Tax Day and the Legal History of Income Taxation

April 15, 2011

Today in Legal HistoryToday is Tax Day, or at least it would have been if it weren’t for a relatively obscure holiday observed in Washington, D.C. that pushed the day back to Monday this year.

Regardless, since 1955, April 15 has become embedded in the nation’s calendars as the day federal income tax returns need to be filed.

However, the practice of collecting income taxes as a primary source of revenue is around 85 years younger than the nation itself.

The practice began in earnest in 1861 as a form of additional income for the U.S. government during the Civil War.

The practice faced a legal challenge shortly thereafter in Springer v. U.S., which raised the first of several constitutional issues.

Namely, that under Article I, Section 9 of the Constitution, Congress is prohibited from imposing direct taxes that are not uniformly applied per official census figures.

Therefore, Springer argued, the income tax, which rates thereof would vary based on the income levels, was an unconstitutional direct tax.

The Court instead ruled for the government because of the instability that a ruling the other way could have caused (and also because the tax had expired seven years prior).

The issue rose again with the Wilson-Gorman tariff in 1894, which imposed income taxes to make up for lowered tariffs.

Income taxThe practice faced a legal challenge yet again in Pollock v. Farmers’ Loan & Trust.

This time, though, the Supreme Court didn’t find the income tax to be an excise tax; instead, the Court declared the practice to be a direct tax and found it unconstitutional, at least in this circumstance of taxation on interest, dividends and rents.

The decision was extremely unpopular at the time, when class disparities were more pronounced and a major political issue.

After fourteen years, Congress finally accomplished something on the issue:  the Sixteenth Amendment.

The Amendment grants Congress the power to collect income taxes without regard to any previous constitutional restriction.

Ironically, since the passage of the Sixteenth Amendment, several Supreme Court cases, such as 1916’s Brushaber v. Union Pacific Railroad, Stanton v. Baltic Mining, and 1926’s Bowers v. Kerbaugh-Empire, have held that the Sixteenth Amendment didn’t grant any additional powers to Congress that didn’t already exist, but only clarified that power to the courts.

With its constitutional hurdles cleared, income taxation became a central part of the government budget, especially since World War II.

Since then, the biggest changes income taxation has seen is in the top income bracket rates, which apply to any income earned above a certain level (currently, that level is $379,150): the rate has varied from as high 90%-92% during World War II and post-war periods to as low as its current level of 35%.

Even today, income taxation is a contentious political issue.

The end of 2010 saw a skirmish over the “Bush Tax Cuts” that were set to expire.

The compromise that was reached only delayed the fight for two years, so we’ll be seeing another clash at that point.

And given income taxation’s history, 2012 will not be the end of the war.