The 16th Amendment Doesn’t Mean What You Think It Means

Political Myth: The Federal Income Tax is constitutional only because of the Sixteenth Amendment.  Get rid of it, and you’ll get rid of the income tax.

Reality: At least with respect to wage income, the Federal Income Tax would be constitutional with or without the Sixteenth Amendment

Explanation

Before even the first ten amendments were passed (let alone the sixteenth), here is what the Constitution had to say (and still has to say) about Congress’ power to impose taxes:

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  (Art I § 8 Cl. 1)

In other words, Congress’ power “lay and collect” taxes is, and always has been, very broad, and it includes, and always has included, the power to tax incomes.  Indeed, the first income tax was passed by Congress in 1861 — 53 years before the Sixteenth Amendment came along.  And although the income tax was unpopular among many even back then, there was never any serious question about whether the first clause of Article I, Section 8 gave the federal government the power to impose one, because it clearly does.

The issue lies in a clause found in Article I, Section 9:

No capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken. (Art I §9 Cl. 4)

Income taxes are not levied “in proportion to the census.”  They are, by definition, levied in proportion to the taxpayer’s income.  Thus, the question arises: Is an income tax a “direct tax”?

The difference between a “direct” tax and an “indirect” tax lies in what, exactly, is being taxed.  An “indirect” tax taxes a transaction.  A classic example of an indirect tax would be a tariff, which taxes the importation of goods.  Another example of an indirect tax would be a sales tax.

A “direct” tax, on the other hand, taxes a person even absent a particular transaction or event.  The example the Constitution uses is a “capitalization” (aka a “head tax,”) in which the government simply decrees “all persons shall pay $50.”  Another classic example of a direct tax is a property tax, in which simply owning a piece of property makes one liable for the tax, regardless of whether they engage in any kind of transaction or not.

Now, pretty much everyone would agree that the payment of wages is a transaction, which means that a tax on the payment of wages (or, a tax on the receipt of wages, depending on how you want to look at it) is an indirect tax.  But in 1895, a corporate shareholder made a very creative argument before the Supreme Court.  He was about to receive a dividend, and the federal government wanted to collect income tax from the proceeds of that dividend.  So this shareholder went to the Supreme Court and argued that a tax on dividend income was akin to a property tax on the stock itself, and therefore should be treated as a direct tax.  The Supreme Court ruled in his favor [Pollock v. Farmers’ Loan and Trust Company, 157 U.S. 429 (1895)] and ruled the income tax unconstitutional as applied to dividend income, interest income, and rent income.

Congress, apparently, did not agree with the Supreme Court’s interpretation of what is, and isn’t, a “direct tax,” so in 1909, having secured the required 2/3 vote in both houses, Congress proposed the Sixteenth Amendment to the state legislatures, 3/4 of which ratified the amendment in 1913.  The amendment read:

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. (emphasis added)

So, in that manner, the Supreme Court’s decision in Pollock was overruled by means of the Constitutional amendment, and income from rent, interest, and dividends can be subject to income tax.  If the Sixteenth Amendment were to be repealed, then presumably rent, interest, and dividends would no longer be subject to federal income tax, assuming the modern-day Supreme Court would continue recognizing Pollock as a binding precedent.  But as applied to wage income, the income tax would continue to be constitutional regardless.

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