Tahlequah Daily Press


June 16, 2014

Constraints on taxation removed by 16th Amendment

TAHLEQUAH — When discussing - and griping about - income taxes, many Americans cite the 16th Amendment as the contrivance which makes possible those federal withholdings from their paychecks.

That is not entirely true. Income taxes existed and Congress possessed the power to tax before the 16th Amendment was added to the U.S. Constitution, but the measure nullified the constitutional requirement that direct taxes be apportioned among the states or according to Census figures. It reads:

“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.”

Income taxes were collected by Congress during the Civil War, and they were included in the platforms of several political movements of the late 19th Century. They were regarded as indirect taxes and exempt from apportionment.

“An interesting question is why the 16th Amendment was ratified,” said Dr. Daniel Savage, chair of the Department of Geography, Political Science and Sociology at Northeastern State University. “As much as Americans seem to hate paying taxes today, it seems relevant to ask why a super majority of Americans favored an amendment to allow the national government to tax incomes back in 1913. Did Americans in that era just like giving their money away to the government?”

Savage said the 16th Amendment was proposed in response to a Supreme Court decision which was unpopular with Congress and the public.

“In this case the court, in Pollock v. Farmers’ Loan and Trust Company [1895], ruled that income taxes were unconstitutional because they were direct taxes and were not apportioned among the states according to population as required by Article 1, Section 9, Clause 4,” Savage said. “Prior to Pollock, income taxes had been collected by the U.S. government and were thought to be constitutional because they were ‘indirect’ taxes and thus did not have to be apportioned.”

There was public sentiment that the justices had rendered their decision through their ideological prisms rather than a logical interpretation of the law. Savage said the justices of the day supported laissez faire economic policies and social Darwinism.

“Members of Congress responded to Pollock by expressing widespread concern that many of the wealthiest Americans had consolidated too much economic power,” he said. “The vast majority of the public, and members of the state and federal legislatures, favored a national income tax because they believed it would be a progressive tax and would only affect the upper class - those who, during the Gilded Age, would be called plutocrats.

Regional support for the amendment was the reverse of what one might expect today. Southern and central populations supported income taxes. The greatest opposition was in the northeast with its larger concentration of industry and upper class citizens, and the west coast.

Americans today may scratch their heads at the overwhelming enthusiasm for income taxes a century ago. The U.S. standard of living saw a dramatic improvement in the late 19th and early 20th centuries. The public had an unfavorable opinion of the wealthy and the mood of the country was liberal.

Opponents of the 16th Amendment barely drew blood. It passed the House of Representatives 318-14 and didn’t bring a dissenting vote in the Senate, 77-0. Alabama was the first state to approve on Aug. 10, 1909, and ratification was achieved with Delaware’s affirmative vote on Feb. 3, 1913.

Rhode Island, Virginia, Utah and Connecticut voted against the 16th Amendment and have never ratified it. It has never been brought to the floors of the Florida and Pennsylvania legislatures.

The 16th Amendment was affirmed in Brushaber v. Union Pacific Railroad (1916). Frank R. Brushaber, a stockholder, filed suit to prevent Union Pacific from paying its taxes. The plaintiff claimed the taxes violated the Fifth Amendment protection against seizure of property without due process. The Supreme Court found no violation.

Bowers v. Kerbaugh-Empire Co. (1926) was a case involving loans made in dollars and repaid in German marks that had devalued since the loans were awarded . In rendering its verdict that the repayment resulted in no taxable income, the court stated that Congress always had the power to levy income taxes, which could be assessed from capital, labor and conversion of capital.

The Supreme Court defined “gross income” as understood today in Commissioner v. Glenshaw Glass Co. (1955). The case involved two suits by the Internal Revenue Service against Glenshaw and William Goldman Theatres, Inc., for not reporting punitive damage awards as income. The IRS won.

The U.S. Court of Appeals for the District of Columbia Circuit found in Murphy v. IRS (2006) that individuals may sue the federal government, but not a federal agency, employee of official.

There is much public distaste with income taxes today, and Savage said most tax breaks and loopholes are for corporations and the wealthy, not the middle and working classes.

“As the billionaire Warren Buffett pointed out, his income tax rate is lower than his secretary’s,” Savage said.

“The reason is that many wealthy Americans get most of their income from investment, while most middle and working class Americans get most of their income from wages. Income from investment is taxed at less than 15 percent, while income from wages is taxed at 25 percent or over for every individual who earns more than $36,250 and every married couple who earn more than $72,500.”

A famous report by the General Accounting Office in 2008 noted that two-thirds of U.S. corporations pay no income tax. Critics say the finding is misleading because shareholder profits are taxed, which draws the reciprocal criticism that such profits are often taxed at investment rates.

Savage said the federal government’s big-ticket items are Social Security, defense, Medicare and Medicaid.

“Social Security funds are actually collected by a separate payroll tax,” he said. “It is a flat rate of 6.2 percent on the first $110,100 earned. If the tax were collected on the first $220,200 earned instead, we would have no trouble funding Social Security indefinitely.”

Funding the nation’s ever-growing health care bill will strain public revenue in the decades to come - and the U.S. is still the world’s unchallenged lavish spender on national defense.

“The United States spends more on health care per capita than any other modern industrialized nation, and the costs of health care keep rising faster than the rate of inflation,” Savage said. “The United States spends more on defense than the next dozen countries combined, and the newspapers are full of articles about weapons systems being built that the military says it does not need.”

Savage said budget deficits and public debt must be controlled by slowing the runaway increases in health care costs and cutting unnecessary defense programs.

“There is no other way - other than raising taxes,” he said.

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