Cameron Miranda
The 16th Amendment, which established Congress's right to impose a federal income tax, was ratified on February 3rd, 1913, just one month before the inauguration of President Woodrow Wilson. However, the first national income tax was enacted by President Abraham Lincoln in 1861 as a response to the financial requirements of the Civil War. This tax lasted 10 years, and the idea of a federal income tax was revived in 1894 with the Wilson-Gorman Tariff Act, which included a 2% tax on incomes over $4,000. The tax was struck down by the Supreme Court in 1895, but the concept of a federal income tax persisted, and President William Howard Taft became a key advocate for a permanent income tax.
| Characteristics | Values |
|---|---|
| Date income tax became law | 3rd February 1913 |
| President at the time | William Howard Taft |
| Amendment | 16th Amendment |
| Aim | Ensure higher-income people paid taxes and reduce government dependence on revenue from tariffs and taxes on goods |
| Previous attempts | 1861, 1894 |
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What You'll Learn
The first income tax law
The first official federal income tax law in the US was the Revenue Act of 1861, which was passed by President Abraham Lincoln to help pay for Civil War expenses. The Act created a Commissioner of Internal Revenue and levied a 3% tax on incomes between $600 and $10,000, and a 5% tax on incomes of more than $10,000.
However, this was repealed in 1872, and it wasn't until 1913 that the 16th Amendment was passed, establishing Congress's right to impose a federal income tax. This amendment was ratified on February 3rd, 1913, and was the third attempt at a national income tax. The first two attempts, in 1894 and 1895, were struck down by the Supreme Court as unconstitutional.
The 16th Amendment was the result of a growing public outcry over a tax system that undertaxed the rich and overtaxed the poor. Progressives in Congress had attached a provision for an income tax to a tariff bill in 1909, and the amendment was championed by President William Howard Taft, who took office that year. The amendment granted Congress the authority to issue an income tax without having to determine it based on population.
Following the ratification of the 16th Amendment, the Revenue Act of 1913 was enacted into law by Congress, which included the income tax along with changes in tariffs. This Act adopted a 1% tax on net personal income of more than $3,000, with a 6% surtax on incomes of more than $500,000.
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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.
Before the 16th Amendment, the majority of funds given to the federal government derived from tariffs on domestic and international goods. The short-lived Revenue Act of 1861 predated the amendment as the first official federal income tax, but it was eventually repealed in 1872.
The end of the 19th century saw the beginning of the Progressive Era, a time period in which political and social reform centred on industry, voting, immigration, and several other topical issues. Levying a federal income tax became a key goal for many progressive groups, with the key argument being that it was fairer for wealthy individuals to pay for the taxes and tariffs that had been largely obliged from the middle class and the poor in society.
In 1894, Congress enacted a 2% tax on income over $4,000 (equivalent to <$co: 0>135,951.63 in 2022). However, this was soon struck down by the Supreme Court in the 1895 decision of Pollock v. Farmers' Loan & Trust. The court ruled that the income tax was a "'direct' tax that had to be apportioned among the states".
Fourteen years after the Pollock decision, President William H. Taft proposed to Congress a new income tax of 2% on corporations. This was imposed through an excise tax on manufactured goods and an amendment to the Constitution to legally sanction the federal income tax. The 16th Amendment was ratified by thirty-six states between 1909 and 1913, and it was formally accepted into the Constitution on February 3, 1913, one month before the inauguration of President Woodrow Wilson. The Revenue Act of 1913, which included the income tax along with changes in tariffs, was soon enacted into law by Congress.
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President William Howard Taft's role
President William Howard Taft played a significant role in the establishment of the federal income tax in the United States. Taft, the 27th President, served from 1909 to 1913, and is known for making the federal income tax a permanent fixture in Americans' lives.
When Taft took office in 1909, there was widespread public discontent with the tax system, which was perceived as favouring the rich over the poor. In response to this, Taft, a Republican, advocated for a progressive tax system that would ensure higher-income individuals paid their fair share. He supported the 16th Amendment, which granted Congress the authority to impose a federal income tax without apportioning it among the states based on population.
