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Constitutional Amendments – Amendment 16 – “Income Taxes

Amendment Sixteen to the Constitution was ratified on February 3, 1913. It grants Congress the authority to issue an income tax without having to determine it based on population. The official text is written as such:

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.

In the Constitution’s original writing, the Taxing Clause in Article I grants Congress the general authority to “lay and collect Taxes, Duties, Imports, and Excises.” For “direct” taxes, Article I commands that they must be collected based on the population of the states. Before an income tax was established, the majority of funds given to the federal government derived from tariffs on domestic and international goods. The short-lived Revenue Act of 1861 predated the Sixteenth Amendment as the first official federal income tax, but it was eventually repealed in 1872. The end of the 19th century saw the beginning of the Progressive Era, a time period in which political and social reform centered on industry, voting, immigration, and several other topical issues of the time period. Levying a federal income tax became a key goal for many progressive groups, the key argument being that it was fairer for wealthy individuals to pay for the taxes and tariffs that had been largely obliged from the middle class and the poor in society. Congress passed the 1894 Wilson-Gorman Tariff Act, which contained an income tax provision of 2% on incomes of over $4,000 (equivalent to $135,951.63 in 2022 U.S. Dollars). Supporters of this new income tax argued that it was not specifically a “direct” tax, which would require it to be apportioned among the states. Two previous Supreme Court decisions supported this theses, but the 5-4 decision in 1895’s Pollock v. Farmers’ Loan & Trust Co. ruled that the income tax in the Act was a “direct” tax. The core argument was that the income tax in the Act was sourced from deriving income from an individual’s property. Based on this, the Court asserted that “direct” taxes included any sort of income tax on rents, dividends, and interest, therefore making them legally required to be apportioned among the states. Read More

Written by TaxConnections Admin | Posted in Congress • Constitutional Amendment 16

Congress Readies New Round of Tax Increases

Background.

The House Committee of Ways and Means (the “House”) has been busy the last few days. Indeed, the House continues to mark up and work through potential revenue raisers (i.e., tax increases) to help pay for recent legislative proposals. Although these proposals are not yet law, tax professionals should keep a careful eye on the proposals to ensure that they do not potentially interfere with their client’s tax planning. At a very minimum, tax professionals should be knowledgeable enough to discuss the proposals with their clients and how such proposals (if eventually enacted into law) would impact their clients’ overall goals and objectives.

Income Tax Rates.

Increasing income tax rates is generally the easiest way to raise additional revenue for the government. And, the proposals are no different in proposing additional income tax increases. These potential increases are discussed below.

Individual Income Tax Rates.

Individual income tax rates are currently housed in section 1 of the Internal Revenue Code of 1986, as amended (the “Code”). The Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97 (the “TCJA”) reduced income tax rates for individuals. Under the TCJA, the top income tax rates for tax years 2018 through 2025 were reduced from 39.6 percent to 37 percent. However, the reduced rates were not permanent and were set to sunset in 2026, i.e., the top rates were set to revert back to 39.6%.

The House proposal seeks to increase these reduced rates from 37 percent to 39.6 percent for the 2022 and later tax years. In addition, the proposal seeks to bring more high-income earners into the higher marginal tax rate of 39.6 percent through a reduction of income subject to the higher rate. For example, under existing law, taxable income of over $538,475 for a single individual is taxed at 37 percent. Under the proposal, taxable income over $501,250 would be taxed at 39.6 percent for a single individual.

Corporate Income Tax Rates.