The Sixteenth Amendment, ratified in 1913, played a central role in building up the powerful American federal government of the twentieth century by making it possible to enact a modern, nationwide income tax. Before long, the income tax would become by far the federal government’s largest source of revenue. This Amendment was part of a wave of federal and state constitutional amendments championed by Progressives in the early twentieth century. The Amendment reversed an 1895 Supreme Court decision that had made a nationwide income tax effectively impossible by invoking what today seems an arcane distinction between “direct” and “indirect” taxes.
The Taxing Clause in Article I, Section 8, grants Congress the broad “Power To lay and collect Taxes, Duties, Imposts and Excises,” but Article I also provides (twice) that a “direct” tax must be apportioned among the states on the basis of population. This means that if a tax is a “direct” tax, a state with one-tenth of the national population must bear one-tenth of the total liability. It doesn’t matter whether one state has lots of whatever is being taxed (such as valuable land) and another state has very little—the states have to bear the burden according to population. That requirement makes direct taxation cumbersome, and often impossible.
For other taxes—the so-called “indirect” taxes—there is no apportionment rule. The Constitution requires only that “all Duties, Imposts and Excises shall be uniform throughout the United States.” This is a relatively easy requirement to satisfy: what’s taxed and the tax rates mustn’t vary from state to state. In the nineteenth century, most of the government’s revenue came from “duties, imposts and excises” on consumption of various goods.
Thus, whether a tax is direct or indirect has mattered—a lot. So what is a “direct tax”? At a minimum, it includes “capitations” (specifically mentioned in the Constitution and generally understood to be lump-sum head taxes—each person pays the same) and also taxes on land. The Framers thought these were “direct.” But that may be it. An early Supreme Court case, Hylton v. United States (1796), approving an unapportioned tax on carriages, said as much, and in the nineteenth century the Supreme Court upheld several other kinds of unapportioned taxes against constitutional challenges. In Springer v. United States (1881), the Court even approved the unapportioned Civil War income tax.
The world was soon turned upside down, however. In Pollock v. Farmers’ Loan & Trust Co. (1895), a badly divided Court struck down the 1894 income tax on the ground that it was direct but not apportioned.
Congress had enacted the 1894 tax as a reaction against the consumption taxes that had funded the federal government for most of its history. Consumption taxes overburdened lower-income persons. The income tax, in contrast, was structured to reach the wealthy, whose income came from investments. With Hylton and Springer on the books, almost no one thought the income tax was a “direct” tax that would need to be apportioned. Precedent aside, this would make no sense: if an income tax were apportioned among the states, a poor state with the same population as a rich state would need to bear the same total tax liability, which would mean tax rates in the poorer state would have to be higher than those in the richer state. Such a crazy tax would be a non-starter politically.
But, the Court in Pollock surprised everyone by concluding, in a 5-4 decision, that the income tax was a “direct” tax after all and, therefore, would have to be apportioned. The Court reasoned that taxing income from property was tantamount to taxing the property itself. The Court in this period was a conservative court, distrustful of what some Justices argued was an “attack upon capital”—an “arbitrary discrimination” between “those who receive an income of $4,000 and those who do not.”
Pollock was met with popular outrage. The Populists and later the Progressives put opposition to Pollock at the center of their political program. But how could they reverse it? Many argued that Pollock was so obviously wrong that a constitutional amendment was unnecessary: given a chance, the Court would admit error and overturn Pollock. But getting another case before the Court would have required Congress to enact a new unapportioned tax. That would have looked like an attack on the Court—not a good strategic move—and, anyway, who could be sure the Court would change its mind? Amending the Constitution was also risky, however. The amendment process is slow, and if the effort failed, an income tax would be delayed indefinitely.
It became clear that, if only for political reasons, an unapportioned income tax was impossible without an amendment. What form should it take? Some advocated repealing the direct-tax clauses, so that we’d never again have to ponder differences between direct and indirect taxes. But the resolution’s sponsor, Nebraska Senator Norris Brown chose instead to give Congress a new, clear power to enact “taxes on incomes”—without apportionment.
