16th Amendment Turns 100

Happy Birthday, dear 16th Amendment.

You are now 100 years old. And, what a 100 years it’s been. Before Roe v. Wade, you were aborted twice. During the Civil War, the country needed revenues, so Congress passed the first income tax. Today, war is no reason for a tax, but the Civil War tax expired after ten years, birthing the idea of temporary tax provisions.

During the 1800s, government raised revenues from excise taxes and tariffs. In 1894, thinking that those taxes caused inflation, Congress reduced tariffs by adding an income tax. The Supreme Court held that income from property such as rents and dividends could not be taxed while income from labor could be taxed. The entire law was tossed out. Your birth was a long and difficult. In 1909, Republican President Taft proposed amending the constitution to allow an income tax. It took the states four years to ratify the 16th Amendment granting Congress the “power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the . . . states.”

Once born, you grew quickly. That single sentence of the 16th Amendment has grown to a tax code of five or six million words, most dedicated to defining the word “income.” What counts? What doesn’t? What reduces it? And, at what rate? True to the Supreme Court 125 years ago, the tax code today taxes income from property at a lower rate than income from labor.

The tax code is flawed, for sure. It has become a hodgepodge of incentives that encourage certain economic behavior in exchange for lower taxes. The result is that many rich taxpayers pay lower rates than middle and lower class taxpayers. Similarly, many corporations – Exxon, Apple, and GE to name a few – report billions in profits and pay little or no tax in the US.

Over the past dozen years ago, Steve Forbes and Herman Cain have run for president proposing a flat tax, while Mitt Romney proposed lower rates. Their fundamental ideas were to eliminate incentives (loopholes) and reduce rates. The idea seems simple, but defining “income” remains exceedingly complex.

The best tax is one that neither alters taxpayer behavior nor allows taxpayers to manipulate the tax base. Taxpayers rarely make “what to do” decisions based on sales or consumption taxes or property tax. Sometimes, consumption taxes affect behavior if a lower cost option is easily available. For example, cigarette taxes of $4.25 per pack in New York encourage a black market in Virginia cigarettes with its $0.30 tax.

The proposed Fair Tax is a consumption tax-based system. “Fair” is a good marketing word, but it hits lower income taxpayers harder because they spend a higher percentage of their income on consumption – meaning they would pay more tax proportionally – than do higher income taxpayers. Instead of “income,” the code would have to define a “sale?” Would it include the sale of stocks or bonds? A house? Medical services or education? Soon, the Fair Tax would be a few million words long, and have a zillion lobbyists.

Taxes are complicated. My daughter is a CPA. She will never starve.

Anyway, Happy Birthday, Income Tax. When you blow out the candles on your cake, here’s hoping you don’t get your wish.★

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Sat, 25 Oct 2014 07:12:24 -0400

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