You Decide

…that the flexibility of the American federal tax code as it stands, some say, is crucial because it can accommodate dramatic changes in the economy and in our national priorities?

First, a little history: Although the first income tax in the United States was adopted in 1861 to help pay for the Civil War, the American tax code as we know it today has evolved from the 16th Amendment, which was passed by Congress in 1909 and ratified by 38 states in 1913.

The 16th Amendment states, “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among several states, and without regard to any census or enumeration.” Our friend the 16th Amendment gave Congress the legal right to tax the incomes of both individuals and corporations. It’s a nice, general sort of law, and some argue that it saved the United States during World War I: When the tariff-based regime that arose in the wake of the Civil War was interrupted by trade disruptions during World War I, that tax base atrophied, and federal income tax filled the gap. Tax regimes change by necessity, some experts say, and disappear when they no longer meet revenue needs.

Then along came World War II: Just when the government particularly needed a massive infusion of cash, withholding taxes on wages was enacted as part of the income tax, and the tax system was transformed from a “class tax” — one in which only wealthy people had their incomes taxed — to a “mass tax.” Employer withholding was key to expanding the tax base and instrumental in increasing tax collections from $8.7 billion in 1941 to $45 billion in 1945.

Income taxes rose steadily for decades, until Congress imposed the largest tax cut in history in 1981. And voilá, the economy boomed (and — not entirely unrelated, some would argue — within a decade the Soviet Union collapsed).

The argument could be made that without a flexible and durable, albeit complicated, tax code, Hitler might have won, the United States wouldn't have become a super power, and it wouldn't have leapt ahead of the Soviet Union economically and won the Cold War.

Our tax code is the very foundation of American freedom and wealth.