Genworth Financial
Income Tax...Just Whose Idea Was It? Frankly, there are few people around today who can remember when there was no income tax. For many of us they've been a fact of our economic lives. Something to complain about. Something to try and minimize. Something most of us can't even begin to understand. And, something we're reminded about with every paycheck we receive, and every tax return we file.
The questions on many taxpayer's minds?
- How does the government decide how much to tax me?
- Why doesn't everyone pay the same percentage of income?
- Why does it have to be so complicated?
- If we all benefit equally from government services, why should one group pay more just because they earn more money?
So, how did we end up with the income tax?
No, it was not the Founding Fathers having another brainstorm of the type that gave us the Electoral College. They were actually opposed to a Federal Tax on income that wasn't apportioned to or divided among the states. Although a tax on income was used to finance the Civil War, the same type of tax was declared unconstitutional by the Supreme Court in 1893. In fact an income tax law wasn't enacted until 1913 when the Sixteenth Amendment was ratified by three fourths of the states.
Amendment XVI
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.
Could the Sixteenth Amendment have been a big mistake?
Debates on the constitutionality of the Sixteenth Amendment, and allegations of tampering with the state's votes during the ratification procedures, continue on in heated chat room discussions and among historians and the legal community. We're not here to pass augment on who's right or wrong. But, the events leading up to the passage of the amendment provide some pretty good insight into why the system may not be perfect.
Background
During the hotly contested three-way presidential campaign of 1892 the concept of a progressive tax - the more you earn the more you pay - became a big issue among candidates Cleveland, Harrison and Weaver. There was an outpouring of public opinion over the unfairness of the then current tariff and excise tax system. The big problem was that the Federal government depended on tariffs and excise taxes on many everyday goods and services. An example of an excise tax that still affects most Americans is the tax on gasoline - no matter who you are, or how much money you make - you pay the same amount of taxes per gallon as the next driver.
Well, the people argued that a system based on tariffs and excise taxes was unfair because the working masses ended up paying a much higher percentage of their income toward taxes than the wealthy few.
Attempts were made to enact new tax laws. But the court said they were unconstitutional.
Protests about unfair taxes continued and the Federal government continued to grow. Bottom line, the government was going to need more money.
The people demanded a progressive Federal income tax!
Public sentiment was in strong favor of a tax that put a heavier burden on the rich and gave a break to the working people. Democrats took advantage of the opportunity to champion the cause and make the Republicans look like the party of the rich and powerful.
Over the years several attempts were made by Democrats to enact legislation designed to tax the rich. Conservative Republicans voted them all down. The result was an increase in the public's unrest and eventually liberal Republicans began to speak out in favor of tax reform. And, Republican President William Howard Taft was pretty much forced to agree with the concept of an "income tax" during public speeches even though he was supposedly opposed to them.
Let the games begin!
Things were going so well with the Democrat's plan to position the Republicans as the party of the rich, that Senator Joseph W. Bailey, a conservative Democrat from Texas, decided to take another shot at them. Even though he was personally opposed to income taxes, in April of 1909 he introduced the Bailey Bill. His intention was to force the Republicans to openly oppose the bill and therefore prove the Democrat's claim that the Republicans were truly the party of the rich. He never expected the bill would have a chance of passing.
Well, Senator Bailey should have done his homework a little better. When he introduced his bill, Teddy Roosevelt and a number of other more liberal Republicans, actually announced their support for the Bailey Bill. It was starting to appear as if the bill would pass.
So, here's a bill introduced by a senator who was opposed to it, getting support from Republicans who he had counted on to be opposed to it. His plan wasn't working. He wasn't happy. And the conservative Republican leadership, including President Taft, were not too happy either.
Round Two!
Unwilling to be outsmarted in this closely-watched political game, Taft along with several conservative Republican senators, got together to plan out a strategy for defeating the Bailey Bill. With their own party divided over the issue, they had to come up with a way to defeat the bill without appearing to be opposed to an income tax.
Their plan was to introduce a Constitutional Amendment. By amending the Constitution to allow for Congress to levy an income tax, the new law could not be ruled unconstitutional by the Supreme Court. But, a big part of the success of their plan rested in the hands of the states. They were counting on the states to vote against ratifying the amendment. After all, if the wording of the amendment excluded the states from benefiting from it in any direct way, why would they ever consider ratifying it?
Round Three!
On June 16th, 1909, Democrats were caught by surprise when President Taft sent a message to Congress recommending the passage of a constitutional amendment to legalize federal income tax legislation.
So, here we have pro-income tax and anti-income tax groups, within both parties, all supporting the same proposed Constitutional amendment. But, with opposing agendas. The Senate passed the Sixteenth Amendment by a vote of 77-0. The vote in the House was 318-14.
The fate of the future of income tax legislation was now in the hands of the states. Both sides were planning on a victory - in their own way - and ready to proudly point to their record of supporting the popular income tax.
The Knockout Punch!
It was February 12, 1913 when the ratification of the Sixteenth Amendment became official. Congress could now enact legislation to collect taxes based on the incomes of American citizens. The first income tax legislation was enacted on October 3, 1913. Known as House Resolution 3321, the nuances of the new law quickly became the subject of debates between legislators, lawyers, and the Federal courts.
Here's a quick recap!
1892 -1913
1892: Income tax is a key issue in the presidential campaign.
1894: National personal income tax law initiated.
1895: U.S. Supreme Court declares the income tax law unconstitutional.
1909: Democrats present the Bailey Bill to enact income tax legislation.
Republicans propose constitutional amendment to enact legislation
requiring payment of income taxes.
1913: To the surprise of many Democrats and Republicans, the Sixteenth.
Amendment to the Constitution is ratified. Congress can pass federal income tax laws.
1913: Federal income tax law based on ability to pay is initiated.
Well, whose idea were income taxes?
There may be no clear-cut answer. State and Federal governments can both claim some credit for responding to the voice of the people. Perhaps our current system of taxation can be viewed as a solid example of the old saying. Be careful of what you ask for. You just might get it.
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