I promised to return this fall to the series of blogs on the Constitution. Previously, I briefly examined the Constitution and Amendments 1 through 15. I stopped with the Civil War Amendments that dealt with ending slavery and its consequences. Today, we come to the 16th Amendment. There is probably no amendment less popular among nearly everyone who pays taxes in the 16th Amendment, which made possible the living of income taxes on American citizens! It reads 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.
Despite being unpopular, there is probably no single constitutional provision adopted after the Civil War with more impact on American society and the emergence of the United States as a world power. Without the income tax, the modern welfare state, the participation of America in the two great World Wars of the 20th century, the creation of the military-industrial complex, the huge federal bureaucracy, and the position of America in the world would have been impossible. [1]
Reasons for Passage of the Amendment
During the years after the Civil War, the industrialization and urbanization of America, together with the expansion of the role of the United States of America in the world, created the need for additional federal income. Progressive groups especially felt that it was necessary to tax the wealthiest segment of society in a way that protected the interests of the poor and middle class. In 1894, Congress passed the Wilson-Gorman Tariff Act, which created an income tax provision of 2% on incomes of over $4,000 (equivalent to $135,951.63 in 2022 U.S. Dollars). [2]
During the Civil War, a similar tax was used to pay the expenses of the war. It was expected that the Supreme Court would use the same reasoning it had used in upholding the Civil War tax to uphold the income tax. [3] That was not the case. In 1895, the United States Supreme Court issued a decision in Pollock v. Farmers’ Loan & Trust Co., holding unconstitutional Congress’s attempt the prior year to tax incomes uniformly throughout the United States. [4]
Article I of the original Constitution gave Congress the general authority to “lay and collect Taxes, Duties, Imports, and Excises.” For “direct” taxes, Article I provided that taxes must be collected based on the population of the states. Before an income tax was established, the majority of funds given to the federal government derived from tariffs on domestic and international goods. [5] That is, citizens of Virginia could not be made to pay taxes greater than citizens of New York. Since an income tax taxes personal or corporate income, it was inevitable that the burden of an income tax would fall on wealthier states with wealthier citizens. The Sixteenth Amendment, ratified in 1913, expressly provides that Congress has the power to collect an income tax without apportionment among the States and without regard to population. Thus, the Sixteenth Amendment creates an income tax exception to the requirement in Article I that direct taxes must be apportioned based on states’ population.
Interpretive Issues
By its terms, the Sixteenth Amendment applies to “taxes on incomes, from whatever source derived.” The empowerment of the Sixteenth Amendment does not extend beyond “incomes” to property taxation or other forms of taxation not permitted by the Constitution. [6] Of course, the term income itself is not entirely clear, and there has been continuing subsequent litigation on what exactly constitutes income for the Sixteenth Amendment. [7] The basic holding of the Court was that: “Income may be defined as the gain derived from capital, from labor, or from both combined, including profit gained through sale or conversion of capital.” [8] This seems simple, but stock dividends and stock issued in reorganizations and the like, and other cases, raise difficult issues. [9]
Internal Revenue Code
Obviously, the nature of the income tax, corporate and individual, gave rise to the need for additional law and administrative interpretation. The Internal Revenue Code embodies the lineal descendant of the income tax act passed in 1913 following ratification of the Sixteenth Amendment contains the basic tax laws of the United States. [10] The federal Internal Revenue Code is approximately 2,412,000 words long, and federal tax regulations are 7,655,000 words long. These numbers do not include the substantial body of tax-related revenue rulings and case law that is often vital to understanding the tax code. [11] This has resulted in calls for simplification.
Tax Resistance
Every so often, someone fails to pay their income taxes based upon arguments concerning the legality of the Federal income tax. The arguments vary. This blog will not cover all of them. In all cases, the courts have overwhelmingly supported the government against taxpayers making specious objections to the code and the income tax system created by the Sixteenth Amendment.
