The power to collect income tax is found in the Constitution of the United States. Article 1, Section 8, Clause 1 (Also known as the Taxing and Spending Clause) sates: “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;”
In 1913, the Sixteenth Amendment to the U.S. Constitution was ratified. It states: “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.”
Case Law Prior to the Sixteenth Amendment:
Article I, Section 9 of the U.S. Constitution states: “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken.” In 1894, Congress passed the Wilson-Gorman Tariff, which created an income tax of 2% on income of over $4,000. Charles Pollock contested that the tax was unconstitutional under Article 1, Section 9. As such, the Supreme Court granted certiorari to hear this issue in Pollock v. Farmers’ Loan and Trust Company (1895) .
In Pollock , the Court held that the Wilson-Gorman Tariff was unconstitutional under Article I, Section 9 of the Constitution, as the act created a direct taxation on property owners, not a tax apportioned among the states.
McCulloch v. Maryland (1819):
In 1816, Congress chartered The Second Bank of the United States. Although the bank was largely privately-owned, it was incorporated by Congress. In 1818, the state of Maryland passed legislation to impose taxes on the bank. James W. McCulloch, the cashier of the Baltimore branch of the bank, refused to pay the tax
Overall, the Court found that Congress possessed the authority to create the bank based on their Spending and Taxing power in conjunction with the Necessary and Proper Clause . Additionally, the Supremacy Clause in the Constitution makes federal laws supreme to state laws, and thus prohibits states from enacting laws contrary to federal laws. Consequently, Maryland’s tax was unconstitutional.
“The State governments have nomer right to tax any of the constitutional means employed by the Government of the Union to execute its constitutional powers.”
“The States have nomer power, by taxation or otherwise, to retard, impede, burthen, or in any manner control the operations of the constitutional laws enacted by Congress to raise into effect the powers vested in the national Government.”
Passage of the Sixteenth Amendment:
In 1913, the passage of the Sixteenth Amendment effectively overturned the holding in Pollock . The Revenue Act of 1913 , passed after the Sixteenth Amendment’s ratification, reinstated the federal income tax.
Income Tax Today:
The Internal Revenue Code is today embodied as Title 26 of the United States Code ( 26 U.S.C. ) and is a lineal descendant of the income tax act passed in 1913, following ratification of the Sixteenth Amendment. Most states also maintain an income tax, while some do not. However, all residents and all citizens of the United States are subject to the federal income tax. Not everyone, however, must file a tax return . The requirements for filing are found in 26 U.S.C. § 6011 . The purpose of the federal income tax is to generate revenue for the federal budget. In 1985 for example, the government collected over $450 billion in income tax from a total of $742 billion in total internal revenue receipts. What an individual pays in income tax is subject to what that person’s income is.