income Tax Is Authorized (Feb. 25, 1913) [kw]Federal Income Tax Is Authorized, U.S. (Feb. 25, 1913) [kw]Income Tax Is Authorized, U.S. Federal (Feb. 25, 1913) [kw]Tax Is Authorized, U.S. Federal Income (Feb. 25, 1913) Income tax (U.S.) Sixteenth Amendment (U.S. Constitution) [g]United States;Feb. 25, 1913: U.S. Federal Income Tax Is Authorized[03360] [c]Government and politics;Feb. 25, 1913: U.S. Federal Income Tax Is Authorized[03360] [c]Laws, acts, and legal history;Feb. 25, 1913: U.S. Federal Income Tax Is Authorized[03360] [c]Banking and finance;Feb. 25, 1913: U.S. Federal Income Tax Is Authorized[03360] Hull, Cordell Bryan, William Jennings Aldrich, Nelson Wilmarth Roosevelt, Theodore [p]Roosevelt, Theodore;income tax La Follette, Robert M. Whitney, Edward Baldwin Taft, William Howard Fels, Joseph Wilson, Woodrow [p]Wilson, Woodrow;income tax

The Sixteenth Amendment followed three previous enactments of direct income tax legislation passed by Congress during the nineteenth century. The first two were enacted in 1861 and 1864, during the Civil War, but they were repealed in 1872. Congress passed the third piece of income tax legislation as an amendment to the Wilson Tariff Act of 1894, but the next year the U.S. Supreme Court ruled this law unconstitutional in Pollock v. Farmers’ Loan & Trust Company. Pollock v. Farmers’ Loan & Trust Company (1895) By 1895, sixteen states had addressed income taxation through legislation, constitutional amendment, or tax-commission report, and most had approved it. Presidents Theodore Roosevelt in 1906 and William Howard Taft in 1908 also indicated some support for a graduated income tax.

A 1913 editorial cartoon captioned “The New Man on the Job” emphasizes the benefits to the working class of the new income tax.

(Library of Congress)

A 1907 Harvard Law Review article by Edward Baldwin Whitney supported a constitutional amendment and provided a point-by-point attack of the Supreme Court’s decision in Pollock v. Farmers’ Loan & Trust. Many of Whitney’s arguments subsequently found their way into the congressional debates. Support for a federal income tax grew in rural states, especially in the Midwest and West, where Republican leaders such as Robert M. La Follette of Wisconsin discovered that income taxation resonated well with voters. New support came from an alliance of urban and rural middle-class citizens that favored state and local tax reform. Many believed that this reform would facilitate the taxation of personal property and in doing so would add to the taxation of property in general, creating more of the funds on which local and state governments primarily relied. Such groups viewed adoption of new taxes—such as the income, inheritance, and corporate taxes—as replacements for state property taxes.

The growth of the Progressive movement after 1906 led to the election of the Republican Insurgents, Republican Insurgency who were instrumental in the passage of the 1909 income tax provisions, and to the growth in the number of radical Democrats under the leadership of William Jennings Bryan. In 1908, the Democratic presidential platform endorsed a constitutional amendment creating a federal income tax. In the midst of the Panic of 1907 and the subsequent depression and election of 1908, Senator Nelson Wilmarth Aldrich introduced a constitutional amendment to establish an income tax. On March 4, 1909, President Taft called a special session of Congress, which passed the Payne-Aldrich Tariff Act Payne-Aldrich Tariff Act (1909)[Payne Aldrich Tariff Act] of 1909 with a provision that included the creation of a constitutional amendment. In addition, the act increased tariff tax rates and authorized a special excise tax of 1 percent on incomes above five thousand dollars for all for-profit corporations. Cordell Hull, author of the income tax provision of the Underwood Tariff Act of 1913, was one of Congress’s most consistent advocates of the Payne-Aldrich Act.

The ratification of the Sixteenth Amendment came about in large part because of two other campaigns that took place in the period 1909-1913. Beginning in 1909, soap magnate Joseph Fels began to finance campaigns for constitutional reforms that would allow property to be taxed. The Fels campaign, whose only electoral victory occurred in Oregon in 1910, convinced many wealthier property owners, especially in the Northeast, that they could benefit from more moderate reforms. Popular enthusiasm for federal policies designed to address monopoly power reached new heights with the 1912 presidential campaigns of Woodrow Wilson, Theodore Roosevelt, and Eugene V. Debs. In his inaugural address in March, 1913, President Wilson called for tariff reform and reduction and for an income tax to make up lost revenues. With ratification of the Sixteenth Amendment assured, President Wilson asked that an emergency session of Congress enact the legislation.

