The Sixteenth Amendment and the 1913 bargain that built the income tax

In 1913 the American people were given a deal. Amend the Constitution, they were told, and Washington will take a modest slice from the incomes of a few wealthy citizens, and everyone else will be left alone. It was a deal, which means someone proposed it, someone accepted it and someone kept the receipt. More than a century later, we can open the receipt and see how the promise held up. It is an instructive document, and I intend to read it to you slowly.

The story starts not in 1913 but in 1787, with a clause most Americans have never read.

What the Framers wrote about direct taxes

The Constitution gives Congress the taxing power in Article I, Section 8: "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." Duties and excises must be uniform. That is the rule for the general run of federal taxes.

Then come two limits on a particular kind of tax. Article I, Section 2, Clause 3 provides that "Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers." And Article I, Section 9, Clause 4 provides: "No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken."

Think about what apportionment means. If Congress lays a direct tax to raise a fixed sum, each state's share of the bill must match its share of the national population. A populous state with low average incomes and a small state with high average incomes would owe by head count, not by wealth. The result is that a direct tax on income would hit citizens of poorer states with a far higher rate than citizens of rich ones, a design no politician could sell. So the clause worked as a barrier. It did not forbid every direct tax. It made one practically impossible without a political bargain among the states.

The Framers did this on purpose. They were thinking about the great arguments of their time: a central government that could reach into every citizen's affairs, count his earnings and demand a portion. They wanted the federal government to live mostly on duties on imports and excises on particular goods, taxes that did not require a census of every household's income. They also wanted any tax that did reach directly into the pockets of citizens to be shared fairly among the states, so that no region could be made to pay for the others. The clause is part of the architecture of federalism, and it is as much a protection of states as of persons.

The Civil War tax

For nearly seventy years the question did not much arise. Then came the war. In 1861, to pay for the Union effort, Congress passed the first federal income tax: a flat 3 percent on incomes above $800. In 1862 the law was rewritten as a graduated tax, 3 percent on incomes in a middle band and 5 percent above $10,000, and the rates were later raised. It was a wartime emergency measure, and it was understood as one.

When the guns stopped, the tax did not stop immediately. It remained on the books for several years while the government paid down the cost of the war, and then it expired. The income tax was allowed to lapse in 1872. For the next two decades, the federal government managed on tariffs and excise taxes.

The Supreme Court did, in the meantime, look at the Civil War tax. In Springer v. United States (1881) the Court upheld it, reasoning that an income tax was not the kind of direct tax the Constitution required to be apportioned. The lesson in 1881 was that an income tax on earnings could stand outside the apportionment rule. The lesson was about to be unlearned.

1894 and Pollock

In 1894 Congress passed a new peacetime income tax, part of a tariff law, a 2 percent tax on incomes above $4,000. In those days $4,000 was far above what a typical household earned, so the tax fell on a small group. It was challenged at once, and the case, Pollock v. Farmers' Loan and Trust Co., reached the Supreme Court in 1895.

The Court's decision, written by Chief Justice Melville Fuller, held that a tax on income from real estate and from personal property such as stocks and bonds was a direct tax, and since the law did not apportion it among the states by population, it was unconstitutional. There was a rehearing in the same year, and the Court, by a vote of five to four, struck down the tax as a whole. The reasoning followed a simple line: a tax on the income from property is a tax on the property itself, and a tax on property is a direct tax that must be apportioned.

You will hear it said that Pollock was a pro-wealth ruling, a judicial coup for the rich. That is an unfair summary, and I will give the other side its due. Four justices dissented, and they thought the Court had misread the Framers. Critics also pointed out that the result was to exempt income from capital from the same tax that applied to wages. Supporters of the tax said that the decision put a hand on the scale for those who earned their money from property. Those were fair arguments. But notice what the majority actually did. It read the text of the Constitution and applied it. If the people disliked the result, the Constitution had a remedy, and that remedy was an amendment. This is how it should work: when the Court is thought to be wrong about the meaning of the text, the people are free to change the text.

They did exactly that.

The amendment

A movement to amend the Constitution to authorize an income tax grew in the years after Pollock. In 1909, President William Howard Taft, wary of passing another statute the Court might strike down, proposed a different path: a constitutional amendment authorizing an income tax, together with a corporate excise tax in the meantime. Congress sent the amendment to the states in the summer of 1909.

The text is short. The Sixteenth Amendment reads: "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."

Read it with care, because every phrase matters. It gives Congress power to tax incomes. It says "from whatever source derived," which overrules the distinction that Pollock drew between income from wages and income from property. And it says "without apportionment," which removes the clause that made a federal income tax impractical. What the amendment does not say is as important. It does not set a rate. It does not say the tax shall be small, or temporary, or limited to high earners. It does not repeal the apportionment rule for other direct taxes. It simply opens a door and leaves the question of how wide to open it to future Congresses.

Ratification took until 1913. The thirty-sixth state, enough to reach the three-fourths required under Article V, ratified on February 3, 1913, and the Secretary of State proclaimed the amendment as part of the Constitution later that month. Americans had changed the document in the way the document itself provides, by the vote of the people's representatives in their states, and not by decree from a bench or a bureau. Whatever you think of the result, the process was honest.

The Revenue Act of 1913 and the promise

Congress moved quickly. The Revenue Act of 1913, passed that autumn as part of a tariff reform bill, imposed a 1 percent "normal" tax on net income above an exemption, set at $3,000 for a single person and $4,000 for a married couple. On top of that came a graduated surtax on high incomes, rising by steps to 6 percent on incomes above $500,000. With the normal tax added, the top rate was 7 percent.

