Meaning of the Sixteenth Amendment
Contrary to conventional wisdom, the Sixteenth Amendment did not grant Congress the power to enact a direct income tax. That power already existed, with the nuance that any direct tax had to be apportioned amongst the states. The Sixteenth Amendment merely removed the requirement that direct taxes, such as the income tax, had to be apportioned amongst the states on a pro-rata basis.
The important takeaway regarding the federal income tax, and the Sixteenth Amendment generally, is that it allows the federal government to bypass the states altogether in terms of raising tax revenues, and tends towards consolidating power in Washington DC. Moreover, the federal income tax better enables the federal government to finance countless unconstitutional programs and activities.
Taxes Permissible under the Constitution
Direct Taxes – Proportional
Prior to the Sixteenth Amendment, Congress was authorized to impose Direct Taxes so long as the tax was “apportioned” among the states. Article 1, Section 9, Clause 4 says, “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken.” The Sixteenth Amendment repealed the portion of this clause that says, “unless in Proportion to the Census or enumeration herein before directed to be taken.”
Indirect Taxes – Uniform
In addition to Direct Taxes, Congress was authorized to impose Indirect Taxes so long as the tax was “uniform” among the states. The uniformity requirement can be found in the first clause of Article 1, Section 8, also known as the General Welfare Clause.
Direct Taxes are taxes like income or estate taxes. It’s easiest to think of a direct tax as a tax imposed on a person or business and the person or business pays this tax directly to the government imposing the tax. For example, to pay income taxes, a person or entity pays money directly to the government and eventually files a tax return with that government. Worded differently, the person on whom the tax is imposed pays the tax directly to the government. The tax is not ultimately paid to the government by a third party.
The personal income tax and the corporate income tax are both direct taxes. Prior to the ratification of the Sixteenth Amendment, direct taxes, like income taxes, had to be apportioned amongst the states. How was the government supposed to apportion a direct tax? Congress would have to decide how much money it wanted to raise from the direct tax and then determine each state’s pro-rata share (based on population) of what each state would owe.
For example, let’s say West Virginia has 1% of the total US population and California has 10% of the total US population. Let’s also say Congress wants to raise $1 Billion. West Virginia would owe $10 Million and California would owe $100 Million. However, since incomes are, in the aggregate, lower in West Virginia than they are in California, raising $10 Million could create a significant burden for West Virginia residents. As such, residents of West Virginia would be more likely to resist this new direct tax or any other direct tax that would disproportionately increase the tax burden placed upon West Virginians.
There are nuanced arguments about whether the income tax became an excise tax or some other kind of tax following ratification of the Sixteenth Amendment. However, for purposes of simplicity, the Sixteenth Amendment removed the requirement that direct taxes, such as the income tax, be apportioned amongst the states on a pro-rata basis. Under the previous example, the West Virginia of today would be far less likely to balk at any increase in the federal income tax since the bulk of this burden would be born by wealthier states, such as California. Removal of the apportionment requirement creates a perverse incentive for people in states with relatively lower income to not balk at increases in federal income taxes. In other words, if West Virginia accounted for 1% of the total US population, it would be safe to say federal income tax revenues from the post- Sixteenth Amendment West Virginia would account for less than 1% of total income tax revenues generated.
The Sixteenth Amendment did not change the Constitutional treatment of Indirect Taxes. These Indirect Taxes simply had to be applied at a uniform rate throughout the United States, as discussed below.
Indirect Taxes are taxes like Tariff Duties, Excise Taxes, Sales Taxes and Value Added Taxes. It’s easiest to think of an indirect tax as a tax paid by one person or business, but collected by another person or business before being remitted to the government. For example, imagine a person walks into a department store and purchases a $100 dress shirt in a state with a 10% sales tax. The total cost for the shirt would be $110 ($100 shirt plus $10 sales tax). The department store would collect the $10 sales tax and eventually remit that $10 sales tax to the government/tax authorities. As such, this sales tax was paid by the customer, but remitted to the government by the store. Thus the tax was indirectly paid by the customer to the government via the store.
Duties, Imposts and Excise Taxes
Duties and Imposts are essentially import and export taxes on goods leaving and arriving in the United States. Excise taxes are consumption taxes, much like sales taxes. However, excise taxes are not separately stated on customer invoices like state sales taxes. Federal excise taxes are imposed on items such as alcohol, cigarettes and gasoline.
The Constitution simply requires that indirect federal taxes, like import and export taxes, and excise taxes, be applied at the same rate throughout the United States.
Why Does the Federal Income Tax Matter?
The Federal Income tax is important for two main reasons.
(1) the federal income tax claims ownership over every individual and business in the United States. In other words, the federal government claims the right to tax the value of your labor. In theory, the federal government can tax individuals and businesses at a rate of 100%. Sound crazy? The top marginal tax rate in the 1940s and 1950s was greater than 90%.
(2) the federal income tax provides the federal government a virtually unlimited source of income. Consider the other topics on this website and the Constitutional functions of the federal government. Consider further that the United States not only survived, but thrived economically for most of its history… a history that did not include a federal income tax. The federal income tax, aided by the Sixteenth Amendment, enables the federal government to engage in countless unconstitutional activities.
United States Constitution – Sixteenth Amendment
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.