The 16th Amendment, ratified in 1913, gave Congress the power to levy an income tax without apportioning it among the states or basing it on the United States Census. This amendment marked a major shift in how the United States government funded itself and allowed it to dramatically increase revenues. The 16th Amendment was significant because it:
- Gave the federal government an independent source of revenue apart from tariffs
- Enabled new progressive income taxes that shifted more of the tax burden onto the wealthy
- Helped fund World War I and later social programs like Social Security
- Expanded the government’s role in regulating the economy and businesses
- Required more record-keeping and oversight to implement an income tax system
Why was the 16th Amendment needed?
The federal government initially relied heavily on tariffs – taxes on imported goods – to raise revenue. But tariffs were unpopular because they raised costs for consumers and industries reliant on imports. Tariffs also tended to be regressive, disproportionately impacting the poor. The federal government also got some revenue from excise taxes, but there was no broad-based tax.
After the Civil War, the government needed new sources of funds. Efforts were made to introduce a federal income tax, which would distribute the tax burden more equitably. The Revenue Act of 1861 levied the first personal income tax, followed by more robust income taxes to fund the Civil War.
However, in 1895 the Supreme Court ruled the 1894 income tax unconstitutional in Pollock v. Farmers’ Loan & Trust Co. The Court held that income taxes on property, rents, dividends, and interest violated the constitutional requirement that direct taxes be apportioned by population. This greatly limited the federal government’s ability to levy income taxes.
By the early 20th century, support was growing for a Constitutional amendment to specifically allow an income tax not tied to the census. This reflected the rise of Populist and Progressive movements and their calls for a more equitable tax system that would make the wealthy pay a greater share. The 16th Amendment was intended to enable modern income taxes.
What does the 16th Amendment do?
The 16th Amendment 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.
In effect, this amendment overturned the Supreme Court’s prior ruling. The 16th Amendment gave Congress the power to tax all income from any source, regardless of apportionment or census. This enabled Congress to implement income taxes directly based on the amount of income earned rather than distributing the tax burden by population.
How did ratification happen?
| Year | Action |
|---|---|
| 1909 | Congress submits amendment resolution to the states |
| 1910 | Alabama ratifies amendment |
| 1911 | 26 more states ratify amendment |
| 1912 | 8 more states ratify amendment |
| 1913 | Delaware ratifies amendment, providing the needed 36th state vote |
The push for income tax reform started gaining momentum in the late 19th century. The 1894 income tax was ruled unconstitutional before it could even take effect. But support for income taxes continued growing, fueled by the rise of Populist and Progressive movements. The Panic of 1907 also stoked support for an income tax that could stabilize revenue.
In June 1909, Congress approved a constitutional amendment resolution with bipartisan support. Republicans like Senator Norris Brown saw an income tax amendment as the next step in tax reform after establishing tariff reform. Democrats like Cordell Hull saw income taxes as a way to shift more of the burden onto wealthy interests.
Over the next four years, state legislatures rapidly ratified the amendment. This quick state approval reflected the growing nationwide consensus around income tax reform. Delaware was the 36th state to ratify, meeting the Constitutional requirement for three-fourths of the states. In February 1913, Secretary of State Philander Knox declared the 16th Amendment ratified.
What income tax systems were enabled?
Revenue Act of 1913
With the 16th Amendment ratified, Congress moved quickly to enact a nationwide income tax. The Revenue Act of 1913 established the first modern federal income tax. Key provisions included:
- 1% tax on net personal incomes over $3,000 ($4,000 for married couples)
- 6% tax on incomes over $500,000
- Corporate income tax of 1%
- Exemptions for low-income earners
- No inheritance tax
This income tax raised around $71 million in 1914, just a fraction of the $292 million raised from tariffs. But the new tax system was in place ready to raise greater funds.
Revenue Act of 1916
With World War I intensifying, the Revenue Act of 1916 raised income tax rates substantially to raise needed funds. This act introduced a progressive tax structure with higher rates for higher incomes:
- 1% tax on incomes up to $20,000
- 2% tax from $20,000 to $40,000
- 3% tax from $40,000 to $60,000
- 4% tax from $60,000 to $80,000
- 6% tax from $80,000 to $100,000
- 10% tax from $100,000 to $150,000
- 13% tax from $150,000 to $200,000
- 15% tax from $200,000 to $500,000
- Progressive surtaxes up to 13% on incomes over $5 million
These higher rates on the wealthy marked a major shift toward a progressive tax system. The 1916 act raised ten times more revenue than the 1913 act.
