Keith Mack
The existence of income tax laws is a highly debated topic, with some arguing that there is no federal statute imposing a tax on income derived from sources within the United States. However, the power to collect income tax is derived from the Constitution of the United States, specifically Article 1, Section 8, Clause 1, also known as the Taxing and Spending Clause. The Sixteenth Amendment to the U.S. Constitution, ratified in 1913, further solidified this power by granting Congress the authority to impose and collect income taxes without apportionment among the states. This amendment overturned the holding in Pollock, which had ruled that income tax was a 'direct' tax requiring apportionment. The purpose of federal income tax is to generate revenue for the federal budget, with rates and requirements varying across states. While most states maintain an income tax, not all do, and there are exceptions to who must file a tax return.
| Characteristics | Values |
|---|---|
| Basis for income tax in the US | Article 1, Section 8, Clause 1 (also known as the Taxing and Spending Clause) of the US Constitution |
| Date of implementation | 1913, with the passage of the Sixteenth Amendment |
| Purpose | To generate revenue for the federal budget |
| Applicability | All residents and citizens of the US are subject to federal income tax, but not everyone must file a tax return |
| Definition of "gross income" | All income from whatever source derived; a more complete definition is found in 26 U.S.C. § 61 |
| Important definitions | "Taxable income" and "adjusted gross income" can be found in 26 U.S. Tax Code Part I |
| Exceptions | The Supreme Court has carved out possible exceptions, such as in Cheek v. United States (1991), where the petitioner was charged with failing to file a return but argued that he believed the tax code was being unconstitutionally enforced |
| Frivolous arguments against income tax | Some argue that federal taxes are voluntary, or that wages are not taxable income, or that there is no federal statute imposing tax on income derived from sources within the US by US citizens or residents |
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What You'll Learn
The Sixteenth Amendment to the US Constitution
The power to collect income tax is enshrined in the US Constitution. Article 1, Section 8, Clause 1 (the Taxing and Spending Clause) states:
> 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.
> 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.
The Sixteenth Amendment effectively overturned the holding in Pollock v. Farmers' Loan & Trust Co. (1895), which held that a tax on income derived from property was so close to a tax on that property that it could not be imposed without apportionment. The amendment removed this barrier, allowing Congress to impose income taxes without considering the population of the states.
The amendment was first proposed by Senator Norris Brown of Nebraska, who submitted two proposals, Senate Resolutions Nos. 25 and 39. The amendment proposal finally accepted was introduced by Senator Nelson W. Aldrich of Rhode Island, the Senate Majority Leader, and Finance Committee Chairman. Aldrich proposed the amendment as part of the congressional debate over the 1909 Payne-Aldrich Tariff Act, hoping to temporarily defuse progressive calls for new taxes in the tariff act.
Between 1909 and 1913, several conditions favoured the passage of the Sixteenth Amendment. Inflation was high, and many blamed federal tariffs for rising prices. The Republican Party was divided, with "insurgents" joining the Progressive Party, which weakened opposition to the amendment. In 1912, the Democrats won the presidency and control of both houses of Congress, and the country was generally in a left-leaning mood.
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Federal income tax laws
While all residents and citizens of the United States are subject to federal income tax, not everyone is required to file a tax return. The federal income tax system is progressive, meaning that higher income levels are taxed at higher rates. The average rate paid on adjusted gross income in 2020 was 13.6%. However, the bottom 50% of taxpayers paid less than 5% of the total individual federal income taxes, while the top 1% paid 42%.
There are various deductions and exemptions that can reduce taxable income. For example, certain entities are exempt from income tax, and there are special rules for estates and trusts. Additionally, tax treaties with other countries can impact an individual's tax liability.
Despite the established federal income tax laws, some individuals and groups argue that there is no legal basis for income taxation. They claim that the Sixteenth Amendment did not authorise a tax on wages and salaries, or that federal taxes are voluntary. However, these arguments have been consistently rejected by the courts, and promoting non-compliance with tax laws can result in penalties.
The Internal Revenue Service (IRS) is responsible for enforcing federal income tax laws and providing guidance to taxpayers. Treasury regulations, published in the Federal Register and the Internal Revenue Bulletin, offer official interpretations of the IRC and instructions on compliance. The IRS also releases rulings, procedures, notices, and announcements that provide additional guidance on tax matters.
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State income tax laws
The history of state income tax laws is also worth noting. The first modern state income tax was introduced in Wisconsin in 1911, followed by Virginia in 1926. During the Great Depression, several states, including Oregon and Washington, instituted income taxes.
It is important to stay informed about the specific state income tax laws and rates for each state, as they can vary widely and have a significant impact on an individual's or business's tax obligations.
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Tax evasion
In the United States, the power to collect income tax is derived from the Constitution. Article 1, Section 8, Clause 1 (also known as the Taxing and Spending Clause) states:
> 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.
The Sixteenth Amendment to the U.S. Constitution, ratified in 1913, further reinforces this by stating:
> 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.
All residents and citizens of the United States are subject to federal income tax, though not everyone must file a tax return. However, tax evasion is a criminal offence under federal law.
To prove a violation of the statute, the prosecutor must show:
- The existence of a tax deficiency (an unpaid federal tax).
- An affirmative act constituting an evasion or attempted evasion of either the assessment or payment of that tax.
- Willfulness (the voluntary, intentional violation of a known legal duty).
It is important to note that a genuine, good faith belief that one is not violating federal tax law based on a misunderstanding caused by the complexity of the tax law can be a defence to a charge of "willfulness". However, a belief that the federal income tax is invalid or unconstitutional is not considered a valid defence, even if the belief is genuine and held in good faith.
The Internal Revenue Service (IRS) is the federal agency responsible for collecting and processing tax returns. They also investigate alleged federal tax crimes and employ special agents to detect and investigate tax evasion and related fraud cases, such as identity theft.
Some common methods of tax evasion include the overstatement of charitable contributions, particularly church donations, and the utilisation of tax havens—jurisdictions that allow for limited taxation. These havens allow individuals to hide money without providing access to tax information, as they are not held to the same disclosure requirements as financial institutions in the United States.
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Tax exemptions
In the United States, the power to collect income tax is derived from the Constitution, specifically Article 1, Section 8, Clause 1, also known as the Taxing and Spending Clause. The Sixteenth Amendment to the Constitution, ratified in 1913, further 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."
All residents and citizens of the United States are subject to federal income tax, but not everyone must file a tax return. While the federal government collects income tax, some states do not.
For organizations, tax-exempt status is typically granted to non-profit entities that provide valuable community services, such as charities. These organizations are not required to pay federal income tax but must maintain accurate records to retain their status. Donations made to these tax-exempt organizations may qualify as charitable contribution deductions on the donor's tax return.
State, county, and municipal governments may also provide tax exemptions to businesses to stimulate local economic growth. For example, a business may be exempt from paying local property taxes if it relocates to a specific geographic area.
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Frequently asked questions
Yes, the 16th Amendment to the US Constitution, ratified in 1913, grants Congress the authority to impose an income tax without having to determine it based on population.
The federal income tax is intended to generate revenue for the federal budget. In 1985, for example, the government collected over $450 billion in income tax out of a total of $742 billion in total internal revenue receipts.
All residents and citizens of the United States are subject to federal income tax. However, not everyone must file a tax return.
"Gross income" is generally defined as "all income from whatever source derived". However, there are important definitions like "taxable income" and "adjusted gross income" that can be found in the US Tax Code Part I.
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