Federal Income Tax System

Remember when you learned about the Boston Tea Party back in elementary school? That’s where it all started. The colonists revolted against unfair taxation without representation. When they won their independence, they wanted to make sure that there would be no more unfair taxation. So what did they do? They wrote it into the U.S. Constitution—namely, in Article I, Sections 2 and 8:

Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers. (U.S. Const. art. I, § 2) 

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. (U.S. Const. art. I, § 8)

The taxes referred to in these two sections are concerned with property taxes and not income taxes. For the most part, the United States federal government imposed an income tax only when in need of revenue to support the military during times of war. During the Civil War, the U.S. government imposed a 3% tax on income over $600, which to us isn’t a lot—about $80,000 in terms of today’s dollar. That would be like only taxing income above $80,000 today. Could you imagine? It is a dream. These taxes were used to fund the war, and after the war, they were essentially eliminated until the late 1800s when Congress imposed a federal income tax that was not apportioned by the state population (as stated in the Constitution). Needless to say, it was challenged in the courts.

In the 1895 case of Pollock v. Farmers Loan and Trust Company, the court ruled that a tax on rent or income from real estate is a direct tax, because “the whole beneficial interest in the land consisted in the right to take the rents and profits” (as cited in Eddlem, 2013). 

The Supreme Court found this income tax to be unconstitutional, but if this is true, then why are we paying individual income taxes in the United States? What do you do to make something Constitutional? That’s right: Create an amendment to the Constitution. And so, in 1913, the 16th Amendment to the Constitution was ratified as follows:

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. (U.S. Const. amend. XVI) 

So there it is. Now Congress and the president have the power to create tax law. The first tax return was due on March 1, 1913.