The Purpose and Powers of the Senate, Part XXVIII: “Indispensable to the Nation's Life”

    The 16^th Amendment would seem to among the most commonly overlooked of its brethren. It was the final amendment to be drafted before the state legislatures lost their access to the drafting process itself, which makes it highly significant to the discussion currently underway in these pages. But its object is not what one might particularly call thrilling. The text of it reads, in full:

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.

Again, hardly thrilling. Indeed, quite mundane. And yet, the 16^th Amendment has proven to be exceptionally consequential. It is a product of its era, to be sure, being the brainchild of populism and imperialism in more or less equal measure. But beyond its particular historical significance, it also inarguably forms the cornerstone of the funding regime underpinning the modern American republic. Without the ability to collect taxes on personal incomes “without regard to any census or enumeration,” the United States Government would not be able to borrow the increasingly large sums of money which have come to constitute one of its primary sources of revenue and it would accordingly have been unable to fund most of the initiatives it has undertaken over the course of the last century. Without the 16^th Amendment, in short, the American republic would be but a shadow of the global power which the modern world has come to know. Say about this what you will – whether you believe a globally dominant United States is good for the world or not – but the historical significance of the thing would seem next to impossible to deny. Bearing this in mind, it would accordingly appear to be a line of inquiry worth pursuing precisely how the amendment itself came about. Who favored it, and why, and what did they ultimately hope to achieve?

    In order to answer these questions – and in order to satisfy the broader purpose of the inquiry currently underway – we must return once more to the so-called “Progressive Era” of American politics. Or rather, we must return to the Progressive Era…eventually. The amendment itself, after all, was approved by Congress in the summer of 1909 and was ratified by the requisite number of states at the beginning of 1913. But the story of how the whole initiative came about actually extends back at least as early as the 1860s. During the Civil War, it seems, in order to fund what would soon prove to be a truly gargantuan war effort, Congress passed the first of what would soon become several federal Revenue Acts. Introduced at various points between 1861 and 1865, these acts initially levied and then increased the first federal income tax in the history of the American republic, the proceeds of which would at their height account for approximately one-fifth of the annual federal revenue. Intended to compensate for increased personal investment in stocks as opposed to property – the latter of which the federal government had been freely taxing for decades – the levy took the form of a simple flax tax – three percent, initially – on personal incomes in excess of eight hundred dollars. As an emergency measure needed to see the nation through a disastrous and unprecedented war, the American people were evidently willing to tolerate such an intrusion into their personal financial affairs. And at length, by way of the Springer v. United States decision in 1881, the Supreme Court came around to acknowledging the measure as being in keeping with the Constitution. But none of this meant that income tax was going to continue to be collected indefinitely. By the time the Revenue Act of 1864 came time to be renewed in the early 1870s, Congress declined to do so on the grounds that such levies were no longer necessary. The war was over, the state of emergency had passed, and there just didn’t seem to be any cause for the federal government to continue collecting more than the standard mix of tariffs and property taxes.

    Enter, twenty years later, the administration of Grover Cleveland (1837-1908), the first Democrat elected to the office of President since 1856. Cleveland and his allies had made a general lowering of tariffs a major campaign promise during the leadup to the Election of 1892, and once in office proceeded to follow through on their pledge with the drafting of a major tariff bill in 1894. As the intended reduction in taxes upon raw materials would have also, in isolation, resulted in a reduction in federal revenues, however, certain among the Democrats who then controlled Congress sought to compensate by additionally levying a relatively modest federal income tax. This would constitute the first federal income tax in two decades, it was true, and the first ever to be collected outside of a period of national emergency. But in practical terms, on a per capita basis, it was substantially less onerous than its Civil War-era predecessors. Applying only to incomes in excess of four thousand dollars – and including dividends, gifts, and inheritances – the federal government would collect a mere two percent for itself. Not every Democrat within the contemporary party caucus was necessarily in favor of this attempt to balance the federal books, it bears noting. Indeed, many of them were far more concerned with simply lowering the tariffs and were willing to tolerate the corresponding tax increases – foisted upon them by populist Congressmen William Jennings Bryan (1860-1925) and Benton McMillin (1845-1933) – only because they suspected that the Supreme Court would strike them down. This, as it happened, is just what the Supreme Court ultimately did.

