Submitted by Tyler Durden on 02/03/2013 12:27 -0500
On February 3rd
, 1913, one of the
two most historic events in US history took place: the ratification of
the 16th amendment, which established Congress' right to impose a
Federal income tax on Americans, and overturned Article I, Section 9 of
the US Constitution which explicitly prohibited a general income tax.
The amendment was brief and to the point, and read 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.
And with that, the US Federal Income Tax was born and has been with us for precisely 100 years. The amendment itself:
The result: the first ever iteration of what would henceforth become the most hated form in US history.
Passed by Congress on July 2, 1909, and ratified February 3,
1913, the 16th amendment established Congress's right to impose a
Federal income tax.
Far-reaching in its social as well as its economic impact, the income
tax amendment became part of the Constitution by a curious series of
events culminating in a bit of political maneuvering that went awry.
The financial requirements of the Civil War prompted the first
American income tax in 1861. At first, Congress placed a flat 3-percent
tax on all incomes over $800 and later modified this principle to
include a graduated tax. Congress repealed the income tax in 1872, but
the concept did not disappear.
After the Civil War, the growing industrial and financial markets of
the eastern United States generally prospered. But the farmers of the
south and west suffered from low prices for their farm products, while
they were forced to pay high prices for manufactured goods. Throughout
the 1860s, 1870s, and 1880s, farmers formed such political organizations
as the Grange, the Greenback Party, the National Farmers’ Alliance, and
the People’s (Populist) Party. All of these groups advocated many
reforms (see the Interstate Commerce Act) considered radical for the
times, including a graduated income tax.
In 1894, as part of a high tariff bill, Congress enacted a 2-percent
tax on income over $4,000. The tax was almost immediately struck down by
a five-to-four decision of the Supreme Court, even though the Court had
upheld the constitutionality of the Civil War tax as recently as 1881.
Although farm organizations denounced the Court’s decision as a prime
example of the alliance of government and business against the farmer, a
general return of prosperity around the turn of the century softened
the demand for reform. Democratic Party Platforms under the leadership
of three-time Presidential candidate William Jennings Bryan, however,
consistently included an income tax plank, and the progressive wing of
the Republican Party also espoused the concept.
In 1909 progressives in Congress again attached a provision for an
income tax to a tariff bill. Conservatives, hoping to kill the idea for
good, proposed a constitutional amendment enacting such a tax; they
believed an amendment would never receive ratification by three-fourths
of the states. Much to their surprise, the amendment was ratified by one
state legislature after another, and on February 25, 1913, with the
certification by Secretary of State Philander C. Knox, the 16th
amendment took effect. Yet in 1913, due to generous exemptions and
deductions, less than 1 percent of the population paid income taxes at
the rate of only 1 percent of net income.
This document settled the constitutional question of how to tax
income and, by so doing, effected dramatic changes in the American way
As for the other historic event of US history, ironically it, too,
took place in 1913, on December 23: this was the day when the Federal
Reserve was founded.
The charts below summarize what has happened next:
Source: Zero Hedge