“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.”
— 16th Amendment to the U.S. Constitution
“From whatever source derived” indeed. Exactly 100 years ago Sunday, on Feb. 3, 1913, Delaware became the 36th state to ratify the proposed 16th Amendment, making a nationwide income tax part of the Constitution. America had collectively decided that the federal government could, henceforth, take Americans’ money “from whatever source derived,” and decide, at a whim, how much to take from each citizen. Ah. Just as the Founders intended!
The battle to take money earned by Americans had been long, beginning at the outset of the Civil War. President Abraham Lincoln needed to raise cash to fight the South, so Congress introduced the income tax as part of the Revenue Act of 1861. Incomes above $800 annually ($20,370 in 2012 dollars) were taxed at 3 percent — yes, America’s first income tax was a flat tax.
But that changed the very next year with the Revenue Act of 1862, when Congress created a sliding scale (to take even more, especially from those filthy rich). Incomes above $600 ($13,750 in 2012) were taxed at 3 percent; incomes above $10,000 ($229,167) were taxed at 5 percent. The act also declared that the income tax must be “withheld at the source,” meaning employers were required to remove the money from salaries paid to workers. Seems people weren’t willingly sending in their hard-earned cash.
That year, the Commission of the Internal Revenue was born, but it was to be short-lived: The act specifically set out that the income tax would terminate in 1866. In a shocking turn never repeated in American history, a tax created by Congress actually did expire.
But the Commission of the Internal Revenue didn’t disappear. Congress had had a taste of that sweet, free money — endless cash pouring in that we can spend however we want!
The Socialist Labor Party (surprise) pushed an income tax in 1887. In 1894, Congress passed the Income Tax Act, the first in peacetime, again setting a flat rate (of 2 percent). The tax hit only Americans earning more than $4,000 ($105,769 in 2012). The proposal came from two Democrats (party motto: “If it moves, tax it!”).
The Supreme Court roundly rejected the new tax, ruling that income taxes were direct taxes and, hence, in violation of the Constitution. See, the Founders really didn’t like anyone, say, a king, demanding money from every person in the country, willy-nilly. So, to get around that little problem — and in a show of bipartisanship (when it comes to taking Americans’ money) — a Republican offered a constitutional amendment, the 16th.
Three-quarters of the states at the time ratified the amendment and, bing, the income tax was born.
That first year, 1913, there were seven brackets, starting at 1 percent, ending at 7 percent. The 1 percenters (those who were taxed only 1 percent) made from $1 to $20,000 (in 2012, $462,963).
So, pretty much everyone. That top bracket hit only Americans earning more than $500,000 ($11,574,074 in 2012). The tax form people filled out was just three pages long.
During World War I (and as Congress got more greedy), there were 21 different brackets. The lowest rate in 1917 had doubled to 2 percent; the top rate had exploded to 67 percent. Taxes fell during the Depression, jumped during the New Deal (when the top rate hit 79 percent) and hit the big time during WWII: In 1944, the lowest bracket was 23 percent; the top bracket, 94 percent (make another hundred bucks, you kept $6). Taxes fell through the ‘50s, held steady in the ‘60s and ‘70s, but changed dramatically when President Reagan cut the dozens of brackets down to just five and dropped the top 70 percent bracket to 38.5 percent.
Democrats raised them again during the Clinton years (actually taxing the poor more), but President George W. Bush slashed the lowest bracket to 10 percent and the top one from 39.6 percent to 35 percent.