    Following the passage of the resulting Wilson-Gorman Tariff Act in 1894 – so named for its co-sponsors, Congressman William Wilson (1843-1900) and Senator Arthur Gorman (1839-1906) – a New York-based bank called the Farmers’ Loan & Trust Company determined to comply with the act on behalf of its various shareholders. Not only were the bank’s directors intent on delivering the applicable percentages to the Department of the Treasury, but they also intended to provide to this same body the names of every individual whose income was thus being taxed. Among these individuals, a man named Charles Pollack then raised an objection. Though he owned, in total, only ten shares in the bank, he did not want them unilaterally disposing of any portion of his income. Accordingly, he brought suit. And while his case was initially dismissed when it found its way into the federal circuit courts, Pollack then appealed to the Supreme Court, which delivered its ruling in the spring of 1895. The substance of the opinion, as written by Chief Justice Melville Fuller (1833-1910), was that while taxes on incomes alone were perfectly permissible under the terms of the Constitution – in keeping with the Court’s aforementioned Springer v. United States decision – taxes on incomes derived from dividends, rents, or interest decidedly were not. The reason for this, as Chief Justice Fuller explained it, was that an income derived from the ownership of a type of property – be it a piece of land, a building, or a share of stock – could not be legally separated from the property itself. Income derived from property, after all, was but an extension of whatever value that the property in question may have held. Taxes on property income were therefore tantamount to direct taxes, which, according to Article I, Section 2 of the Constitution, “Shall be apportioned among the several States which may be included within this Union, according to their respective Numbers [.]” While all other types of incomes could be taxed in the form of an excise, therefore, incomes derived from property had to be treated like property. The relevant portion of the Wilson-Gorman Act was therefore null and void.

    The Pollock v. Farmers' Loan & Trust Company (1895) decision did not turn out to be a particularly popular one among large swaths of the contemporary American political class. Indeed, at a time when members of both parties were increasingly concerned with things like inefficiency, waste, corruption, wealth inequality, and the rise of corporate monopolies, Chief Justice Fuller’s ruling that the primary incomes of some of the nation’s wealthiest citizens were practically immune from taxation did not land very well at all. The Democratic Party, for one, had become increasingly intertwined with the contemporary populist movement, the primary supporters of which were agrarian westerners who felt that an overreliance on tariffs would only end up punishing poor farmers and laborers. The industrialized East was where most of the nation’s wealth was concentrated, and yet it was the comparatively impoverished South and West where people would end up sacrificing a larger portion of their incomes in paying taxes on the goods they needed to survive. The Democrats accordingly made a meal out of the Pollack ruling, going so far as to include a federal income tax plank in their platform leading up to the Election of 1896 and choosing the aforementioned William Jennings Bryan as their nominee for President.

    Many progressive Republicans were also mightily displeased at the outcome of the Pollack case, though the nature of their disapproval had its roots in a different source. Whereas populist Democrats were concerned primarily with wealth inequality, Republicans like Robert La Follette (1855-1925), Theodore Roosevelt (1858-1919), and Norris Brown (1863-1960) saw the era’s increasingly large and powerful corporations as representing the single greatest threat to the prosperity of the American citizen. So long as these entities were permitted to continue growing unchecked, these men avowed, they would eventually form monopolies which no force on Earth could counter and whose primary victims would be the consumers forced to pay whatever rates their corporate overlords set. By disallowing the taxation of things like dividends and interest – absent a practically unworkable scheme of state-by-state apportionment – Pollack effectively helped to aid this process along by allowing corporations to drain more wealth out of the country than they could ever pay back in tariffs. But while Republican lawyers and statesmen began notching out victories in the states against various species of corporation – see La Follette’s battles with the railroads during his tenure as Governor of Wisconsin and Roosevelt’s support for the Ford Franchise-Tax Bill (1899) as Governor of New York – similar success at the federal level continued to elude them in the wake of the Pollack ruling. As long as Chief Justice Fuller’s decision was still the last word on taxing property incomes, there seemed to be no point in even broaching the subject in Congress.