A common argument is that the Sixteenth Amendment is somehow invalid because it was not properly adopted. The courts have held that this argument is baseless. This argument is based on the premise that all federal income tax laws are unconstitutional because the Sixteenth Amendment was not officially ratified or because the State of Ohio was not properly a state at the time of ratification. Unfortunately for those taking this position, the Sixteenth Amendment was ratified by forty states, including Ohio (which was confirmed as a state as of 1803). [12] Shortly thereafter, two other states ratified the amendment. Under Article V of the Constitution, only three-fourths of the states are needed to ratify an Amendment. More than three-fourths of states ratified the Sixteenth Amendment without Ohio to complete the number needed for ratification. After the Sixteenth Amendment was ratified, the Supreme Court upheld the constitutionality of the income tax laws. [13] Since then, courts have consistently upheld the constitutionality of the federal income tax. [14]
Some individuals want to believe that a religious objection to income taxes eliminates their duty to pay them. the Supreme Court held that the broad public interest in maintaining a sound tax system is of such importance that religious beliefs in conflict with the payment of taxes provide no basis for refusing to pay, stating that “[t]he tax system could not function if denominations were allowed to challenge the tax system because tax payments were spent in a manner that violates their religious belief.” [15] We can safely assume that if religious objections were a valid basis to avoid taxes, America would become a much more religious nation.
Finally, some individuals have taken the position that taxpayers may refuse to pay federal income taxes based on religious or moral beliefs or on an objection to using taxes to fund certain government programs. Some of these persons mistakenly invoke the First Amendment and, often, the Religious Freedom Restoration Act (“RFRA”). The First Amendment to the United States Constitution provides that “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof, or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances, freedom of speech and religious opinion do not extend to failure to pay taxes. The Sixteenth Amendment does not provide a right to refuse to pay income taxes on religious or moral grounds just because taxes are used to fund government programs opposed by the taxpayer or which violate a deeply held belief. It is also settled law that RFRA does not afford a right to avoid payment of taxes for religious reasons. [16] Once again, if personal moral or religious objections to certain programs or policies were to be a valid objection to paying taxes, there would be vast numbers of people (myself included) that would object to all or a part of the spending of the government. No government could possibly allow or survive such a rule.
Calls for a Wealth Tax
One issue of current importance is the call of some for a wealth tax to eliminate the great wealth disparities of our nation. The prior discussion shows readers that a wealth tax would be difficult to sustain. The Sixteenth Amendment avoided imposing restrictions on unapportioned taxes for income defined as incomes from whatever source derived. The Sixteenth Amendment would probably not support a Wealth Tax because such a tax is a tax on capital, not income. Additionally, a wealth tax likely would be considered an unapportioned direct tax and, therefore, unconstitutional. Some believe a wealth tax could be sustained based on an early Supreme Court decision in Hylton v. United States, which upheld a tax on the carriages for the conveyance of persons (an early excise tax on consumption transactions).[17] In Pollock v. Farmers’ Loan & Trust Co, the court took the view that Hylton sustained the carriage tax as a tax on the use and an excise.”[18] To validate a wealth tax, it would be necessary to overrule Pollock, a tactic urged by some. [19]
Conclusion
A discussion of the implications of the Sixteenth Amendment might take up millions of pages, as does the code and its interpretations. For now, it is enough to know that this one Amendment opened up a new taxation regime to fund an expansion of Federal power. It also created an entirely new area of the law that occupies thousands of lawyers, accountants, and others daily. Its importance cannot be overstated.
Copyright 2023, G. Christopher Scruggs, All Rights Reserved
[1] I would like to emphasize that this paragraph is not meant to indicate that the tax and the emergence of America as a world power were bad things. In fact, the reasons that progressive Americans gave for the adoption of the tax are as valid today as they were then. In fact, the emergence of the “super-rich” internationally gives reason to ponder the reasons for the adoption of the income tax and the potential application of those reasons today.
[2] Act of Aug. 27, 1894 9, § 27, 28 Stat. 509, 553 (1894).See, “Constitutional Amendments – Amendment 16 – “Income Taxes” at www.reaganlibrary.gov/constitutional-amendments-amendment-16-income-taxes (Downloaded September 16, 2023).
[3] Springer v. United States, 102 U.S. 586 (1861).
