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.
Joseph R. Fishkin is Marrs McLean Professor in Law at the University of Texas at Austin School of Law.
William E. Forbath, Lloyd M. Bentsen Chair in Law and Associate Dean for Research, University of Texas School of Law.
Coleman P. Burke Professor Emeritus of Law at Case Western Reserve University School of Law
The Sixteenth Amendment, ratified in 1913, played a central role in building up the powerful American federal government of the twentieth century by making it possible to enact a modern, nationwide income tax. Before long, the income tax would become by far the federal government’s largest source of revenue. This Amendment was part of a wave of federal and state constitutional amendments championed by Progressives in the early twentieth century. The Amendment reversed an 1895 Supreme Court decision that had made a nationwide income tax effectively impossible by invoking what today seems an arcane distinction between “direct” and “indirect” taxes.
The Taxing Clause in Article I, Section 8, grants Congress the broad “Power To lay and collect Taxes, Duties, Imposts and Excises,” but Article I also provides (twice) that a “direct” tax must be apportioned among the states on the basis of population. This means that if a tax is a “direct” tax, a state with one-tenth of the national population must bear one-tenth of the total liability. It doesn’t matter whether one state has lots of whatever is being taxed (such as valuable land) and another state has very little—the states have to bear the burden according to population. That requirement makes direct taxation cumbersome, and often impossible.
For other taxes—the so-called “indirect” taxes—there is no apportionment rule. The Constitution requires only that “all Duties, Imposts and Excises shall be uniform throughout the United States.” This is a relatively easy requirement to satisfy: what’s taxed and the tax rates mustn’t vary from state to state. In the nineteenth century, most of the government’s revenue came from “duties, imposts and excises” on consumption of various goods.
Thus, whether a tax is direct or indirect has mattered—a lot. So what is a “direct tax”? At a minimum, it includes “capitations” (specifically mentioned in the Constitution and generally understood to be lump-sum head taxes—each person pays the same) and also taxes on land. The Framers thought these were “direct.” But that may be it. An early Supreme Court case, Hylton v. United States (1796), approving an unapportioned tax on carriages, said as much, and in the nineteenth century the Supreme Court upheld several other kinds of unapportioned taxes against constitutional challenges. In Springer v. United States (1881), the Court even approved the unapportioned Civil War income tax.
The world was soon turned upside down, however. In Pollock v. Farmers’ Loan & Trust Co. (1895), a badly divided Court struck down the 1894 income tax on the ground that it was direct but not apportioned.
Congress had enacted the 1894 tax as a reaction against the consumption taxes that had funded the federal government for most of its history. Consumption taxes overburdened lower-income persons. The income tax, in contrast, was structured to reach the wealthy, whose income came from investments. With Hylton and Springer on the books, almost no one thought the income tax was a “direct” tax that would need to be apportioned. Precedent aside, this would make no sense: if an income tax were apportioned among the states, a poor state with the same population as a rich state would need to bear the same total tax liability, which would mean tax rates in the poorer state would have to be higher than those in the richer state. Such a crazy tax would be a non-starter politically.
But, the Court in Pollock surprised everyone by concluding, in a 5-4 decision, that the income tax was a “direct” tax after all and, therefore, would have to be apportioned. The Court reasoned that taxing income from property was tantamount to taxing the property itself. The Court in this period was a conservative court, distrustful of what some Justices argued was an “attack upon capital”—an “arbitrary discrimination” between “those who receive an income of $4,000 and those who do not.”
Pollock was met with popular outrage. The Populists and later the Progressives put opposition to Pollock at the center of their political program. But how could they reverse it? Many argued that Pollock was so obviously wrong that a constitutional amendment was unnecessary: given a chance, the Court would admit error and overturn Pollock. But getting another case before the Court would have required Congress to enact a new unapportioned tax. That would have looked like an attack on the Court—not a good strategic move—and, anyway, who could be sure the Court would change its mind? Amending the Constitution was also risky, however. The amendment process is slow, and if the effort failed, an income tax would be delayed indefinitely.
It became clear that, if only for political reasons, an unapportioned income tax was impossible without an amendment. What form should it take? Some advocated repealing the direct-tax clauses, so that we’d never again have to ponder differences between direct and indirect taxes. But the resolution’s sponsor, Nebraska Senator Norris Brown chose instead to give Congress a new, clear power to enact “taxes on incomes”—without apportionment.
Congress passed the resolution in 1909, and the amendment was ratified four years later; Congress enacted a nationwide (unapportioned) individual income tax in 1913. The country has had one ever since, and the Supreme Court has had little reason to focus on the Amendment that makes this possible. The power to tax incomes has proved very broad.
Still, it is possible that we could in the future have another debate about “direct” versus “indirect” taxes. In Eisner v. Macomber (1920), the Court struck down an unapportioned income tax as applied to certain stock dividends, holding that they effectively fell on property, not income; other cases from the 1920s made similar distinctions. Today, most commentators think those cases are no longer good law, but they haven’t been overruled, and Chief Justice John Roberts favorably cited both Pollock and Macomber in his opinion in NFIB v. Sebelius (2012), which approved the core of Obamacare. If some future Supreme Court decides to impose new limits on Congress’s power to tax, these old characterization questions could reappear.
In the meantime, the Sixteenth Amendment matters most because it has forever changed the character of the United States government, from a modest central government dependent on consumption taxes and tariffs on imports to the much more powerful, modern government that fought two World Wars and the Cold War with the vast revenue that came from the federal income tax.