New Deal Tax Reform
The Great Depression saw calls for more drastic progressive income taxes on the wealthy. The Revenue Act of 1935 raised the top marginal income tax rate to 79% at the highest income level. This was part of President Franklin D. Roosevelt’s New Deal reform package.
Later tax acts during World War II raised the top income tax bracket over 90%. High wartime marginal tax rates were seen as necessary to help fund the war effort.
The new income tax enabled by the 16th Amendment proved essential for generating revenue during global conflicts and economic downturns in the early 20th century. The progressivity of this new tax system also satisfied longstanding calls for tax equity reform.
What were the impacts of the 16th Amendment?
New revenue source for growing federal government
The 16th Amendment was revolutionary in establishing income taxation as a major revenue source for the federal government. In fiscal year 1918, income taxes provided around 50% of total federal revenue, surpassing customs and excise tax revenue. The ability to levy income taxes directly on citizens enabled the government’s budget and capabilities to expand dramatically.
Federal expenditures more than doubled from around $700 million in 1915 to $1.8 billion in 1918. Without the 16th Amendment, it would have been very difficult to raise enough money to fund World War I. The new income tax revenue also later enabled New Deal programs and Social Security during the 1930s.
More progressive tax system
The income tax system enabled by the 16th Amendment allowed the rise of progressive taxation where high earners pay a greater percentage of their income. The tax liability on the wealthy expanded from around 10% in 1915 to 50-70% by the end of World War II. This satisfied a longstanding goal of tax reformers.
However, the overall tax system is still debated today. Some argue it should be even more progressive, with top rates returned to 1950s levels around 90%. Others counter that very high rates are impractical in a globalized world and lead to tax avoidance. But the 16th enabled ongoing debate around progressive tax policy.
Increased government oversight of economy and finances
Implementing an income tax required much greater reporting to the Internal Revenue Service about income, profits, deductions, and other financial details. The 16th Amendment markedly increased the federal government’s oversight and auditing of finances for individuals and businesses.
This greater financial oversight expanded in later decades. For instance, the Bank Secrecy Act of 1970 required banks to report high cash transactions. The 16th Amendment set an important precedent for requiring citizens to share financial details with the government in the interest of taxation and regulation.
Limitation of states’ taxing power
While the 16th Amendment expanded federal power, it restricted state income tax options. Prior to 1913, many states had implemented income taxes. But after the 16th Amendment, state income taxes were mostly repealed because the federal system dominated that revenue source. The 16th Amendment concentrated income tax authority with the federal government.
However, controversy exists on this issue. In 1930, the Supreme Court ruled in Lucas v. Earl that salaries can be taxed at both the state and federal level. Many experts argue that the 16th Amendment does not clearly limit state income taxation power. But the federal income tax is now broadly dominant.
Increased complexity of tax preparation and planning
Detailed income reporting requirements increased the complexity of tax preparation for citizens. Moreover, the graduated income tax brackets and changing deductions and credits made tax planning and accounting more complicated for individuals and businesses.
This complexity led to the rise of dedicated tax preparation companies like H&R Block that emerged in the 1950s. It also increased demand for accountants and tax attorneys versed in compliance and planning strategies. The 16th enabled the now massive tax preparation industry.
Conclusion
The 16th Amendment marked a major expansion of federal power and transformed the way the United States government raises revenue. By overturning the previous ban on income taxes, the 16th Amendment enabled the rise of the modern income tax system. This provided the federal government an independent revenue source that could rapidly scale up during major conflicts and economic downturns.
The income tax also satisfied longstanding public desire for a more equitable system that imposed greater responsibility on the wealthy. But the 16th Amendment and subsequent tax acts also led to greater government involvement in regulating the economy and oversight of personal finances. The amendment dramatically impacted the relationship between citizens, businesses, and the government. More than a century after its ratification, debate continues on how progressive or broad federal income tax policy should be. But the 16th was clearly a transformative change for funding the federal government and shaping economic policy.