[4] Pollock v. Farmers’ Loan & Trust Co., 157 U.S. 429 (1895), on rehearing 158 U.S. 601 (1895). Both decisions are collectively referred to as “Pollock.”
[5] U.S. Contusion Art 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;….
[6] Eisner v. Macomber 252 U.S. 189, 206 (1920).
[7] Id., at 207–08. The court adopted the view that “Income may be defined as the gain derived from capital,
from labor, or from both combined,” provided it be understood to include profit gained through a sale or conversion
of capital assets,….” In so holding, the court overturned an attempt to tax stock dividends where there was no realization of profit. The court continues to have to apply the term income in complex situations and the holdings of the court are not uniform. See for example, United States v. Phellis 57 U.S. 156 (1921); Rockefeller v. United States 257 U.S. 176 (1921); Marr v. United States 268 U.S. 536 (1925), Miles v. Safe Deposit Co., 259 U.S. 247 (1922).
[8] Eisener v. Macomber, at 207.
[9] See for example, United States v. Phellis 57 U.S. 156 (1921); Rockefeller v. United States 257 U.S. 176 (1921); Marr v. United States 268 U.S. 536 (1925), Miles v. Safe Deposit Co., 259 U.S. 247 (1922).
[10] Internal Revenue Code 26 U.S.C. Title 26 (2018).
[11] Scott Greenburg, “Federal Tax Laws and Regulations are Now Over 10 Million Words Long”
(October 8, 2015) . https://taxfoundation.org/blog/federal-tax-laws-and-regulations-are-now-over-10-million-words-long/ (downloaded September 16, 2023)
[12] Bowman v. United States, 920 F. Supp. 623 n.1 (E.D. Pa. 1995). Congress has upheld the 1803 admission of Ohio. Five United States Presidents have been from Ohio, and its citizens have paid substantial income taxes.
[13] Brushaber v. Union Pacific R.R. 240 U.S. 1 (1916).
[14] Sochia v. Commissioner 23 F.3d 941 (5th Cir. 1994) Miller v. United States 868 F.2d 236, 241–42 (7th Cir. 1989) (per curiam), United States v. Stahl, 792 F.2d 1438, 1441 (9th Cir. 1986), United States v. Foster 789 F.2d 457 (7th Cir. 1986) Knoblauch v. Commissioner 749 F.2d 200, 202 (5th Cir. 1984).
[15] United States v. Lee 455 U.S. 252, 260 (1982), Jenkins v. Commissioner 483 F.3d 90 (2d Cir. 2007), United States v. Indianapolis Baptist Temple224 F.3d 627 (7th Cir. 2000), Adams v. Commissioner 170 F.3d 173 (3d Cir. 1999), United States v. Ramsey, 992 F.2d 831, 833 (8th Cir. 1993), Wall v. United States 756 F.2d 52, 53 (8th Cir. 1985, United States v. Peister 631 F.2d 658 (10th Cir. 1980).
[16] United States v. Lee 455 U.S. 252, 260 (1982), Jenkins v. Commissioner 483 F.3d 90 (2d Cir. 2007), United States v. Indianapolis Baptist Temple224 F.3d 627 (7th Cir. 2000), Adams v. Commissioner 170 F.3d 173 (3d Cir. 1999) United States v. Ramsey 992 F.2d 831, 833 (8th Cir. 1993),Wall v. United States 756 F.2d 52, 53 (8th Cir. 1985), United States v. Peister 631 F.2d 658 (10th Cir. 1980), Salzer v. Commissioner T.C. Memo. 2014-188, 108 T.C.M. (CCH) 284 (September 15, 2014).
[17] Hylton v. United States 3 U.S. (3 Dall.) 171 (1796).
[18] Pollock v. Farmers’ Loan & Trust Co. 157 U.S. 429, 574 (1895).
[19] See, Greg Roselsky, “Is a Wealth Tax Constitutional?” Planet Money (December 17, 2023) www.npr.org/sections/money/2019/12/17/787476334/is-a-wealth-tax-constitutional (Downloaded September 16, 2023).