In commiseration of Independence day, it’s worth remembering that the 16th Amendment wrought unparalleled constitutional havoc by unchaining the taxing mechanisms of the federal government from the unwittingly adopted but more or less effective “capitations clause” of Article I, Section 9.
While a tendency exists to think of this action as a hallmark of the progressive era’s “social reform” movement toward using the redistributive tools of the federal government to rectify wealth inequality, this common viewpoint is in error.
The 16th amendment as adopted actually had very little to do with wealth redistribution. Rather, it was primarily a flanking move against the politically entrenched protective tariff regime (a policy that, ironically, “redistributed” wealth in its own ways towards the beneficiary recipients of industrial protectionism and – subject to the famous neoclassical ambiguity of specific factor modeling – laborers therein). After almost half a century of attempting and failing to repeal the protective tariff system head on, a group of free trade-inclined lawmakers used the occasion of a protection-inclined tariff revision to propose a drastic restructuring of the federal revenue system. The underlying premise was that tariffs attained their political preeminence because, in addition to providing protection, they also supplied most of the government’s revenue.
Aha, the political economy-inclined observer might note at this point, but doesn’t tariff revenue operate at the expense of full fledged protectionism, which tends to exclude the importation of the very items that would fill the treasury at lesser rates? Indeed it does, and the free traders sought to capitalize on that distinction. They believed that tariffs only approached prohibitive and protective rates because they were obscured by a complex veneer of a revenue-based tariff schedule that far exceeded its revenue mandate. The flanking therefore occurs by stripping away that mandate, exposing protection for what it is, and destabilizing the political coalition that sustained it.
This was the genesis of the events that brought about the federal income tax amendment and, for a brief moment in 1913, it worked…until unscrupulous politicians soon discovered that income tax revenue could be generated to support any and every type of expenditure programs and political favors imaginable, effectively leaving the protective tariff to its own devices as they hiked and hiked and hiked the now decoupled tax rates.
The evidence? Look no further than Wall Street’s reaction to the federal income tax amendment votes in 1909. You will note that protection-beneficiary firms saw their stocks move in the opposite direction of the fate of the income tax, but firms that did not compete with importers saw little to no effect.