Today in 1895: Federal income tax ruled unconstitutional

April 8, 2010

Federal income tax formsDeath and taxes and childbirth! There’s never a
convenient time for any of them!
Margaret Mitchell

As tax day fast approaches, it’s easy to forget that for most of our nation’s history, there was no federal income tax at all.

It wasn’t until 1894 that Congress gave us the first peacetime income tax as a popular way to fund the growing nation’s infrastructure needs. The law called for a flat 2% tax on all incomes above $4,000. The new tax affected less than 10 percent of the population, which probably explains its popularity.

But while the tax itself was relatively small, its political impact was huge. Thanks to the industrial revolution, wealth and power had become concentrated in the hands of a few individuals and corporations, and taxing the rich became a rallying cry for social activists and the growing Populist movement.

Of course, the folks with the money and power weren’t about to roll over, and in Pollock v. Farmers’ Loan and Trust Co., they argued that taxing real estate rental income was effectively a “direct tax” on property. This, the plaintiffs argued, violated a Constitutional provision that all direct taxes be apportioned among the states according to population. The case was quickly taken up on appeal by the U.S. Supreme Court.

On April 8, 1895, the Supreme Court declared that the federal income tax was unconstitutional, and the wealthy were off the hook…At least for a while.  The Supreme Court’s unpopular decision eventually led to the ratification of the Sixteenth Amendment in 1913, which in no uncertain terms gave Uncle Sam the power to tax incomes “from whatever source derived.”

The quote from Margaret Mitchell (author of “Gone with the Wind”) can be found in Uncle Anthony’s Unabridged Analogies: Quotes & Proverbs for Lawyers and Lecturers, which is available at a 10% discount to Westlaw Insider readers. Check it out!