Think of the figures from a family's point of view. A household with $4,000 of income, in an economy where most workers earned considerably less, owed nothing. The great majority of American families filed no return. The tax was drawn to reach those at the top, and its first-year yield was small relative to the tariffs that still funded most of the government. That was the promise as the public understood it: a light tax on the wealthy, a tax most citizens would never see.

Several of its champions said so. The idea of a tax on the rich was the political selling point, and the low rates and high exemptions were the proof. I do not say that to charge bad faith. Many of the men who wrote the law meant what they said. I say it because the mechanism they created contained no ceiling. The amendment gave Congress power over incomes "from whatever source derived," and a power with no stated limit tends to be used up to the point where voters rebel. A promise that depends on the self-restraint of a legislature is not a limit. It is a mood.

From 1913 to 1918, how fast the mood changed

The mood lasted four years. The United States entered the First World War in 1917, and the revenue demands of the war overwhelmed the 1913 schedule. The War Revenue Act of 1917 raised the top rate to 67 percent. The Revenue Act of 1918 raised it again, to 77 percent on the highest incomes. Exemptions fell, so that far more households became taxpayers than in 1913. In five years, a top rate of 7 percent had grown elevenfold: 77 divided by 7 is 11.

You can defend the wartime rates as necessary in an emergency, and I am willing to give that argument a fair hearing. A nation at war has a claim on its citizens. But the emergency ended and the rates did not return to 1913. After the war the top rates were cut, though they stayed above the pre-war level, and the apparatus of collection, the forms, the audits and the Bureau of Internal Revenue, remained. This pattern would repeat in the Second World War with the invention of paycheck withholding, a story told in withholding began as a wartime emergency in 1943 and simply never left. In both cases the emergency measure became the permanent baseline.

For the long arc of the top rate, from 7 percent to the law of 2018, see a century of top income tax rates, from 7 percent in 1913 to the 2018 law.

The objection: the Constitution was amended, so the matter is settled

A defender of the modern tax code will say: you have just described a constitutional amendment, passed by Congress and ratified by the states, and nothing could be more legitimate. Why complain?

I answer in three points.

1. I agree the tax is constitutional. The Sixteenth Amendment is part of the Constitution, and no honest conservative argues otherwise. Claims that the income tax is somehow illegal have been rejected by the courts. I am not making that argument. The tax is valid. My argument is about wisdom and about the promise.

1. The legitimacy of a power does not settle how much of it to use. The amendment authorized a tax. It did not authorize a tax that reaches half the country's households while a large share pays nothing, or one that burdens filers with a code few can read. Those are choices made by Congresses, and voters are entitled to criticize them. A power that is legal is not necessarily prudent.

1. The Framers' reasons for the original barrier did not disappear. They wanted federal revenue to come from sources that did not require the government to inspect every household's finances. The apportionment rule was part of a design to keep the central government from becoming a standing auditor of the people. The amendment removed the rule. The concern it served remains, and it grows with every added form, schedule and reporting requirement. See tax complexity is a subsidy for lobbyists, and the code shows how it works.

What the bargain taught

I draw four lessons.

One, constitutional change is the proper way to change the Constitution. Pollock was a decision some Americans hated, and they answered it the legitimate way, by amendment, not by pressure on the justices or by ignoring the ruling. That is a model for today's fights over the courts. If the Court reads the text in a way you dislike, persuade your fellow citizens and amend the text.

Two, an unlimited grant invites unlimited use. The Sixteenth Amendment contains no rate cap, no limit on the share of income, and no requirement of a supermajority to raise rates. Nothing in the federal text caps it. The only guard is the voters, and the voters are only as well informed as the tax code is clear. Anyone who has tried to read the code knows how well that works.

Three, a tax designed for the few tends to expand to the many. The 1913 exemption of $3,000 to $4,000 kept most households out. Wars and later programs lowered exemptions and raised rates. Today, the structure of the income tax is that a large share of income-tax revenue comes from a small share of filers, a fact we examine in Who actually pays the federal income tax, read straight from the IRS tables, and the political consequence is that most voters can vote for a spending bill that someone else largely pays for. Madison's warning about factions in Federalist No. 10 is on point.

Four, the Founders' preference for taxes citizens can see. Taxes on consumption are voluntary to a degree, and they make the cost of government visible at the point of purchase. The income tax made the cost invisible by deducting it before the paycheck arrives. When citizens cannot see what they pay, they cannot judge what they get. Read the Federalist on direct and indirect taxes and decide for yourself.

The case in brief

1. The Constitution's apportionment clauses in Article I, Sections 2 and 9, made a federal income tax impractical, and Pollock v. Farmers' Loan and Trust Co. (1895) applied those clauses to strike down the 1894 income tax.
2. The Sixteenth Amendment, ratified in 1913, gave Congress power to tax incomes "from whatever source derived" without apportionment, through the proper constitutional process.
3. The Revenue Act of 1913 set a 1 percent normal tax with a top rate of 7 percent, and exempted most families, and wartime laws raised the top rate to 77 percent by 1918.
4. The tax is constitutional, but the power has no stated rate limit, so the only guard against its expansion is the vigilance of voters.
5. A citizen who wants a smaller reach for the tax should argue for it in the legislature, since the amendment left every question of rate and scope to Congress.

What you can do: read the Sixteenth Amendment and Article I, Sections 2 and 9, on the Constitution page, then write your representative one paragraph on what limit you want on the income tax.