    Events finally took a significant turn in favor of reform in the spring of 1909 following the inauguration as President of Republican William Howard Taft (1857-1930). In a special message to Congress in July of that year, Taft drew attention to the Pollack decision, what he perceived to be its negative impact on domestic tax policy, and the need for some manner of remediation. “The decision of the Supreme Court in the income-tax cases,” he notably declared,

Deprived the National Government of a power which, by reason of previous decisions of the court, it was generally supposed that Government had. It is undoubtedly a power the National Government ought to have. It might be indispensable to the nation's life in great crises. Although I have not considered a constitutional amendment as necessary to the exercise of certain phases of this power, a mature consideration has satisfied me that an amendment is the only proper course for its establishment to its full extent. I therefore recommend to the Congress that both Houses, by a two-thirds vote, shall propose an amendment to the Constitution conferring the power to levy an income tax upon the National Government without apportionment among the States in proportion to population.

Unsurprisingly, this call for an income tax amendment by the leader of their party roused many progressive Republicans to begin pursuing exactly that. Ultimately, it was the aforementioned Senator Brown who succeeded in drafting the requested reform. But its successful passage through Congress was only made possible by a major split then threatening to tear the Republican Party apart.

    Taft’s message, it bears noting, had been delivered at a time when his party both held the majority in both houses of Congress and was also in the midst of a rather punishing debate about federal tariffs. Progressive Republicans like Senators Norris and La Follette were for their part favor of lowering most tariffs, as were populist Democrats from the South and West. Tariffs, they all agreed, disproportionally impacted the poorest members of American society while raising far less in federal revenues than other kinds of taxes might. Conservative Republicans, meanwhile, held protectionism to be a core tenet of the Republican Party gospel. As explained by men like Nelson Aldrich (1841-1915), majority leader and chairman of the Senate Finance Committee, tariffs protected the profits of American business, ensured high wages for industrial workers, and prevented American farmers from being undercut by foreign competition. In the immediate, given this division, there did not seem to be much hope for compromise. When Republican Congressmen Sereno Payne (1843-1914) put forth an initial proposal that would have seen tariffs lowered across the board, Senator Aldrich offered a counterproposal that would have lowered fewer tariffs and actively increased several more. Progressives then responded with a proposal straight out of Taft’s address. It was the duty of the those who aimed to lower federal tariffs, he said, in light of what he described as the “rapidly increasing deficit […] to arrange the duty so as to secure an adequate income, and […] that if it was not possible to do so by import duties, new kinds of taxation must be adopted [.]” A tax on inheritances was Taft’s first choice, but as this seemed to be something of a non-starter with Senate Republicans, he was instead inclined to suggest, “An amendment to the tariff bill imposing upon all corporations and joint stock companies for profit […] an excise tax measured by 2 per cent on the net income of such corporations.” Not only would this serve as, “An excise tax upon the privilege of doing business as an artificial entity” but it was calculated to, “Bring into the Treasury of the United States not less than $25,000,000.” With a newly inaugurated President thus urging them on, progressive Republicans accordingly inserted just such an amendment into the tariff bill.

    It was at this point that Senator Aldrich attempted a little slight-of-hand. With the Republican caucus thus split and his leadership in the Senate under threat, he decided to offer his progressive opponents something on the order of a trade. In exchange for their support of his version of the tariff bill – with included more increases than decreases as well as a tax on corporate incomes – he was willing to throw his own weight behind the draft income tax amendment that Senator Brown was attempting to promote. In actual fact, he was not in favor of any such alteration to the Constitution. Like many Conservative Republicans, Aldrich was too much of a friend to big business to believe taxing their dividends to be in the least bit desirable. But what the Senator from Rhode Island was betting on was that the amendment would never be ratified. He could stomach – and would stomach – an excise tax on corporate incomes, but he would only vote for Senator Brown’s beloved amendment because he believed it was doomed to failure. On July 12^th, 1909, this wager was put to the test, with a unanimous affirmation in the Senate and a vote of 318-14 in the House The progressive Republicans came around, conservative Republicans held firm, populist Democrats jumped at the opportunity, and protectionist Democrats voted their interest. Nearly everyone, it seemed, had got what they wanted. Now it fell to the states to prove Senator Aldrich right or wrong.

