In order to answer this question we will review the history and purpose of the Sixteenth Amendment.
The Internal Revenue Service tells us that the U. S. Congress passed the Income Tax Act of 1894 but the Supreme Court ruled it Unconstitutional in 1895. They also make mention that the Sixteenth Amendment was ratified in 1913 and provided for an income tax to be collected. They did not give any details about the proceedings leading up to its ratification nor did they give us the definition of the Term “Income”. The true understanding of the meaning of “income” will go a long way in helping us to understand the true meaning the Sixteenth Amendment.
Following a Joint Resolution of the House of Representatives and the Senate of the United States, the Congressional Research Service (CRS) analyzed and interpreted all of the U. S. Supreme Court cases regarding the Sixteenth Amendment to the Constitution for the United States of America.
According to the CRS “the ratiﬁcation of the Sixteenth Amendment was the direct consequence of the Court’s 1895 decision in Pollock v. Farmers’ Loan & Trust Co. holding unconstitutional Congress’s attempt of the previous year to tax incomes uniformly throughout the United States. A tax on incomes derived from property, the Court declared, was a “direct tax,” which Congress, under the terms of Article I, § 2, and § 9, could impose only by the rule of apportionment according to population.” The Internal Revenue Code contains no provisions for an apportionment among the States.
After a series of decisions the Supreme Court found it possible to allow an excise (indirect) tax on the privilege of doing business in corporate form with the amount of the tax being based on the amount of corporate income received from that corporate activity, no matter what the source of the income may be. Congress has always had the power to lay excise taxes from the beginning.
The CRS concludes its interpretation with these words, “The Sixteenth Amendment conferred no new power of taxation but simply prohibited the previous complete and plenary power of income taxation possessed by Congress from the beginning from being taken out of the category of indirect taxation to which it inherently belonged . . . .”
As we can see, the Sixteenth Amendment did not give Congress any new taxing power. The Income Tax is a tax on the privilege of doing business in corporate form. What it did do was that it prevented Congress from taxing income derived from property because of ownership. Our earnings are our property and can not be taxed!
Regarding the definition of the term “income”, building upon deﬁnitions formulated in cases that gave the meaning of or the interpretation of the Corporation Tax Act of 1909, the Court initially described income as the “gain derived from capital, from labor, or from both combined,” inclusive of the “proﬁt gained through a sale or conversion of capital assets” by corporations.
To address the question of why should the State governments step in and prevent the unconstitutional taxing of their citizens earnings, we must take a look at the U. S. Supreme Court case McCulloch v. Maryland.
In this case the State of Maryland wanted to tax United States chartered banks doing business in Maryland. The United States objected and it went to the Supreme Court. In order to settle the dispute the Court had to define the taxing power of both the United States and the States.
In addressing the different aspects of the taxing power of Congress the judge goes on to say that “..an indefinite power of taxation in the Government of the Union might, and probably would, in time, deprive the Governments of the States of the means of providing for their own necessities, and would subject them entirely to the mercy of the National Legislature.”
Has that happened in any of the States in the Union? Is there any of them that doesn’t rely on the federal government to make ends meet?
The Judge goes on to say “The people of all the States have created the General Government, and have conferred upon it the general power of taxation. The people of all the States, and the States themselves are represented in Congress, and, by their representatives, exercise this power. When they tax the chartered institutions of the States, they tax their constituents, and these taxes must be uniform.”
In plain simple terms, when the Federal Government taxes the corporations of a State, it taxes its citizens indirectly.
Let us examine these words of the Court.
“..an indefinite power of taxation in the Government of the Union might , and probably would, in time, deprive the Governments of the States of the means of providing for their own necessities, and would subject them entirely to the mercy of the National Legislature.”
How does the unconstitutional taxing of State citizens’ earnings effect the revenue of the States and deprive the States of the means of providing for their own necessities? If all the money that now goes to Washington in the form of Income Taxes on individuals earnings stayed in the States where it comes from where would it be spent? No doubt it would be spent in that State.
How much revenue would that extra money circulating within the States generate for the States in sales taxes and other taxes that would receive a boost from extra money in circulation? I can answer that for you. It would generate enough so that the States would not have to go begging for money from the federal government to make ends meet.
That, my friends, is why the State governments must stand up and put an end to the unconstitutional taxing of our earnings. It would multiply the buying power for the consumers by billions and free the States from the general government’s overreach.