A Brief History of Income Tax

A Brief History of Income Tax

The controversy surrounding the Sixteenth Amendment is one of my favorite topics when teaching United States Government. The course is designed to put the student in the role of a constitutional scholar, exploring many different viewpoints on the US Constitution. Every year a handful of Americans are jailed for refusing to pay income tax. Too often they cite various libertarian sources that claim the income tax is illegal; therefore conclude they do not have to pay. Let’s take a look at the controversy surrounding the amendment and the Federal Income Tax.
Is current Federal Income tax law illegal? Some opponents of income tax claim that the tax is unconstitutional because the Sixteenth Amendment was improperly ratified. Interestingly, this is partially a fact. The Sixteenth amendment was not ratified properly, but this does not mean that the federal income tax is unlawful, because the Sixteenth Amendment is not the source of the federal government’s power to impose income taxes.
Lets take a look at the constitution: Article I, Section 8, Clause 1 grants the federal government its power to impose taxes: 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. That article is limited by Article I, Section 2, Clause 3: Representatives and direct Taxes shall be apportioned among the several States, and Article I, Section 9, Clause 4: No Capitation, or other direct Tax, shall be laid, unless in Proportion to the Census or Enumeration….
According to the Founders, any direct tax, such as a property tax, must be levied by the states, according to the rule of apportionment; the Federal Government may uniformly levy indirect taxes such as a duty or excise tax.
Lets skip ahead to 1894. In that year, the federal Income Tax Act of 1894 was passed. But that law was quickly struck down as unconstitutional. As worded, it failed to clearly identify the federal income tax as an indirect tax, and the court determined the 1894 income tax an illegal direct tax (remember the Congress is prohibited from imposing any direct tax). Soon thereafter, Congress sought to clarify the issue by passing an amendment to the Constitution. The Sixteenth Amendment was ‘adopted’ in 1913. It states: 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. Carefully note the wording: there is no mention of indirect or direct tax. As a result it’s widely accepted that the Sixteenth Amendment did not grant any new taxation power to Congress. It did not remove any power either. In the end it states only that the federal government can impose an indirect income tax. But even that is anticlimactic because the federal government always had this power.
Now lets look carefully at the definition of excise tax. First of all it’s a tax on transaction and that means it’s an indirect tax. Any tax on transaction is a tax on the privilege of doing something with property, rather than a tax on the property itself. So what’s a privilege? A privilege is any activity that represents value. Because income is a measure of the activity or privilege, it is used as the basis for determining the amount of the tax. We can see this principle in action each time we register an automobile. The excise tax collected by the town is a tax on the transaction of registering the vehicle. The value of the vehicle is the basis for determining the amount of tax.
Finally, the federal income tax is a tax on transaction, evidenced by income, making it an indirect tax, levied by the federal government legally and constitutionally. Beginning in the 1940’s The Sixteenth Amendment has been considered irrelevant to the legality of Federal Income Tax.


Copywrite Gary Kaszas 2009