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Economics and Business

Income Tax

How old is the U.S. income tax?

It dates to 1913. Proposed in Congress on July 12, 1909, and ratified February 3, 1913, the Sixteenth Amendment to the U.S. Constitution gives the federal government (specifically, the U.S. Congress) authority to levy and collect income taxes. The language of the amendment states that incomes “from whatever sources derived” may be taxed—and without regard to a census. In other words, it is up to Congress to determine the level at which citizens of the country are taxed, and this may be done without apportionment among the individual states.

One hundred years before the Sixteenth Amendment was approved, Congress had begun eyeing income tax as a way to collect funds for government use. Lawmakers first considered levying an income tax to help pay for the War of 1812 (1812–14), which the new republic fought against Great Britain over shipping disputes. During the American Civil War (1861–65), Congress imposed an income tax for the first time, charging workers and businessmen between 3 and 5 percent of their earnings and establishing (in 1862) a Bureau of Internal Revenue to administer the tax program. Once the war was over, income taxes were phased out. In 1894, responding to increasing economic and political pressures, the legislature again passed an income tax law (2 percent on all incomes over $4,000), as part of the Wilson-Gorman Tariff Act. But it was struck down by the U.S. Supreme Court, which declared it unconstitutional in the case of Pollock v. Farmers’ Loan and Trust Company (1898). In the early 1900s, the idea of an income tax received widespread political support for the first time. Progressive politicians could see that the nation’s wealth was poorly distributed, the gap between rich and poor growing wider. Conservative politicians worried that the government would not be able to respond to a national emergency if it lacked resources. These political factions found a single voice in favor of a graduated income tax (a tax based on level of income: those who earn more pay higher taxes). To circumvent the U.S. Supreme Court, it was necessary for Congress to propose an amendment to the Constitution. In ratifying the amendment, the states gave Congress the authority to set rates and collect income tax.

Tax rates have fluctuated ever since the passage of the Sixteenth Amendment, reaching their highest mark during World War II (1939–45) when the rate soared to 91 percent. The war effort also brought the innovation of automatic withholdings: Taxes were deducted directly from paychecks. In 1953 the Bureau of Internal Revenue was dramatically reorganized to create the Internal Revenue Service (IRS). Over the decades, tax laws (collectively called the Tax Code) have become increasingly complex, prompting a recent movement in favor of a flat (versus the graduated) tax, where all taxpayers are charged at the same rate.



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