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 no right to tax any of the constitutional means employed by the Government of the Union to execute its constitutional powers.”
- “The States have no power, by taxation or otherwise, to retard, impede, burthen, or in any manner control the operations of the constitutional laws enacted by Congress to carry 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.
Some terms are essential in understanding income tax law. "Gross income" can be generally defined as "all income from whatever source derived;" a more complete definition is found in 26 U.S.C. § 61. Other important definitions like "taxable income" and "adjusted gross income" can also be found in 26 U.S. Tax Code Part I.
Paying the Federal Income Tax:
While everyone is subject to the federal income tax, the Supreme Court has carved out possible exceptions. One example of note comes from Cheek v. United States (1991). In Cheek, the petitioner was charged with failing to file a federal income tax return, violating §7203 of the Internal Revenue Code, as well as willfully attempting to evade his income taxes, violating § 7201. Cheek admitted that he did not file his returns but testified that he had not acted willfully because he sincerely believed, based on his indoctrination by a group believing that the federal tax system is unconstitutional and his own study, that the tax laws were being unconstitutionally enforced and that his actions were lawful. The Supreme Court held that if a jury accepts Cheek's assertion that he truly believed that the Code did not treat wages as income, then the Government would not have proved that Cheek willfully violated the tax code, however unreasonable the belief might appear to a court.
Internal Consistency Test:
The Internal Consistency Test is a test that the Supreme Court created in Container Corp. v. Franchise Tax Bd. (1983) which states that a tax formula used by a state must "be such that, if applied by every jurisdiction, it would result in no more than all of the [entity's] income being taxed." Essentially, this means that two states may not tax an individual for the same portion of that individual’s income. The Supreme Court upheld this test in Comptroller of Treasury of Md. v. Wynne (2015). At issue was a tax scheme in Maryland which taxed residents (here, the Wynns) for income earned via stocks owned in a corporation that does business in multiple states. Maryland taxed the Wynnes for income earned in other states, even though the Wynnes already paid taxes on that money. The Court used the Commerce Clause of the United States Constitution to justify the Internal Consistency Test, finding that Congress, not individual states, holds the power to "regulate Commerce . . . among the several States," and that States are precluded from "subjecting interstate commerce to the burden of multiple taxation."
Individuals are not the only ones required to file income tax returns, corporations do as well. While they are subject to many of the same rules as are individual taxpayers, they are also covered by an intricate body of rules addressed to the peculiar problems of corporations.
Menu of Sources:
Federal income tax material:
- Article I, Section 8 - Congressional Power to Tax
- 16th Amendment
CRS Annotated Constitution:
- Fourteenth Amendment: Individual Income Tax
- Sixteenth Amendment: Income Tax
Federal Income Tax Statutes:
U.S. Code: 26 U.S.C. - Internal Revenue Code
Federal Income Tax Regulations:
Title 26 C.F.R.
[Last updated in June of 2023 by the Wex Definitions Team]