Page Created:
        April 17, 2013
Last updated:
        April 17, 2013

Many Unhappy Returns—Millions of Them

It's the 100th anniversary of the 16th Amendment. Don't forget to file your taxes.

[A version of this article appeared February 2, 2013, on page A15 in the U.S. edition of The Wall Street Journal.]

 *  *  *

A century ago, on Feb. 3, 1913, the 16th Amendment to the Constitution authorizing a federal income tax was ratified. But the amendment's adoption was more an accident than an act of political will, and tinkering with the Constitution was not even required for the federal government to tax Americans' earnings.

The country's first income tax was implemented to raise money during the Civil War. The tax was repealed in 1872 because the revenues were no longer needed. The idea was resurrected in 1894 as a populist measure to tax the rich when William Jennings Bryan successfully championed passage of a 2% income tax on annual income over $4,000. The rich denounced it as communistic and predicted that many would flee the country rather than pay the tax.

They didn't have to flee. The following year, a tax case reached the Supreme Court, which ruled that an income tax on wages, professions and trades would be constitutional. But the court determined that the tax's application to rental income amounted to a tax on real property, violating the Constitution's "direct tax" clause. For that reason, the income tax was declared unconstitutional.

Initially, the decision was tied 4-4 with Justice Howell Jackson too ill to participate. So the dying Jackson was carried to court for a rehearing. He voted to uphold the tax. But another justice changed his vote, ultimately leading to a 5-4 decision declaring the income tax unconstitutional. It is believed that Justice David Brewer was swayed by his uncle, Justice Stephen Field, to switch. (Yes, an uncle-nephew team sat on the Supreme Court from 1889 until 1897.) Pollock v. Farmers' Loan remains one of the court's most controversial decisions.

But the federal government still wanted another revenue source for the Treasury, which had relied mainly on tariffs and excise taxes for its revenues. The House passed legislation in 1909 imposing an income tax and the Senate seemed likely to concur. The law would tax wages, professions and trades while excluding rents, which would meet the Supreme Court's 1895 test.

The Senate boss, Finance Committee Chairman Nelson Aldrich, together with President William Howard Taft concocted a compromise to stop the income tax bill that the House had passed. Congress would immediately pass a 1% "excise" tax on corporate income over $5,000—in effect the rich were being taxed. As a further sop to income tax advocates, Aldrich would sponsor an income tax constitutional amendment.

Aldrich was quite candid about his scheme to block the House bill that had been passed, declaring to the Senate: "I shall vote for the corporation tax as a means to defeat the income tax."

The compromise passed unanimously in the Senate and by a vote of 318 to 14 in the House. The corporate excise tax would be levied, and the income tax constitutional amendment would be sent out to the states for ratification—which Taft and Aldrich thought was impossible. After all, the Constitution had not been amended in 40 years. Of the 15 amendments that had been adopted, 10 were included in the Bill of Rights. The 11th and 12th were adopted in 1789 and 1804, and three had resulted from the Civil War.

The plan went awry. After 1909, the U.S. underwent a major political transformation. Democrats and progressive (Teddy) Roosevelt Republicans swept many state elections. Woodrow Wilson won the 1912 presidential election. Democrats controlled both houses of Congress. On Feb. 3, 1913, the legislatures in Delaware, New Mexico and Wyoming voted for the amendment, pushing the total to the required 36 states. The 16th Amendment was officially adopted on Feb. 25. Three and a half years had passed since the Taft-Aldrich compromise supposedly relegated the income tax to the dust bin.

Congress quickly heeded President Wilson's call to dramatically lower tariffs and impose an income tax in 1913. The tax was supposed to be a flat 4%, but Ways and Means members John Nance Garner (later Franklin Roosevelt's vice president) and Dorsey Shackleford turned it into a graduated tax of 1% to 7%, attuned to "capacity to pay."

After the tax law was passed, judges embraced it—for everyone else, just not themselves. Judges across the land proclaimed that the Constitution prohibited diminishing their salaries (and those of the president and state employees) through taxation. They emphasized the point by issuing court rulings in their own favor, excusing themselves from the tax. This lasted until the Depression, when the force of public opinion essentially shamed them into relenting. Under a law passed in 1932, Franklin Roosevelt became the first president subject to the income tax, but he refused to pay an increased rate that he helped enact in 1934. FDR insisted on paying the lower 1932 rates.

Before World War II, only one-third of the population earned enough to be subject to the income tax. After the war, the tax still affected only half the population. As late as 1947, farmers paid little or no income tax even when crops were good—it was generally accepted that they kept no books and were not expected to do much paperwork.

Over the years, the personal exemption and standard deduction have not kept pace with inflation, so today 70% of the population is subject to income taxes. Almost 60 million returns, mostly under $20,000 in gross income, pay no income tax, largely the result of the earned-income and child tax credits. The individual income tax today raises $950 billion annually through 144 million tax returns. Of this, the top 40 million returns pay about $856 billion and the bottom 104 million returns only about $94 billion.

The U.S. could easily reduce the tax-filing population to pre-World War II levels by dropping two-thirds of taxpayers from the drudgery of filing annual returns. For instance, a nonrefundable 3.4% withholding tax on $2.8 trillion gross income of those in the lower two-thirds. But nothing is so simple when it comes to the tax code.

The constitutionality of the 16th Amendment was challenged from the beginning, and it is still assailed by tax protesters. A frustrated Tax Court, in addition to reliably ruling in favor of the IRS when such cases come before it, adds a penalty of up to $25,000 against anyone raising the frivolous constitutional argument in court. The protesters don't seem to realize that repeal of the 16th Amendment would not mean abolition of the income tax. Alas, tax relief must come from Congress.


A version of this article appeared February 2, 2013, on page A15 in the U.S. edition of The Wall Street Journal.