The 16th Amendment
“What Were We Thinking”

It is hard to believe today but it took a constitutional amendment in 1913 to establish the income tax as a fact of life for American citizens. The reason it required an amendment is that the US Supreme Court had previously declared an income tax unconstitutional. As a result of this amendment, millions of Americans are faced with the prospect of doing their income taxes by April 15th each year. That is the day that you must have filed your return, filed for an extension, or be in big trouble.

The 16th amendment reads as follows: “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.”

Now, could this amendment have been any worse? Let’s see: (1) there is no limit on the amount or percentage for the tax, (2) income from any source can be taxed, and (3) the individual states don’t have claim to a single nickel. Of course, the income tax started out as a tax designed to “sock it to the rich”. The first income tax started at 1% on the first $20,000 ($508,859 today) and increased to 7% on all income above $500,000 ($12,721,485 today). If the rates had stayed the same and been adjusted for inflation, average Americans would be paying a federal income tax of only just over $5,000 on their first half-million dollars of income. However, as you might expect, the rates did not stay at the original levels. During World War II the top rate rose to 94% and remained near that level until President Kennedy led the charge to reduce the top rate to 70% in 1964 (18 years after the conclusion of WWII). The other thing that got out of hand is that nobody remembered to adjust the brackets for inflation. This sneaky detail pushed Americans into higher and higher tax brackets each and every year that the consumer price index increased. In other words, more money for Uncle Sam even though your paycheck was just keeping up with the cost of living. Finally, President Reagan led the charge to index the federal brackets to inflation beginning in 1981. Surprisingly, this was a republican president working with democrats in congress to reduce the top personal income tax rate from 70% to 50% in 1981 and then to 28% in 1986. What followed was a lengthy and powerful peacetime expansion that many economists attribute to the changes in the income tax structure.

In all fairness, states do get some of the federal tax money back in various grants, but it generally comes packed with rules, regulations, and requirements that can frustrate states trying to utilize resources efficiently. Nobel Prize winning economist Milton Friedman has told us that: “….the great threat to freedom is a concentration of power.” Well, power goes where the money goes and the bulk of our money is going to Washington where the world’s greatest concentration of power resides. It would have been so much more reasonable if the 16th amendment had included some limits on the income tax rate, an inflation adjustment, and a method of sharing the revenue with the states.

However, since there is no limit, it is up to us as citizens to promote a reasonable level for the income tax. The primary issue is the freedom of productive Americans to be able to spend the fruits of their labor rather than to have it spent for us. You can always spend your money more efficiently than someone else can spend it for you. The 16th amendment did freedom no favors.