The History of Income Taxes in America
Today we recognize that it is tax day here in America so we take a look at the history of income taxes in America. I hope you enjoy looking at how the legal landscape of income taxes has changed over the years.
As always, if you have any questions about your real estate, business, estate planning, or any other legal issue, please let us know by e-mailing me at email@example.com.
In honor of Tax Day, it seems fitting to take a look at the history of income taxes in America. Income tax has not always been legal in the United States, in fact for most of the United States history, income tax has had its brushes with its constitutionality. Americans, in general, have been skeptical of the taxing authority from the earliest foundations of this nation. The American Revolution has its earliest makings arising from Colonial protests over Britain’s right/authority to tax the colonies without representation. It is out of this concern that when the founding fathers crafted the Constitution, taxing authority while allowed was vague and legally weak.
Under Article 1, Section 8 of the Constitution, Congress was given the power to lay and collect taxes. However, in exercising its rights to collect duties, imposts and excises Congress was required to apportion such obligations in a uniform manner throughout the United States. Further, in Article 1, Section 9 in collecting income taxes the Constitution required Congress to distribute direct taxes in proportion to each state’s census population.
The founders were rightfully concerned about how an unchecked government would exercise its taxing authority. Alexander Hamilton in Federalist 33 stated that the Necessary an Proper clause of the Constitution should be a guideline for Congress in legislating issues related to taxation. However, the vagueness of the taxing authority in the Constitution led to numerous legal challenges.
The most notable challenge was the US Supreme Court ruling in Pollock v. Farmer’s Loan & Trust Co.(1895) which is credited with the decision to made income taxes unconstitutional. This case stated that taxes on rent, dividends and interest were direct taxes (ie. Income taxes) and therefore Congress was required to apportion the tax in a uniform manner. As apportioning, income taxes is functionally impractical the case had the effect of prohibiting income taxes at the federal level. The decision in Pollock remained the law of the United States until 1916 when Congress passed Sixteenth (16th) Amendment to the Constitution.
The 16th Amendment gave Congress the direct authority to collect income taxes without apportionment among the States and without regard to any census. Income taxes that were previously prohibited because it was impractical to apportion, was now possible because apportionment among the states based on population was no longer required.
In 1916 when income taxes functionally became Constitutional the top rate under the 1913 Revenue Act was 6% on incomes over $500,000. Within 2 years the top marginal rate would climb to 77%. During the Great Depression and through WWII Franklin D. Roosevelt made several proposals to increase tax rates including proposing a 100% tax rate on incomes over $25,000. FDR would eventually increase the top marginal rate to 94% in 1945 on incomes in excess of $200,000.
In 1955 the US Supreme Court in the Glenshaw Glass case defined income by stating that gross income is “accessions to wealth, clearly realized, and over which the taxpayers have complete dominion”. This case functionally stands for the proposition that any increase in wealth is considered income unless so exempted by statute. It is from this definition that the income taxing authority has found its roots and it is from this case that income tax policy has been based ever since.
Taxes have long been fodder for political commentary. The issue sparks fierce debate from Washington DC to the local pub or dinner table. Everyone seems to have an opinion on the validity or fairness tax structures. But there you have it. The history of income taxes in America, from impractical and unconstitutional to constitutional and the main theme of nearly every presidential election since 1916.So remember, when you pay your income taxes today, in 1915 under the Pollock case this income tax was for all practical purposes not legal.
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The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are facing a legal issue of any kind, get competent legal advice in your State immediately so that you can determine your best options.