    Obviously, given that the 16^th Amendment is what it is, Senator Aldrich was wrong. Not only were state legislatures in the South and West already inclined to support any such measures as would obviate the need for the punishing federal tariffs which their primarily agrarian inhabitants actively struggled to pay, but a sharp rise in commodity prices that had begun in the late 1890s also primed states in the Midwest and even the Northeast to respond favorably as well. In addition, there also existed an increasingly influential segment of the Republican Party inclined to view an undifferentiated federal income tax as an essential ingredient in the national program that they envisioned. Described by faction leader and former President Theodore Roosevelt in a speech in 1910 as the “New Nationalism,” this program included the creation of a national health service, social insurance, farm relief, and worker’s compensation, all of which was to be accompanied by a general strengthening of the American military with an emphasis on protecting the American merchant fleet. Absent some means of funding such measures, of course, any one of them might have proven to be ruinously expensive. In consequence, Roosevelt Republicans were also strongly in favor of a robust regime of inheritance taxes and federal income taxes by which their vision of a new America for the 20^th century might be placed on a stable footing. In light of the support increasingly enjoyed by the likes of Roosevelt – whose popularity grew in proportion as that of his hand-picked successor, Taft, waned – the only group left inclined to vote against ratifying Senator Brown’s amendment were diehard conservative Republicans like Senator Aldrich and his supporters. And as 1909 progressed through to 1913, this faction’s influence steadily evaporated.

    The actual progress of ratification makes for a rather interesting tale. In the first year after the amendment’s approval, from August of 1909 to August of 1910, only nine states saw their way clear to providing their affirmation. But among that small number were exactly the states one would expect to find at this early stage: Alabama, Kentucky, South Carolina, Illinois, Mississippi, Oklahoma, Maryland, Georgia, and Texas. All but Illinois were located in the South, and all were primarily agrarian in terms of their economy. In light of their aforementioned antipathy towards the continued imposition of federal tariffs, their support for a federal income tax was more or less a given. The next stage in the ratification process took place between January of 1911 and July of that same year, during which time no fewer than twenty-two states added their own affirmations to the record. Among these twenty-two were seven from the West – Idaho, Oregon, Washington, Montana, California, Nevada, and Colorado – ten from the Midwest – Ohio, Indiana, South Dakota, Nebraska, North Dakota, Michigan, Iowa, Kansas, Missouri, and Wisconsin – three from the South – North Carolina, Tennessee, and Arkansas – and one – New York – from the Northeast. Again, most of the enthusiasm seemed to come from regions of the country most likely – due to the nature of the local economy – to favor a shift from taxes on commodities to taxes on incomes, with only one state from the region which benefitted from a reliance on tariffs chiming in at the very end.

    The next five states to ratify the amendment were also something of a mixed bag. There was Arizona, in the Southwest, which had only just become a state and was dominated by the Democratic Party; Minnesota, in the Midwest, which was deeply agrarian in its politics; Louisiana, in the South, about which much the same could be said; West Virginia, in the Southeast, where the mining industry was king; and Delaware, in the Northeast, which was the odd man out. Delaware being the 36^th state to vote in favor of ratification, the process was officially completed on February 3^rd, 1913. Over the next several months, the states that followed were similarly telling. New Mexico and Wyoming were very much western states, the former of which had only acceded to the union in January of 1912, and New Jersey, Vermont, Massachusetts, and New Hampshire were all firmly in the Northeast. Connecticut and Rhode Island, it bears noting, each voted to reject the amendment, while the state of Pennsylvania never bothered to even consider it. Given that all of these Northeastern states benefited from a reliance on federal tariffs over federal excises, such a result was rather to be expected.

