A:

The story of income tax is ripe with stops, starts and court battles. Due to British taxation being one of the triggers that set off the fight for independence, the American Constitution stated in the first draft that citizens should not be subject to direct taxation.
Despite this, the first income tax in the U.S. was invoked to pay for the Civil War. Upon the conclusion of the war, this unconstitutional tax was repealed but it gave the government a taste for the revenue that income tax could raise. A new income tax was introduced in 1894, ostensibly to make up for lost revenues from reductions to U.S. tariffs. This tax was taken before the Supreme Court and was declared unconstitutional in the case Pollock v. Farmers' Loan and Trust Co.

To counteract this defeat, the government drafted the 16th Amendment stating, "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." The amendment was ratified in 1913, clearing the legal hurdles to an income tax. Unsurprisingly, an income tax was levied that very year. The legislation was again taken up in front of the Supreme Court. On January 24, 1916, the court ruled that income taxes were now legal due to the constitutional changes. From that time forward, income tax has become a regular fixture. Long before the permanent imposition of income tax or, worse yet, pay-as-you-go income tax, Benjamin Franklin lamented, "nothing is certain but death and taxes." Since then, medical advances have made headway on at least delaying death, but we've consistently lost ground on the taxes. (To learn more, check out our Investopedia Special Feature: Income Tax Guide.)

This question was answered by Andrew Beattie.

RELATED FAQS
  1. Who first came up with the idea of a progressive tax?

    Learn how the progressive income tax system developed in the United States and became the federal government's primary revenue ... Read Answer >>
  2. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
  3. How does the marginal tax rate system work?

    The marginal tax rate is the rate of tax that income earners incur on each additional dollar of income. As the marginal tax ... Read Answer >>
  4. How are effective tax rates calculated from income statements?

    Learn how to read an income statement and how to find the information necessary to calculate a company's effective income ... Read Answer >>
  5. How can I lower my effective tax rate without lowering my income?

    Discover how to reduce your effective tax rate without losing income by maximizing adjustments and deductions, earning tax-free ... Read Answer >>
Related Articles
  1. Taxes

    Understanding Income Tax

    Income tax is a levy many governments place on revenue of entities within their jurisdiction.
  2. Taxes

    Paying Uncle Sam: From Tobacco To $1 Trillion

    The services we rely on, like education, law and security, were built on taxes.
  3. Taxes

    The Court Cases That Have Shaped US Sales Tax Law: How They Apply Today

    Explore two Supreme Court cases that established legal precedent for the treatment and apportionment of sales taxes at the state level.
  4. Financial Advisor

    3 Federal Income Tax Facts You Didn't Know

    Learn about three federal income tax facts that most Americans may not know from one of the most trusted financial resources on the Web.
  5. Taxes

    How Will Raising Taxes on the 1% Make a Difference?

    What would happen if taxes were raised (even by a small degree) on the highest earners?
  6. Taxes

    Why America's Taxes Are Too Low

    The solution to America's economic woes may not be in lowering taxes further, but may, in fact, lie in increasing them.
  7. Taxes

    Explaining Double Taxation

    Double taxation refers to income taxes being imposed twice on the same source of earned income.
  8. Taxes

    The Unseen Taxes That You Pay Every Day

    Taxes are embedded in the price of everything we buy to an extent that most people don't even realize.
  9. Taxes

    Comparing Regressive, Proportional and Progressive Taxes

    Learn about the basic differences between three common tax systems.
  10. Taxes

    What's a Marginal Tax Rate?

    The marginal tax rate is based on a progressive tax system, where tax rates for an individual will increase as income rises. This method of taxation aims to fairly tax individuals based upon ...
RELATED TERMS
  1. Sixteenth Amendment

    The amendment within the Constitution that gives Congress the ...
  2. Income Tax

    A tax that governments impose on financial income generated by ...
  3. Direct Tax

    A tax that is paid directly by an individual or organization ...
  4. Federal Income Tax

    A tax levied by the United States Internal Revenue Service (IRS) ...
  5. Tax Base

    The assessed value of a set of assets, investments or income ...
  6. Effective Tax Rate

    The average rate at which an individual or corporation is taxed. ...
Hot Definitions
  1. Redlining

    The unethical practice whereby financial institutions make it extremely difficult or impossible for residents of poor inner-city ...
  2. Nonfarm Payroll

    A statistic researched, recorded and reported by the U.S. Bureau of Labor Statistics intended to represent the total number ...
  3. Conflict Theory

    A theory propounded by Karl Marx that claims society is in a state of perpetual conflict due to competition for limited resources. ...
  4. Inflation-Linked Savings Bonds (I Bonds)

    U.S. government-issued debt securities similar to regular savings bonds, except they offer an investor inflationary protection, ...
  5. Peak Globalization

    Peak globalization is a theoretical point at which the trend towards more integrated world economies reverses or halts.
  6. Phishing

    A method of identity theft carried out through the creation of a website that seems to represent a legitimate company. The ...
Trading Center