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March 7, 2022


What’s the big deal about the 16th Amendment?

Those in the know are already thinking about federal taxes. History buffs will have a base understanding of why, in 1913, Congress ratified the law. Since Colonial times, a large percentage of Americans have eschewed paying taxes for intangibles (the Stamp Act) or paying taxes to a government that did not allow their voices to be heard (the Townshend Act). Most of us remember learning about the American Revolution rallying cry “no taxation without representation.”

But do you know the curious sequence of events that led up to the 16th Amendment?

The Civil War and the first income tax

Actually, the first income tax in the U.S. happened in 1861. This 3% tax on all income over $800 was introduced as a way to pay for the cost of the Civil War.

Repealed 11 years later in 1872, Congress still needed a way to raise funds. So again in 1894, Congress put a 2% tax on income over $4,000 (roughly $130,00 today).

Fifteen years later the progressives provided an income tax to the tariff bill. Conservatives, in an effort to kill the bill, added their own provision; a constitutional amendment enacting this tax. They wholeheartedly believed this would force states to reject ratification. Boy, were they surprised. It was ratified in 1909 and went through. In the end, very few people actually paid this tax; per the U.S. National Archives after deductions and exemptions, “less than 1% of the population paid income taxes at the rate of only 1% of net income.” But the amendment was not the first of its kind. The shifting economy of the 1800s meant people were seeing a need for federal regulation.

The first industry to be federally regulated

So, it is not difficult to see the progression of government oversight and of the public acceptance of federal taxes. It is human nature; when people can see a personal benefit they are often more willing to pay taxes.

For example, taxes, as we know them today, are often used for infrastructure. Besides being necessary for us to get to work and school, roads are an important function of both business and farming. The Industrial Revolution meant more people lived and worked in urban areas. Populations exploded. These people needed food. This meant they needed to have meat and grains brought into the city.

After the Civil War most roads were still little more than dirt paths. The only real way to move large shipments of grain, produce or meat was the railroad. During this time railroads were owned privately and were unregulated. (This was in part what led to railroad barons and the Guided Age, but we digress) .

Railroads were the first industry to come under federal regulation because it was widely recognized that the owners were few and had a controlling monopoly on this vital mode of transport. This was especially hard on farmers as prices for the transport of their good was wholly arbitrary. This is what led in large part to the approval of the Interstate Commerce Act of 1887. This, among other changes, set the foundation for the 16th Amendment.

U.S tax history