    All the same, it is interesting to note that Roosevelt’s native New York, though home to some of the wealthiest individuals and corporations in the country, opted to ratify the amendment relatively early in the process, and that the state which carried the amendment across the line, Delaware, was also located in the Northeast. These two ratifications – along with those of New Jersey, Vermont, Massachusetts, and New Hampshire – would seem to speak to the degree to which the tax debate in Congress which had given rise to both the Payne-Aldrich Tariff and the 16^th Amendment succeeded in fracturing the contemporary Republican Party. Whereas, under the leadership of President William McKinley in the late 1890s, Republicans had been so supportive of protectionism that they approved the Dingley Tariff (1897), one of the highest and longest lasting in the history of the United States, the influence of William Howard Taft proved insufficient to either assuage the progressives in his party or elicit compromise on the part of the conservatives. Indeed, his stewardship of the party proved so divisive – or else the tensions which McKinley had managed to keep at a low simmer could no longer be prevented from finally boiling over – that the Republican National Convention, held in the summer of 1912, quickly devolved into a series of complaints and recriminations on the part of the progressive wing of the party and saw Taft ultimately gain the nomination and Roosevelt decide to bolt. The subsequent formation of the Progressive Party under Roosevelt’s leadership in turn resulted in the incumbent Taft finishing in third place in the Election of 1912, Roosevelt finishing in second, and Democrat Woodrow Wilson coming in first.

    But this is all rather beside the point, fascinating though it may be in its own right. What matters, under the circumstances, is what the proposal, approval, and successful ratification of the 16^th Amendment says about its fundamental character. Was it mainly a popular initiative, an institutional reform, or something in between? In light of both the nature of the policy which the amendment sought to empower and the political machinations which resulted in its ultimate approval by Congress, the latter of these characterizations would seem to be the most apt. There can be no denying, circa 1909, that the concept of a federal income tax had more than its share of popular support. As aforementioned, farmers and laborers in the South, West, and Midwest increasingly struggled under the weight of federal tariffs over the course of the 1890s and 1900s whose burden Northeastern industrialists were able to shoulder with relative ease. Senators representing the former regions accordingly had every reason – inasmuch as the legislators who appointed them had every reason – to support such measures as would offer relief to their constituents by shifting the nation’s tax burden to those most able to pay it.

    All that being said, the story of precisely how the 16^th Amendment made it out of Congress in the first place – and the pace and cadence of its eventual ratification – speak to an a substantially different line of causation. Senator Norris Brown, the initial sponsor of the amendment, no doubt acted when and how he did because he felt he had the backing of the newly inaugurated President Taft and because he believed that Taft broadly shared his progressive political principles. And Senator Nelson Aldrich, whose support inarguably made the amendment’s approval possible, most assuredly acted as he did only in order to allay a major division in his party and to secure the passage of his preferred version of the tariff bill then under discussion in Congress. That his strategy failed on both counts would seem to be a testament both to the depth of the cleavage then tearing the Republican Party apart and to the degree to which a federal income tax represented a policy with national appeal. To no small extent, it must be said, state legislatures acted as they did during the ratification process because the members thereof understood that providing tax relief to the constituents was bound to pay electoral dividends. But there was also doubtless a significant degree of party politicking wrapped up in which states voted, and when, and how.

    The ratification of the 16^th Amendment, recall, took place at the same time as the two major parties were readying themselves to take part in the Election of 1912. And in terms of the Republicans in particular, it took place over a period that witnessed their continued splintering and final division into two parties. In consequence, while Republican state legislators were then in the midst of considering the aforementioned amendment, they were also simultaneously undertaking to hold primaries and assign delegates for the purpose of choosing their party’s eventual nominee for President. Given that Roosevelt’s New Nationalism program – discussed above – held up the imposition of federal income taxes as key to its eventual success, and given that President Taft received most of his support from regions of the country where conservative Republicans on the model of Senator Aldrich held sway, it would seem fairly reasonable to assume that either ratifying or rejecting the amendment in question became a part of how the various state Republican parties – where said parties were in control of the state legislature – asserted their factional standing as the Election of 1912 drew ever closer. Were these Republicans legislators entirely unmoved by the financial travails of their constituents or their own desire for reelection? Of course not. But with a presidential contest in the offing and their party in the process of a very messy ideological realignment, the Republicans who then controlled the various state assemblies had things to consider beyond simply pleasing the voters. The 16^th Amendment, therefore, like so many of its predecessors, would seem best characterized as the product of both popular and institutional support.