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Sunday, February 3, 2013

Happy 100th Anniversary 16th Amendment

Today - February 3, 2013, marks the 100th anniversary of the ratification of the 16th Amendment which allowed for an income tax. The complete text follows:

"The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration."

Click here to see a copy of the Amendment and a copy of the 1913 personal income tax form.

Without the amendment, a personal income tax was not within the confines of the congressional taxing authority. In 1911 though, the US Supreme Court upheld the corporate income tax as a permissible excise tax (Flint v. Stone Tracy Co., 220 U.S. 107 (1911)).

The income tax enacted soon after ratification of the 16th Amendment had many features we still have today such as consideration of business expenses and a standard deduction for individuals. The standard deduction was $3,000 ($4,000 if married).

The rate structure and exemption was such that few individuals owed tax.The tax rate for individuals was 1%. There was a surtax for higher income individuals:
  • 1% on net income over $20,000 and not exceeding $50,000
  • 2% on net income over $50,000 and not exceeding $75,000
  • 3% on net income over $75,000 and not exceeding $100,000
  • 4% on net income over $100,000 and not exceeding $250,000
  • 5% on net income over $250,000 and not exceeding $500,000
  • 6% on net income over $500,000
Returns were due March 1.

Some things that have changed since 1913:
  • Individual returns are now due April 15.
  • In 1913, a person with $3,000 or less of income ($4,000 if married), owed no tax. The $3,000 of 1913 equates to about $69,573 today.  For 2012, a single person under age 65 owes income tax once their income exceeds $9,750 ($11.200 if age 65 or older).
  • In 1913, the top rate of 6% kicked in on net income over $500,000. For 2012, the top rate of 35% kicks in for a single person when income is $388,350.  That $500,000 of 1913 equates to $1,393,000!
  • In addition to today's income tax, employees and self-employed individuals pay payroll taxes of 15.3%.
So, yes, we pay a lot more tax today than in 1913 and a much greater percentage of the population owes income tax than in 1913.  The number of individuals subject to income tax grew during WWII as more revenue was needed to fund the war effort (and it was viewed as patriotic to pay your taxes).

Some additional information you may find of interest:
  • GPO report on the 16th Amendment and "income" - here
  • Historical highlights of the IRS (a timeline from the IRS) - here
  • History of the IRS (from the IRS) - here
  • Tax history from CRS (2001) - here
  • Tax History Project from Tax Analysts - here

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