Sixteenth Amendment

The Sixteenth Amendment to the U.S. Constitution, which was ratified in 1913, allows Congress to levy a tax on income from any source without apportioning it among the states and without regard to the census.

The text of the Sixteenth Amendment is 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."

Congress passed a joint resolution calling for the amendment in July 1909, and Alabama ratified it a month later. The amendment came into force when the 36th state, Delaware, ratified it in February 1913. 

The first permanent federal income tax was levied in 1913: the schedule consisted of seven brackets, with rates ranging from 1%, on the first $20,000 of income, to 7% on income exceeding $500,000. The government raised a total of $28.3 million. (These figures are not adjusted for inflation.)

Congress had imposed income taxes prior to the ratification of the Sixteenth Amendment. The Revenue Act of 1862 charged citizens earning more than $600 per year 3% of their income, while those making over $10,000 paid 5%. The tax was collected in order to fund the Civil War; rates were raised in 1864, but the law was allowed to expire in 1872. For the most part, however, the federal government raised most of its revenue from excise taxes and tariffs prior to 1913.

Congress attempted to impose another national income tax, of 2% on earnings in excess of $4,000, in 1894. The tax was challenged in court by a Massachusetts resident named Charles Pollock, and the Supreme Court ruled in his favor in Pollock v. Farmers' Loan & Trust Co. in 1895, striking down the tax.

The rationale for the ruling comes from Article I, section 2, clause 3 of the Constitution: "Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers…." In U.S. constitutional law, a "direct tax" is a tax on property "by reason of its ownership."

In Pollock, the Supreme Court ruled that this description applied to income from the plaintiff's 10 shares of the Farmers' Loan & Trust Co., and by extension to all interest, dividends and rents derived from property. (The Court did not rule that income from labor was a direct tax, so that could in theory have been subject to federal, unapportioned income taxes.) In order to levy a direct tax, Congress would have had to apportion it among the states, assigning each one an amount to raise based, for example, on its representation in the House of Representatives. 

The Sixteenth Amendment removed that requirement. The change was supported primarily by states in the South and West, where the tariffs that were at that time the primary source of income for the federal government exacerbated an already steep rise in the cost of living.