In June 1909, Taft sent a letter to Congress during the debate over the Payne-Aldrich tariff, lobbying for the 16th Amendment. He argued that the Pollock decision, a Supreme Court ruling from 1895, allowed the federal government to levy a corporate income tax as an excise tax. Taft proposed a two-tax system where income taxes would be collected from both citizens and businesses. He believed that this approach would help him achieve his primary goals of tariff and corporate tax reform.
Taft also understood the political reality of the time, recognising that the income tax had broad support in both the Democratic and Republican parties. He saw personal income taxation as a tool to be used sparingly, such as in times of war, and was concerned about potential evasion by citizens. Nonetheless, he championed the 16th Amendment as a means to ensure higher-income earners paid their fair share and reduce the government's reliance on revenue from tariffs and taxes on goods.
The 16th Amendment was passed by Congress on July 2, 1909, and Taft's advocacy played a crucial role in its eventual ratification on February 3, 1913, just before he left office. The amendment established the federal income tax as a permanent feature of the US tax system, and it continues to be in force today.
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The Revenue Act of 1913
The Act reduced import tariff rates from approximately 40% to around 25-27%, the lowest since the Walker Tariff of 1857. This reduction was a key priority for President Wilson, who believed that high tariffs were equivalent to unfair taxes on consumers. The Act also introduced a one percent tax on income above $3,000 per year, with a top tax rate of six percent on those earning more than $500,000 annually. This tax affected approximately two to three percent of the population.
The passage of the Act was not without challenges. While the bill passed relatively quickly in the House of Representatives, it faced opposition in the Senate due to lobbying pressures and differences in opinion among Democrats. However, after weeks of hearings, debates, and lobbying by the Wilson administration, the Senate ultimately voted in favour of the bill.
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Income tax today
The federal government of the United States has imposed an income tax since the ratification of the Sixteenth Amendment to the United States Constitution in 1913. This amendment established Congress's right to impose a federal income tax and granted Congress the authority to issue an income tax without having to determine it based on population. Today, 42 US states impose income taxes, which are a major source of state government revenue, accounting for 33% of state tax collections in fiscal year 2023.
The US imposes a progressive income tax where rates increase with income. The tax rate applied to taxable income, which is the total income less allowable deductions, may increase as income increases. The average rate paid in 2020 on adjusted gross income (income after deductions) was 13.6%. Over the last 20 years, this has meant that the bottom 50% of taxpayers have consistently paid less than 5% of the total individual federal income taxes, with the top 50% of taxpayers paying 95% or more of the tax collected.
Income taxes are levied on wages as well as on capital gains, and fund federal and state governments. Payroll taxes are levied only on wages, not gross incomes, but they contribute to reducing the after-tax income of most Americans. The most common payroll taxes are FICA taxes that fund Social Security and Medicare. Capital gains are currently taxable at a lower rate than wages, and capital losses reduce taxable income to the extent of gains.
Several types of credits reduce tax, and some types of credits may exceed tax before credits. Most business expenses are deductible. Individuals may deduct certain personal expenses, including home mortgage interest, state taxes, and contributions to charity.
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Frequently asked questions
President William Howard Taft, who served as president from 1909 to 1913, successfully advocated for a permanent, national income tax.
No. The first American income tax was in 1861, when President Abraham Lincoln levied a 3% tax on incomes over $800 to fund the Civil War. This was repealed in 1872.
The 16th Amendment to the US Constitution, ratified on February 3, 1913, established Congress's right to impose a federal income tax. The Revenue Act of 1913, pushed by incoming President Woodrow Wilson, included the income tax along with changes in tariffs.
Taft saw personal income taxation as a power that should be used only in emergencies, such as wartime. He also wanted to ensure that more higher-income people paid taxes, and that the government wasn’t wholly dependent on revenue earned from tariffs and taxes on goods.
