A Discussion of Oliver DeMille’s 1913 Chapter 2 “World-Shifting Event #1: The Sixteenth Amendment”
Yes, there once was a time when you did not have to pay federal income taxes! But the Sixteenth Amendment passed in 1913 changed that.
This is Oliver DeMille’s second chapter on the dramatic changes to the US system in 1913. Last chapter discussed some of the overall issues while this one focuses on the sixteenth amendment.
The Constitution set things up so that the federal government could not enact a direct tax on the citizens. Instead, it had to rely on indirect taxation, which means the states would tax their citizens and then send the money to the federal government.
Specifically, this is detailed in Article I, Section 2 of the US Constitution. Once the federal government determines its funding needs, it determines how much each state owes, based on its population, which is called “apportionment.” (p. 35)
This created a natural check on the federal government by the states because Washington would have no recourse if the states were to refuse to fund the budget. It could argue, vote, issue executive orders, and deliver Supreme Court decisions, but if the states stood firm together, the federal government would eventually have to give in to the states or lose its funding. (p. 27)
That is a stark difference from today for sure, which gives you some insight to the scale of the impact of this amendment on the expansion of the power of the federal government.
Essentially this ended the federal system that the Constitution had designed that had the power of the states equal to the power of the federal government, giving us “more of a national model” we know today with the states depending on the federal government. (p. 29)
Direct vs. Indirect Taxation
This is not an issue many of us have thought about it, but it mattered a great deal to the founders of our country.
Taxation was the most covered topic in the 85 Federalist Papers that were published to create support for the ratification of the Constitution. Nearly 15% of the essays dealt with taxation issues. (p. 29)
It was important to the founders that the federal government could not impose direct taxes on the people. A direct tax is when the government that is going to spend the money is getting it directly from the taxpayer, like our federal income tax today. (p. 29)
An indirect tax is when the government that is going to spend the money is getting it through an intermediary, like our sales taxes at the state level. Sales taxes are collected from consumers by businesses who then send the money to the government. (p. 29)
What makes it an indirect tax is that the people and the government officials never interact. (p. 30)
Our founders were motivated by the government abuses they had seen by the British during America’s colonial days. They did not want there to be an IRS type agency directly interacting with the people.
Thus, they pushed strongly for indirect taxes, where the taxpayer would pay their taxes to the state government, which would serve as a buffer between the citizens and the federal government. Part of this was the principle of avoiding a conflict of interest. This means that when the entity that gets to keep and spend the tax money also has the power to directly collect it from the citizen, it will naturally be less fair than a third party which collects the tax but doesn’t get to keep it. With this conflict of interest removed, freedom increases. (p. 30)
To quote the wise poet/philosophers of 1991, C+C Music Factory, this issue, now that it has been raised is definitely one of the “things that make you go hmmm…”
This was not just theory to the founders; they had seen the repercussions of two systems side by side. The British Empire had direct taxation over Ireland but not Scotland. (p. 31)
Scotland had its own parliament and collected taxes from its people, and then had to send some of that to British crown. This provided the protection of an indirect tax so the Scottish people had a buffer “from the excesses of British government agents, military recruiters, and tax collectors.” (p. 31)
Ireland, on the other hand, paid their taxes directly to the British agents, and their people suffered some of the ill treatment our founders were trying to protect us from such as “arrests, intrusions, and collection of their private papers and records without warrant any time a government officer wanted to make things difficult for them.” (p. 32)
Understanding this, we get new insights into the minds of the American colonists. Not all wanted to split from Britain; some would have been happy to stay a part of the empire if they could have an independent parliament like Scotland. (p. 31)
It also sheds light on what was at stake in the Boston Tea Party. Britain established a direct tax on tea in America, which indicated America was heading for the Irish model, not the Scottish model. (p. 32)
Given all this history, we can understand why it was important to the founders to keep the power of direct taxation away from the federal government.
They didn’t want to be slaves to Washington like the Irish people had become enslaved to London. They explicitly wanted to be independent in each state following the Scottish model. Thus, the founding generation chose to only allow state governments to directly tax, and they kept the power of the federal government at bay by not allowing it to collect direct taxes. (p. 33)
Conclusion
The founders had a specific list of enumerated powers for the federal government.
James Madison noted in Federalist Paper #41 that the federal government would be tempted to go beyond these powers. (p. 37) Clearly we see that today.
Access to revenue from a direct income tax is one of the reasons the government has been able to escape its constitutional limits.
Congress had tried once before to enact an income tax in 1894 that would have placed a 2% flat tax on incomes of the wealthy. (p. 37) At that time, it came before the Supreme Court who ruled it unconstitutional.
It would take an amendment to gain this power, and that is what they got 19 years later.
Many have written about the history of this drastic change in the American system. Some have focused on the aristocratic forces that pushed for this from behind the scenes, and others have suggested that the amendment was never appropriately ratified. But regardless of such arguments, we have lived under the Sixteenth Amendment for a century now, and the results have been negative to American freedom and prosperity. (p. 38)
Reference: DeMille, Oliver, 2012. “World-Shifting Event #1: The Sixteenth Amendment” Chapter 2 of 1913, Obstacles Press, Inc., Flint, Michigan.
