This Day in History 11/3: The Birth of the US Income Tax

88159772Sharpen those pencils, take out your calculator and make sure you have those W-2s and 1099s ready.  The Neighborhood is celebrating April 15 five months early. 

No, we’re not insane (well, maybe a little.)

Today is the anniversary of the introduction of the U.S. Income Tax, thanks to the ratification of the 16th Amendment to the Constitution in February of 1913.  Ever since then, we as a nation have cycled through an often painful, mostly baffling ritual of filing our income tax returns.

Income taxes had been tried before, most notably during the Civil War–no Abe, you can’t deduct top hats and laudanum as a business expense.  Yet it took a constitutional amendment to finally get the ball rolling on our 1040s.  It all stemmed from deciding what exactly were income taxes–a direct tax on something, or an indirect tax based on an event. 

Under the Constitution, Article 1, Section 8, Clause 1 and Section 9, Clause 4, Congress had the right to  tax citizens of the United States, but in a uniform manner and, at first, only direct taxes on property.  Furthermore, the tax revenue would be apportioned to each state according to population.  The courts had argued that direct taxes was only taxes on people and property, and everything else was an “indirect tax.” 

The income tax, however, was another issue entirely.  Are you taxing something, as in the wages of a person?  Or are you taxing their labor, which makes it an indirect tax?

The Supreme Court struck the first blow.  In 1895, in the case of Pollock v. Farmers’ Loan & Trust Company, the court ruled that an 1894 income tax law was unconstitutional because it taxed revenue derived from property–rents, interest, and dividends–which was an indirect tax.  Congress could only tax what can be apportioned to the states, and an income tax on property was deemed impractical.  So according to the courts, you can’t have a federal income tax.

Easy there, Chief Justice.  The Congress can fix it, using the good old Sharpie of governance, the constitutional amendment.  The Sixteenth Amendment to the U.S. Constitution finally established a national income tax, which would be collected and distributed by the federal government as it saw fit, not apportioned according to population.

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.   – Amendment XVI, U.S. Constitution (1913)

irs-form-1040-1913-xl

The first 1040, from 1913

Thus was introduced the infamous 1040 form.  The 1913 form, pictured here, was a rather straightforward affair.  With the instructions, it was only 4 pages long.  Even a semi-literate immigrant could file a return.  Your average robber baron, however, was in a pickle–not much room for deducting that second horse buggy, or claiming your half-blind Irish butler as your “dependent.” 

Since Congress wisely understood that the rich want to keep as much of their money as possible, soon after the 16th Amendment came the deduction.  Today’s form, including the schedule attachments, is 13 pages of small print.  This doesn’t even include the instructions, nor your state return, which is often longer than the federal form.  Most of these forms are the deductions we file so we can get back every penny that Uncle Sam (and Blind Uncle Dave, in my state’s case) takes from us.

To that end, let’s examine some interesting deductions from some important Americans pre-1913:

George Washington: 1 elephant tusk, claimed as a “dental expense.”

John Adams: counted his brisk walk from the bedchamber to his chamber pot as his commuting costs.

Benjamin Franklin: Able to use his Elderly Tax Credit (Schedule R) since at least the French and Indian War.

Thomas Jefferson: 150 “dependents” and growing.  All without a spouse to file jointly (gasp!).

Francis Scott Key: itemized each “bomb bursting in air” in his expenses on Schedule C.

Andrew Jackson: argued at his audit that “whuppin’ dem Seminoles” was a charitable donation because he was “doin’ dem a favor.”

Frederick Douglass: listed as a capital loss on his master’s return, a capital gain on his own. 

Alexander Hamilton: set of pistols, listed as “conflict management equipment” under his expenses.

Lewis and Clark: each claimed Sacajewea as a dependent to gain the Earned Income Tax Credit. 

Crazy Horse, Sitting Bull: each claimed wiping out Custer at Little Bighorn as their donation to a retirement account for 1876.  Too bad they could only claim half the scalps.

William Tecumseh Sherman: told to itemize expenses per building burned and per rail tied.  Had a gang of runaways calculate Schedule A. 

Finally,

Abraham Lincoln: forgot to claim Ford’s Theatre tickets as a business expense.  Who knew audits were so brutal back then?

 

1 Comment

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One response to “This Day in History 11/3: The Birth of the US Income Tax

  1. Frances Hunter

    Mr. D., this was both informative and funny! Thanks for the laugh and the history lesson. As usual, when government wants to do something, they find a way to justify it and rewrite or reinterpret the law to make it possible.

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