The 16th Amendment

In 1894, Congress passed a new income tax as part of the Wilson-Gorman Tariff Act, a 2% tax on incomes above $4,000. The tax was immediately challenged in court. In Pollock v. Farmers' Loan & Trust Co. (1895), the Supreme Court struck it down in a controversial 5-4 decision, ruling that a tax on income derived from property was a "direct tax" that had to be apportioned among the states by population. [2]

The Pollock decision created a constitutional impasse. Progressives and populists, particularly in the agrarian South and West, argued that tariffs were regressive taxes that fell hardest on working people who bought imported goods, while the wealthy who earned income from investments paid nothing. They wanted the federal government to tax wealth directly. But the Supreme Court had said the Constitution wouldn't allow it. [5]

The solution was a constitutional amendment. After years of political maneuvering (including a strategic move by conservatives who proposed the amendment believing the states would never ratify it), the 16th Amendment was sent to the states in 1909 and ratified on February 3, 1913, just weeks before Woodrow Wilson took office. [5]

The original income tax was modest by any measure. The Revenue Act of 1913 imposed a 1% tax on net personal incomes above $3,000 ($93,000 in today's dollars), with a graduated surtax reaching 7% on incomes above $500,000. Proponents assured the public that only the wealthiest Americans would ever pay it; fewer than 2% of households filed a return in 1913. [3]

That restraint lasted exactly four years. When the United States entered World War I in 1917, Congress raised the top rate to 67%. By 1918, it reached 77%. The Revenue Act of 1942, passed for World War II, transformed the income tax from a "class tax" into a "mass tax," lowering the exemption threshold so dramatically that the number of taxpayers jumped from 3.9 million to 42.6 million in a single year. Payroll withholding, introduced in 1943, made the extraction invisible and automatic. [3] [4]

The income tax never shrank back to its original scope. This is Robert Higgs's "ratchet effect" in action: government power expands during crises and never fully retracts. Each emergency (World War I, the Great Depression, World War II, the Cold War) provided justification for higher rates and broader application. The temporary became permanent. The exception became the rule. [6]

The 16th Amendment did more than create a tax. It created a direct financial relationship between the federal government and every working American, a relationship the Founders deliberately avoided. It provided the revenue stream that made possible the massive expansion of federal power throughout the 20th century: the New Deal, the Great Society, the national security state, the regulatory apparatus. [1]

The federal tax code has grown to over 10,000 pages, with tens of thousands more pages of regulations and rulings. It is so complex that most Americans cannot prepare their own returns. The compliance industry (accountants, tax attorneys, software companies) exists solely because of this complexity. The code is riddled with exemptions, deductions, and credits that represent decades of lobbying by special interests. [6]

Whether one supports reforming the income tax, replacing it with a consumption tax, or simply simplifying the code, the essential point remains: the 16th Amendment gave the federal government a power the Founders intentionally withheld, and that power has grown far beyond anything its proponents envisioned or promised.