Congress passed the resolution in 1909, and the amendment was ratified four years later; Congress enacted a nationwide (unapportioned) individual income tax in 1913. The country has had one ever since, and the Supreme Court has had little reason to focus on the Amendment that makes this possible. The power to tax incomes has proved very broad.
Still, it is possible that we could in the future have another debate about “direct” versus “indirect” taxes. In Eisner v. Macomber (1920), the Court struck down an unapportioned income tax as applied to certain stock dividends, holding that they effectively fell on property, not income; other cases from the 1920s made similar distinctions. Today, most commentators think those cases are no longer good law, but they haven’t been overruled, and Chief Justice John Roberts favorably cited both Pollock and Macomber in his opinion in NFIB v. Sebelius (2012), which approved the core of Obamacare. If some future Supreme Court decides to impose new limits on Congress’s power to tax, these old characterization questions could reappear.
In the meantime, the Sixteenth Amendment matters most because it has forever changed the character of the United States government, from a modest central government dependent on consumption taxes and tariffs on imports to the much more powerful, modern government that fought two World Wars and the Cold War with the vast revenue that came from the federal income tax.
Hardly anyone agrees with this, but I think the Founders, many of them anyway, thought the apportionment rule for direct taxes wasn’t a glitch. It was intended to be a real limitation on the congressional taxing power; it worked by making direct taxation cumbersome, and often impossible. Many Founders thought direct taxation was dangerous—it lacked built-in protections against governmental overreaching—and it was therefore to be used only in emergencies like war, when revenue needs outweigh other concerns. In ordinary times the government would be funded by taxes on consumption like excises, which don’t have to be apportioned. Apportionment might have been a silly way to prevent abusive taxation, but the rule wasn’t mindless. And no apportioned direct tax has been enacted since 1861.
The Sixteenth Amendment is often said to have given Congress the power to tax income, but Congress always had that power. The question answered by the Amendment was whether an income tax is a direct tax that has to be apportioned. (An apportioned income tax would be absurd; one hopes Congress would never enact such a tax.) The Supreme Court in Pollock v. Farmers’ Loan & Trust Co. (1895), which struck down the unapportioned 1894 income tax, had said the tax was direct, at least insofar as the taxed income came from property. By making it clear that apportionment isn’t required for a “tax on incomes,” however, the Amendment made the modern, unapportioned income tax possible. That’s why the Amendment was (and is) so important.
Pollock had been a surprise because the dictum in Hylton v. United States (1796)—that the only direct taxes are capitations and land taxes—had been accepted throughout most of the nineteenth century. But, buried in its bombastic language, the Pollock majority actually did a nice job of tying its conclusion to Hylton: a tax on income from property is equivalent to a tax on the property itself.
And the Pollock Court said the unapportioned Civil War income tax, upheld in Springer v. United States (1881), largely reached income from services, not property—as if that made a difference. The services-property distinction wasn’t mentioned in Springer, but interpreting Springer in that way made it possible to strike down the 1894 tax while not repudiating precedent.
Following (or pretending to follow) precedent often makes it easier for a decision to gain acceptance, but that didn’t happen with Pollock. Because of Hylton and Springer, almost all commentators at the time thought Pollock was clearly wrong. Nevertheless, with the case on the books—whether rightly decided or not—an unapportioned income tax was impossible without a constitutional amendment.
Although motivated by Pollock, the Sixteenth Amendment was agnostic about that case’s merits. If Pollock was wrong, the Amendment was legal surplusage. If Pollock was right, the Amendment changed the law. Either way, an income tax doesn’t have to be apportioned.
