One hundred years ago, Congress sent a constitutional amendment to the states to permit the federal government to tax incomes.
The pressure for an income tax had been building ever since the Supreme Court declared the 1894 income tax unconstitutional — as a “direct” tax, it had to be apportioned among the states according to population. Such apportionment would defeat the principal aim of the tax’s southern and western Populist proponents, which was to shift the tax burden onto the high-income states of the Northeast.
In 1909, these Populists wanted a corporate income tax as well as a personal income tax. The story goes that the conservative Republicans, led by Sen. Nelson W. Aldrich of Rhode Island, agreed to enact a corporation tax but let a personal income tax depend on the ratification of a constitutional amendment — one that they were confident the states would not ratify. Aldrich openly stated that he would vote for the corporation tax in order to defeat the income tax.
To the Republicans’ surprise, the states quickly ratified the Sixteenth Amendment, and we have both corporate and personal income taxes.
The income tax, as its opponents a century ago predicted, has become a monstrosity. It has spawned a system of special privileges and penalties as Congress uses it to promote and discourage all sorts of policies that have nothing to do with raising revenue, nothing to do with the Constitution’s grant of power to “collect taxes… to pay the debts and provide for the common defense and general welfare of the United States.”
Among other things, the income tax is the base of the peculiar American mania for home-ownership, due to a provision in the first (1913) income tax law to permit the deduction of mortgage interest payments. This pyramid collapsed last year, but its base remains in place.
The income tax is also the source of our deranged health-insurance system. During World War II, the government prohibited employers from competing for workers via higher wages. Instead, employers began to offer health insurance as a tax-deductible fringe benefit.
The ridiculously arcane tax code has spawned entire industries, costing billions of dollars, in which individuals and businesses lobby for exemptions, try to exploit loopholes, or simply struggle to comply with the code. The system is so ridiculously complex that the Secretary of the Treasury (the chief tax-collector) and the chairman of the House Ways and Means Committee (the chief author of the tax law) can claim that they failed to pay their taxes because they didn’t understand the tax code.
Our dysfunctional tax system has led many to advocate a radically simplified “flat tax.” Others call for the abolition of the income tax and adoption of a national sales or “value-added” tax (VAT). Conservatives dislike the VAT idea because, as an indirect and hidden tax, it makes it much easier for the government to raise taxes. Liberals dislike the VAT because it is regressive, taxing everyone’s consumption equally, rather than falling more heavily on the rich.
The problem is that, like Nelson Aldrich, we will end up with both an income tax and a VAT. Indeed, that could happen even if we did repeal the Sixteenth Amendment. A good argument can be made that the amendment was unnecessary, because Congress had always had the power to tax incomes, and it was the Supreme Court that got it wrong when it struck down the 1894 income tax. The federal government had collected an income tax during the Civil War, which the Supreme Court upheld (at least with regard to professional earnings) in 1881.
So, to be really certain, we need to amend the Constitution in such a way as to prohibit income taxation.