Congress proceeded to enact the Underwood Tariff Act Underwood Tariff Act (1913) of 1913 on October 13, and in doing so it made the income tax law. The extent and rate of initial tax were modest and noticeably nonredistributive by subsequent standards: The law established a “normal” rate of 1 percent on nearly all personal and corporate income, and in setting the exemption at three thousand dollars, it excused nearly all income earners (95-96 percent of them). The 1913 act also established a graduated surtax of up to 6 percent, but this tax was applicable only to those with annual incomes of twenty thousand dollars or more (an extremely high income at that time). In addition, the act exempted dividends up to twenty thousand dollars from the personal income tax, and it also exempted interest income earned by owners of state and local bonds. As a result, the wealthiest families paid marginal rates ranging from 1 percent to 7 percent. In the first several years of the income tax, roughly 2-4 percent of American households paid taxes in any given year.

Significance

Ratification of the Sixteenth Amendment gave the federal government power to tax income directly rather than through tariff or consumption taxes. At the time, ratification was more symbolic than substantive; the act was essentially a legal apology for the system of financing federal burdens using tariffs and excise taxes. Since the birth of the nation, the use of tariffs and excise taxes had favored the most affluent citizens, and the Sixteenth Amendment did not change this. The act was reaffirmed when the Supreme Court declared it constitutional on January 14, 1916, in Brushaber v. Union Pacific Railroad Co. Brushaber v. Union Pacific Railroad Co. (1916) Despite its modest beginnings, the 1913 act created a mechanism that was increasingly used to redistribute wealth and to generate revenues to meet emergency and expanding social needs. Income tax (U.S.) Sixteenth Amendment (U.S. Constitution)

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Anderson, Donald F. William Howard Taft: A Conservative’s Conception of the Presidency. Ithaca, N.Y.: Cornell University Press, 1973. Provides background and biographical information about the principal issues and individuals involved in the passage of the Sixteenth Amendment.
  • citation-type="booksimple"

    xlink:type="simple">Brownlee, W. Elliot. Federal Taxation in America: A Short History. 2d ed. Washington, D.C.: Woodrow Wilson Center Press, 2004. Comprehensive overview of the U.S. tax system extends from the creation of tax legislation through ratification of the amendment and ends with the state of taxation under George W. Bush’s administration.
  • citation-type="booksimple"

    xlink:type="simple">Buenker, John D. The Income Tax and the Progressive Era. New York: Garland, 1985. This case study of the multifaceted nature of Progressive Era reform shows how the legislative enactment of the tax resulted from the politics of coalition, compromise, and consensus at every stage of its evolution.
  • citation-type="booksimple"

    xlink:type="simple">Joseph, Richard J. The Origins of the American Income Tax: The Revenue Act of 1894 and Its Aftermath. Syracuse, N.Y.: Syracuse University Press, 2004. Looks into the social origins of the federal income tax and contends that the central issue was not a shift to a new tax base but rather the degree of the rates’ progressiveness.
  • citation-type="booksimple"

    xlink:type="simple">Ketcham, Earle Hoyt. The Sixteenth Amendment. Urbana: University of Illinois Press, 1926. Describes how the states came to ratify the amendment and the impact of income tax-related Supreme Court decisions before and after ratification.
  • citation-type="booksimple"

    xlink:type="simple">Kinsman, Delos O. “The Present Period of Income Tax Activity in the American States.” Quarterly Journal of Economics 23, no. 2 (1909): 296-306. Documents state-related income tax activity from 1895 to 1909.
  • citation-type="booksimple"

    xlink:type="simple">Makin, John H., and Norman J. Ornstein. Debt and Taxes. New York: Random House, 1994. Provides historical context for the introduction of the income tax and describes the tax’s evolution up to the 1990’s.
  • citation-type="booksimple"

    xlink:type="simple">Stanley, Robert. Dimensions of Law in the Service of Order: Origins of the Federal Income Tax, 1861-1913. New York: Oxford University Press, 1993. This book serves as a corrective to progressive and pluralist understandings of the origins of federal income tax.
  • citation-type="booksimple"

    xlink:type="simple">Waltman, Jerold L. Political Origins of the U.S. Income Tax. Jackson: University Press of Mississippi, 1985. Chapter 1 provides background and examination of the Sixteenth Amendment. Includes information on follow-up legislation in 1916, 1917, 1918, and 1921.
  • citation-type="booksimple"

    xlink:type="simple">Weisman, Steven R. The Great Tax Wars: Lincoln to Wilson—The Fierce Battles over Money and Power That Transformed the Nation. New York: Simon & Schuster, 2002. Relates the debates and legal struggles over taxation that took place in the United States from the time of the Civil War to the aftermath of passage of the Sixteenth Amendment. Includes notes, bibliography, and index.
  • citation-type="booksimple"

    xlink:type="simple">Whitney, Edward B. “The Income Tax and the Constitution.” Harvard Law Review 20, no. 4 (1907): 280-296. This article provides a point-by-point criticism of Pollock v. Farmers’ Loan & Trust Co.
  • citation-type="booksimple"

    xlink:type="simple">Witte, John F. The Politics and Development of the Federal Income Tax. Madison: University of Wisconsin Press, 1985. Analysis of federal income tax policy from the Civil War through the Reagan administration of the 1980’s, based on incremental and pluralist policy-making theory.

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