The income tax is the largest source of revenue for the federal government. The Taxing Clause in Article I, Section 8 of the Constitution allows Congress to “lay and collect Taxes, Duties, Imposts and Excises,” but the article also says that “direct” taxes must be apportioned among the states according to their population. According to the “rule of apportionment,” a state with one-fifth of the national population is responsible for paying one-fifth of the total federal tax. The Constitution only requires indirect taxes, however, to be uniform throughout the United States. Basically, this clause in Article I surmises that Congress is unable to tax based on individual income.
Though income taxes imposed in support of the American Civil War were largely tolerated, later attempts by Congress were met with significant opposition. In 1894, Congress instituted an income tax of 2 percent on incomes greater than $4,000 in order to reduce tariff rates. One year later, in 1895, the Supreme Court ruled in Pollock v. Farmers’ Loan & Trust Co. that this new federal income tax was unconstitutional because it was a direct tax and violated the “rule of apportionment” by directly taxing the people instead of being imposed based on the population of each state.
The ruling of this case was met with popular outrage, and it became clear to Congress that an unapportioned income tax was impossible without an amendment. While some advocates wanted to repeal the direct-tax clauses, Nebraska Senator Norris Brown and others supported giving Congress a newly defined power to enact tax on incomes without apportionment. Congress passed the Sixteenth Amendment in 1909 and it was ratified four years later in 1913. The first unapportioned individual income tax was enacted by Congress in 1913, and the United States has had one ever since.
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.
The Sixteenth Amendment gives Congress the power to enact a federal income tax on any source without these taxes being apportioned among the states based on their populations, which are reported by the census or enumeration.
Major Court Cases
The Sixteenth Amendment was established largely in response to the highly unpopular ruling of the Pollock v. Farmers’ Loan & Trust Co. Supreme Court case in 1895. In this case, the Supreme Court ruled that Congress’s new federal income tax was unconstitutional because it violated the “rule of apportionment” for direct taxes. The decision, of course, became irrelevant in 1913 by the ratification of the Sixteenth Amendment.
Since the ratification of the Sixteenth Amendment, several Supreme Court cases have clarified what is considered “taxable income” as well as Congress’s taxing powers.
In 1916, the Supreme Court upheld in Brushaber v. Union Pacific Railroad Co. that the Sixteenth Amendment removes the requirement that income taxes be apportioned among states according to population, so the Revenue Act of 1913, which established a federal income tax and lowered tariff rates, is constitutional. Years later, in the 1920 case Eisner v. Macomber, the Court ruled that stock dividends are not taxable under the Sixteenth Amendment because they are not income. The majority opinion said the taxpayer does not “receive anything out of the company’s assets for his separate use and benefit.”
Decades later, in the 1955 case Commissioner v. Glenshaw Glass Co., the Court ruled that money received as punitive damages are taxable income. This emphasizes that income is not limited to “the gain derived from capital, from labor, or from both combined” but also applies to “instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.”
The National Federation of Independent Business v. Sebelius in 2012 was a Case regarding the individual mandate and Medicaid expansion provisions of the Affordable Care Act, which is also commonly known as Obamacare. In this case, the Court upheld the individual mandate to maintain minimum health insurance as a constitutional exercise of Congress’s taxing power. While Congress may not have the power to require individuals to purchase health insurance, it does have the power to tax the individuals who do not.
Modern controversy on the Sixteenth Amendment surrounds the validity of tax laws and the power of the federal government.
The term “tax protesters” is used to describe people who refuse to pay taxes because they believe that the federal income tax is unconstitutional or invalid. Some tax protesters of the Sixteenth Amendment assert that the U.S. federal income tax is illegal because it was never properly ratified. They argue the text of the amendment differs from the text proposed by Congress, but this argument has been rejected in any court case where it has been raised. Others argue that because the Sixteenth Amendment does not contain the word “repeal,” the amendment is ineffective to change the law.
In general, opponents of the Sixteenth Amendment say it undermines the Constitution’s intent to limit government. They explain that the Constitution did not establish a central taxing and collecting mechanism because the Founding Fathers had mistrust after the king’s taxing policies. In this way, the amendment gives the federal government too much power at the expense of states and individuals. Instead, many think either states should have the power to levy income tax and then the funds could be better directed to the needs of its recipients, or there should be no income taxes at all.
The Sixteenth Amendment guarantees Congress the power to levy unapportioned federal income taxes. This is important because income tax allows for the federal government to carry out important duties, including maintaining an army, building roads and bridges, and enforcing laws. Many tax dollars also go to support Social Security, Medicare, and other healthcare and social safety net programs.