But the Amendment gives its blessing only to “taxes on incomes,” and it seems that a direct tax not “on incomes” is unaffected by the Amendment (and therefore probably politically impossible today). What direct taxes remain subject to apportionment? Some have argued that the Amendment was intended to return us to the Hylton understanding—that “direct taxes” includes, at most, capitations and land taxes. Maybe so, but that interpretation accepts the suspect notion that apportionment can’t apply to forms of taxation unknown to the Founders—a peculiar way to interpret a limitation on congressional power.
This essay is part of a discussion about the Sixteenth Amendment with Joseph R. Fishkin, Professor, University of Texas School of Law, and William E. Forbath, Lloyd M. Bentsen Chair in Law and Associate Dean for Research, University of Texas School of Law. Read the full discussion here.
In any event, the Supreme Court has had no recent occasion to focus on the Amendment. The general scholarly understanding is that the taxing power is so broad that, if Congress says a tax is on “income,” apportionment isn’t required. But that view would permit Congress to define the limits on its own power. And that conception conflicts with old judicial decisions holding that, for an unapportioned tax to be protected by the Amendment, it really must be on “income.”
The preeminent example is Eisner v. Macomber (1920), where the Court struck down an unapportioned income tax as applied to certain stock dividends. Although the income tax as a whole was valid—it was direct, but exempted from apportionment by the Amendment—the Court held that the tax on stock dividends effectively fell on property, not income. During the 1920s, the Court repeatedly said that Congress couldn’t circumvent apportionment by labeling a levy an “income” tax, or hiding a non-income component within the income-tax base.
Rejected though they are by most scholars today, those old cases might still have life. In Chief Justice Roberts’ 2012 opinion in NFIB v. Sebelius (2012), upholding the Obamacare “penalty” for failure to acquire health insurance, both Pollock and Macomber were cited favorably. By citing Pollock, the Court accepted the proposition that a tax on any property (including the income from that property), not just land, is direct. (That was a slight, but reasonable, expansion of Hylton. Interest on bonds should be treated the same as rents from land.) And the citation to Macomber implied that the meaning of “incomes” may still matter: a tax isn’t on income just because Congress says it is.
But Chief Justice Roberts may not have been thinking about any of this; the citation to Macomber might just have been a throwaway. And, even if the distinctions between direct and indirect taxes and between taxes on income and other taxes retain constitutional significance, and I think they do, characterization issues have declined in importance because of the Sixteenth Amendment. The unapportioned, individual income tax is such a cash cow that Congress has little incentive to enact potentially questionable taxes—where classifying the tax as direct or indirect might be problematic—or to include something in the income-tax base that might not be “income.” Why risk repudiation by the courts with so many constitutionally safe revenue-raisers available?
If Congress does look to new sources of revenue, however—because of burgeoning budget deficits, say—the old interpretive issues may return. The Amendment isn’t of only historical significance.
The Constitution does not exist in a vacuum, sealed off from the Court and the People who interpret it and reason from it over time. To really understand what the Sixteenth Amendment is about, one needs to understand its context: the intense conflict in the late nineteenth and early twentieth century over the future of the American economic system—a conflict that still echoes today.
This was the period in American history in which powerful, nation-spanning corporations first took control of large swaths of the national economy. Think of the railroads, or monopolies like Standard Oil. These corporations were more powerful than state governments. The dynasties that owned them had great political clout and more concentrated wealth than Americans had ever seen. Inequality was rising to the point that many Americans began to fear that our constitutional democracy might be lost, replaced by an economic and political oligarchy.
In response, waves of reformers sought major changes. One was a change to the tax code. Instead of relying exclusively on consumption taxes that fell most heavily on ordinary people, the Populists and later the Progressives wanted a federal income tax that would fall most heavily on the enormous new fortunes of the era.
At the time, few thought there was any constitutional problem with an income tax. Precedents from as far back as 1796 and as recently as 1881 made that clear. But the Supreme Court, at this time, consisted primarily of lawyers from the nation’s small new legal elite. As lawyers, they had handled the work of the new large corporations and monopolies. They feared the federal income tax as a form of socialism, and in Pollock they found a way to strike it down.
