Taxes

The Income Tax

Under the Constitution, Congress could impose direct taxes only if they were levied in proportion to each state's population. Thus, when a flat rate federal income tax was enacted in 1894, it was quickly challenged and in 1895, the U.S. Supreme Court ruled it unconstitutional because it was a direct tax not apportioned according to the population of each state.

By 1913, 36 States had ratified the Sixteenth Amendment to the Constitution. In October, Congress passed a new income tax law with rates beginning at one percent and rising to 7 percent for taxpayers with income in excess of $500,000. Less than one percent of the population paid income taxes at this time. Form 1040 was introduced as the standard tax reporting form and, though it has changed and grown much more complicated over the years, it remains in use today.

Prior to the enactment of the income tax, most citizens were able to pursue their private economic affairs without the direct knowledge of the government. Individuals earned their wages, businesses earned their profits, and wealth was accumulated and spent with little or no interaction with the government. The income tax fundamentally changed this relationship, giving the government the ability to know all about an individual and business' economic life. Presidents Franklin Delano Roosevelt and Richard Nixon, among others, have used the Internal Revenue Service to harass their political enemies.

Tax Protestors

Many people in the United States are known as tax protestors, refuse to pay taxes under the belief that income [Page 780]taxes are unconstitutional or were passed illegally. Tax Protestors argue that forcing people to engage in “voluntary compliance” is unconstitutional under the Fifth Amendment prohibition against forcing citizens to testify against themselves. Tax Protestors have limited success in the U.S. court system.

World War I and the 1920s

The entry of the United States into World War I greatly increased the government's demand for revenue and Congress responded by passing the 1916 Revenue Act. The 1916 Act raised the lowest tax rate from one percent to 2 percent and raised the top rate to 15 percent on taxpayers with incomes in excess of $1.5 million. Through out the war, taxes continued to increase. By 1918, the bottom rate was 6 percent and the top rate was 11 percent. Even in 1918, however, only 5 percent of the population paid income taxes.

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