16th Amendment: Pollock's Tax Blockade and the Senate Bluff That Backfired

Got something to say to this podcast? Send a voicemail, and you might hear yourself on the next episode!

For most of the 19th century, the federal government ran on tariffs and excise taxes on goods like whiskey and tobacco. The Civil War brought the Revenue Acts of 1861 and 1862, first a 3 percent flat tax on income over $800 and then a graduated 3 to 5 percent tax, with about 60 percent of the money coming from New York, Pennsylvania and Massachusetts. That tax expired in 1872. As Gilded Age inequality grew, Greenbackers, Populists and William Jennings Bryan's Democrats demanded its return, and the 1894 Wilson-Gorman Tariff Act added a 2 percent tax on incomes over $4,000. In 1895, Pollock v. Farmers' Loan and Trust Co. ruled that taxes on rent, dividends and interest were direct taxes that had to be apportioned by state population, effectively blocking any tax on invested wealth.

In 1909, President William Howard Taft proposed a corporate tax and a constitutional amendment, and Senate Majority Leader Nelson Aldrich of Rhode Island introduced it as a tactical move to save his tariff bill, expecting business friendly state legislatures to reject it. Rising inflation, Insurgent Progressive Republicans including Theodore Roosevelt, and Woodrow Wilson's 1912 win carried it through, and Delaware became the 36th state to ratify on February 3, 1913. Later courts held that the amendment only removed the apportionment rule, and the 1955 Glenshaw Glass decision defined income as accessions to wealth clearly realized.

• Justice John Marshall Harlan dissented in Pollock, warning that invested wealth could no longer be made to support the government without amending the Constitution.
• Roosevelt's faction wanted steady revenue for a world class military that unpredictable tariffs could not fund.
• New York Governor Charles Evans Hughes warned that the phrase from whatever source derived could let Washington tax state and municipal bonds.
• Under the broad definition of income, even illegal profits are taxable, which is how prosecutors convicted Al Capone.
• In the Murphy case of 2006 and 2007, the court rejected an argument that damages for emotional distress and lost reputation were not income.