The decision in Pollock provoked enormous popular outrage. As President (and future Chief Justice) Taft later reflected, “Nothing has ever injured the prestige of the Supreme Court more.” That outrage is what led to the passage of the Sixteenth Amendment. Rarely in American history has a single Supreme Court decision been so clearly and decisively rejected by the American people in this manner.
What the Sixteenth Amendment rejected was a vision of a weak federal government that could subsist only on what were essentially consumption taxes—a government that could never be powerful enough to confront, regulate, and break up the enormous new fortunes and monopolies of the Gilded Age. Instead, the Sixteenth Amendment set the federal government on its twentieth century path: a national government whose scope would frankly have been inconceivable in 1789, regulating the world’s largest economy and commanding its largest military.
Today Americans take all this for granted. It has been our constitutional order for a century.
But the conflict over the main constitutional powers of the federal government—the power to tax, the power to spend, the power to regulate Commerce, and the Reconstruction power to promote liberty and equal citizenship—has never really ended. Conflict over the power to tax could rear its head again.
This essay is part of a discussion about the Sixteenth Amendment with Erik M. Jensen, Coleman P. Burke Professor Emeritus of Law, Case Western Reserve University School of Law. Read the full discussion here.
For instance, suppose that in response to rising levels of economic inequality, Congress passes a tax on wealth. Like the income tax a century ago, a wealth tax would undoubtedly provoke outrage from wealthy people. It would also undoubtedly provoke a lawsuit claiming the tax is a “direct” tax, and therefore unconstitutional unless apportioned among the states. (No tax has been apportioned since 1861. It makes absolutely no sense, in terms of fairness or politics, to apportion any tax other than a head tax. So requiring apportionment would mean Congress cannot tax wealth.)
We think Americans, including but not limited to Supreme Court Justices, ought to read the “direct”/“indirect” distinction more narrowly, as the Court did for the first century of the nation’s history before its historic mistake in Pollock (which the people decisively repudiated in the Sixteenth Amendment). The best way to understand the “direct”/“indirect” distinction today is that the only direct tax, requiring apportionment, is a head tax. It should be up to the people, through their representatives, to decide whether to impose any other tax, such as an income tax, a wealth tax, a carbon tax, etc. Few people like being taxed, so the best check on excessive taxes is not lawsuits, but democracy.
Why read the “direct”/“indirect” distinction narrowly? The simplest and best reason is that this bit of constitutional text is part of a 1789 compromise over slavery that Americans later decisively rejected, on the battlefields of the Civil War. As Bruce Ackerman explains in his article Taxation and the Constitution, the original point of the apportionment rules for “direct” taxes was this: if the Southern states were going to get extra representatives and presidential votes because of their (completely disenfranchised) slaves, then those states should also pay extra taxes. The ratio would be the same: three-fifths. The constitutional debates make this clear. You can also see it in the text of the Constitution itself. The same sentence in Article I, Section 2, Clause 3 apportions both “Representatives and direct Taxes”—all according to “the whole number of free Persons . . . and three fifths of all other persons” (slaves) in each state.
So to summarize: For a century after 1789, the Court read the limitation on direct taxes very narrowly. In the middle of that period, we eliminated slavery, and with it the point of the original apportionment compromise. Nonetheless, in Pollock, five Justices made the ill-advised decision to revive and expand the “direct” tax apportionment rule in an effort to hobble the modern progressive state. This failed. Through the Sixteenth Amendment, the People reversed the Court. After a few feints the other way in the 1920s, such as Eisner v. Macomber, the Supreme Court has come to accept that after the Sixteenth Amendment, the federal government is no longer hobbled by any far-reaching “direct” tax rule. That is how it ought to stay.
Still, in constitutional politics, old ideas—even bad ideas—have a way of coming back around again. We agree with Professor Jensen that we may not yet have seen the last of claims arguing, Pollock-style, that the direct apportionment clause blocks the federal government from enacting some future tax.