The 16th Amendment

Lesson Plan - Get It!

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Taxation

A direct tax is levied on income and activities conducted.

Examples: Income Tax or Property Tax

An indirect tax is levied on products or services.

Examples: Tariff or Sales Tax

• Which of these two types of taxes did the Constitution allow the U.S. Congress to use in order to collect money?

Article I, Section 8, Clause 1:

The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.

This gave Congress the ability to collect taxes; however, regulations were placed on the types of taxes the federal government was able to levy.

Remember, the American Revolution began over the idea of no taxation without representation, which led to the very formation of the United States of America.

The Founding Fathers did not want the United States to tax its citizens in the same ways the British Government had in the 18th century.

From Article I, Section 2, Clause 3:

Representatives and direct taxes shall be apportioned among the several States which may be included within this Union, according to their respective numbers ...

Just as states are apportioned members of the House of Representatives based on population, taxes had to be based on this same principle according to the original Constitution.

This forbade the tax of income on individual citizens. A direct federal income tax under the original Constitution was not allowed because it allowed the federal government to pass the jurisdiction of the states and tax people directly.

The state could tax income and activities like real estate, but it could not levy tariffs in the way the federal government could. This created a certain degree of unpredictability in what the U.S. federal income would be every year.

Tariffs were also a severe cost to both farmers and people who purchased goods like tools from abroad and sold their goods to other countries. They could also easily deter international trade.

Civil War

During the Civil War, President Abraham Lincoln took several measures to benefit the war effort that may not have been legally sound.

The Emancipation Proclamation was one document that, in peacetime, would have been ruled unconstitutional by the Supreme Court and was why the 13th Amendment was passed immediately following the war.

Another possible overstep was Lincoln's Income Tax Act in 1862. This instituted a 3% income tax for lower incomes and a 5% tax for higher incomes in order to help to pay for the war.

While this may seem very low and mundane now, the idea that the U.S. government could take money directly from its citizens was hotly contested at the time.

This act was eventually repealed in 1872 as Reconstruction was coming to an end and the country was no longer united under Lincoln and the Republican party.

Wilson-Gorman Tariff Act

After the Panic of 1893 depression, the U.S. Congress had the idea to increase international trade and help restart the U.S economy by instituting an income tax again so tariffs could be lowered. They instituted the Wilson-Gorman Tariff, also known as the Revenue Act, in 1894.

Only a year later, this Act was found unconstitutional because the direct taxes were not being apportioned. Although this was the same type of tax Lincoln instituted during the Civil War, there was now political will to challenge it.

20th Century

As the United States entered the 20th century, it was becoming a global power. Needing a more steady and hefty income in order to modernize the way the rest of Europe was, the idea of a federal income tax became increasingly popular.

With this new outlook, Congress voted on the 16th Amendment in 1911 under the presidency of William Taft who, like his fellow Progressive Era presidents Theodore Roosevelt and Woodrow Wilson, supported the idea of an income tax.

Within two years, the amendment was ratified by three quarters of the states.

• So, what did the amendment say?

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.

This specifically gave the federal government the power to tax people directly.

Graduated Tax System

The U.S. government adopted a progressive tax system, which meant that people who made more money would be taxed at a higher rate.

• How did this work?

Someone who made $5,000 might be required to pay 10% of that income in federal income tax, or $500. Someone who made $50,000 might be required to pay 25% of that income, or $12,500.

Now that you understand how a federal income tax became legal in the U.S., head over to the Got It? section to examine the arguments for and against passing the 16th Amendment.