I have heard the argument a few times over the years that the income tax is unconstitutional. To these people I always say: income tax used to be unconstitutional. The first peace-time income tax in the US was put forward in the Wilson-Gorman Tariff Act of 1894. This piece of legislation, supported by pro-free traders, was designed to lower tariffs and replace the lost revenue with a tax on incomes over $4,000 (or $101,912 in 2019 dollars). At the time, the tax would have only affected 1% of households. But lawsuits were abound and the Supreme Court of The United States ruled the tax unconstitutional. The argument against the tax came from Article 1, Section 9, Clause 4 of the US constitution which states that “No direct tax shall be laid, unless in proportion to the Census of enumeration…” What this meant was that if state A had twice as many people living in it as state B, then state A had to pay twice the amount of tax. This is cumbersome for an income tax because even though state A may be more populous, it may not have more income. Median income varies from state to state and this phenomenon was much more prevalent in the past.
So how did we get to where we are today? Afterall, I said income tax used to be unconstitutional. Well, whenever we don’t like something about the US constitution what do we do? We pass an amendment! And that’s exactly what happened in 1913; the 16th amendment was adopted and gave congress the power to levy an income tax without apportioning it among the states on the basis of population. As can be expected, the income tax was not supported by everyone. It was especially despised by the northeast, which is exactly where most of the income in the country was located at that time. In fact, New Hampshire, Vermont, Rhode Island and Massachusetts never ratified the amendment.
With the passage of the 16th Amendment, the IRS found itself with a new roll and established a personal income tax division which employed 30 people. Moreover, in 1917 they employed 524 headquarters staff and 4,529 field staff. By 1918, total staff had grown to 9,600, and it rose further to roughly 14,000, 18,000, 20,000, and 21,000 in each of the subsequent years. Not coincidentally, federal revenues grew dramatically during this time period as well. The average collection for each year in the twelve years preceding 1915 was $281 million. For the twelve years between 1915 and 1926, the average was $2.78 billion.
After looking over those numbers, one might ask just what did the federal government do with all those new revenue streams? Well, a funny thing was happening in the beginning of the 20th century: America was getting bigger! Hawaii, Alaska, Guam, Puerto Rico, the Panama Canal, and the Philippines all became US territories during this time. And the US didn’t stumble upon these land masses, they were usurped from other imperial nations which requires military clout, which requires money. Combine this with the outbreak of World War I and the vast sums of money that were being loaned to the Allied Powers, one can easily see how the US felt it was in need of a few extra bucks.