Faulty Interpretation
The standard narrative, from its opponents, of how we got the income tax goes something like this: For the first one hundred years of our history the federal government was financed mostly by tariffs, taxes on imports. Then the progressives decided that taxing the incomes of the rich would be "fairer", so they began a drive to replace the tariff with a small income tax which was paid mostly by the wealthy. However the progressives were tripped up by the heroic Supreme Court which ruled in the1894 Pollock case that income taxes were unconstitutional. The progressives struck back with 16th Amendment in 1913 which permitted an unapportioned direct income tax. At first the income tax was small and borne by the wealthy but has grown to the current ubiquitous nightmare.
If the above is accurate, then one might draw the conclusion that repealing the 16th Amendment would bring us back to the halcyon days of Congressmen wrangling over how high the tariff should be with no intrusive income tax. The problem is that the above is not accurate and repealing the 16th Amendment would likely have little effect on our current tax code, at least little effect which would be predictable. The root of the problem with the standard narrative is a misunderstanding of the Pollock case.
Getting It Right
Rather than ruling the entire tax law of that year, which included an income tax, unconstitutional, the court ruled only one particular part of the tax bill unconstitutional; the entire bill was then thrown out on the idea that removing only the offending section would have fundamentally altered the intent of Congress in passing the bill. The offending section was a tax on rental income from real estate. The rationale to declare this tax unconstitutional was novel--an example of judicial activism--and it overthrew one hundred years of understanding of taxation under the Constitution going back to the 1796 Hylton case.
Essentially the court said that a tax on rental income from real estate was in effect a tax on the real estate itself; this is a winning argument on purely economic grounds but is a loser under the Constitution. Taxes on the value of property are, under the Constitution, direct taxes that must be apportioned (divided equally) among the states--only property taxes and head taxes (capitations) are direct taxes. No historical instance of the federal government resorting to direct taxation comes to mind. All other forms of taxation are, Constitutionally, indirect and must be uniform throughout the states, e.g. Charleston cannot charge a lower tariff than Boston. The reasoning of the Pollock court took a tax on rental income which had always been understood to be an indirect tax and made it a direct tax on real property. Its lack of apportionment made it unconstitutional. Again, this was a novel argument.
The problem that the Pollock argument presented to Congress in creating future tax law was that virtually any tax, formerly thought of as indirect, could be turned into a direct tax by considering its source. Hence a tax on income from any business activity could be thought of as a direct tax on the property used in the business. This rationale may indeed have had the salutory effect of limiting the federal power of taxation, especially on business and rental income. It did not seem to have the effect of limiting the power to tax wages. In fact the Pollock court left standing wage taxes in 1894. The court threw out the entire tax bill because Congress meant to tax mostly the rich but taxed primarily the poor after the tax on rental income was ruled unconstitutional.
In a purely Constitutional sense, the 16th Amendment was a conservative amendment. It did nothing more than prevent the use of the novel rationale of the Pollock case, i.e. a tax on income from property (the source of the income) was in effect a tax on the property itself. It re-established the formerly clear line between direct and indirect taxes which Pollock had blurred. As the Supreme Court said, and tax protestors have misinterpreted, the 16th Amendment conferred no new power of taxation--from the case Stanton v. Baltic Mining Co. (1916):
“..by the previous ruling [in Brushaber] it was settled that the provisions of the 16th Amendment conferred no new power of taxation, but simply prohibited the previous complete and plenary power of income taxation possessed by Congress from the beginning from being taken out of the category of INDIRECT taxation to which it inherently belonged, and being placed in the category of direct taxation....”
Conclusion
The income tax was never meant to be what it is today. "Income", one hundred years ago, was something a wealthy patrician earned passively while sipping brandy in one of his mansions. It was investment earnings. The drive to replace tariffs, which were thought to bear on the poor more heavily, with a "soak the rich" income tax was pure class warfare from the so-called Progressive Era. Today's system of withholding taxes from our wages did not come about until World War II, the brainchild of one Milton Friedman (this perhaps ironic depending on your view of him).
So what does it all mean today? Income tax opponents need to come to terms with the fact that there was no glorious time of income tax (as we think of the term today) unconstitutionality before the 16th Amendment. The current system of tax withholding would be unharmed by its repeal. The question of how and how much we are taxed is political one. Anyone who wants to influence tax policy must make economic arguments to influence the politically powerful, not arguments from faulty constitutional theories. My hope is that those who want lower taxes will stop undermining their otherwise good arguments by referring to a glorious bygone era of Constitutional orthodoxy that never existed.
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