Where does the US derive authority to tax?

By Van Leaming

Published: 06/10/2024

The Power to Tax

For most Americans, taxes are a way of life. We may grumble and moan a bit come tax time, but most Americans realize the necessity and accept this as a duty and obligation to our Country. Taxes have been with us since our founding, and some would say that was the trigger for our genesis. However, although we have had various taxes throughout our history, for large periods of our history we had no income tax at all. So where does the United States derive the legal basis for taxation? The United States has a complex tax system, with various levels of government collecting taxes to fund public services. Understanding where the authority to tax comes from requires a journey through history, tracing back to the early days of the American colonies, moving through the establishment of the U.S. Constitution, and highlighting significant amendments and legal decisions that have shaped the current tax landscape.

Taxes are a necessary but often controversial part of governance. Their legality and the extent of the government’s power to impose them have been subjects of debate and evolution since the country’s inception.

The Early Days: Colonial Taxes

In the early American colonies, taxes were primarily imposed by colonial governments to fund local needs, such as infrastructure and defense.¹ These taxes were relatively simple and direct, often taking the form of property and poll taxes.² However, the imposition of taxes by the British Crown, such as the Stamp Act of 1765, without colonial representation, sparked outrage and contributed to the Revolutionary War.³ This period highlighted the importance of having a fair and representative system of taxation.

The Constitution and Article I

Following independence, the Articles of Confederation initially governed the fledgling nation, but they provided a weak federal government with no power to tax directly.⁴ This led to financial difficulties, prompting the creation of the U.S. Constitution in 1787.⁵

Article I, Section 8, Clause 1 of the Constitution granted Congress the power to levy taxes, duties, imposts, and excises.⁶ This was a significant shift, as it centralized fiscal authority, allowing the federal government to raise revenue directly from the populace. Additionally, Article I, Section 9, Clause 4 placed certain limitations on taxation to ensure fairness, such as requiring direct taxes to be apportioned according to the population of each state.⁷

^{1. 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;}
^{Article I, Section 8, Clause 1}

^{4. No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.}
^{Article I, Section 9, Clause 4}

The 16th Amendment: Federal Income Tax

Despite these provisions, the nature and scope of federal taxation continued to evolve. The most transformative change came with the ratification of the 16th Amendment in 1913.⁸ Prior to this amendment, the Supreme Court had struck down the Federal income tax as unconstitutional in the 1895 case of Pollock v. Farmers’ Loan & Trust Co., because it was not apportioned according to the states’ populations.⁹ The 16th Amendment resolved this by explicitly allowing Congress to tax income from any source without apportionment among the states.⁸ This effectively allowed Progressive taxation as taxes could now be administered at different and unequal rates, or non-apportioned.

This amendment laid the foundation for the modern Federal income tax system, which has become the primary source of revenue for the federal government. It is akin to changing from a neighborhood shop to a nationwide franchise—vastly increasing both the scope and complexity of tax collection.

Modern Era: Obamacare and Taxation

Fast forward to the 21st century, the role of taxation in federal policy saw another pivotal moment with the Affordable Care Act (ACA), commonly known as Obamacare.¹⁰ In 2012, the Supreme Court upheld the ACA’s individual mandate (requiring individuals to have health insurance or pay a penalty) under Congress’s taxing power, effectively ruling that the mandate was a tax. Instead of the government compelling you to buy something, the ruling said that through the power vested in Congress while you did not have to buy Healthcare, you could be taxed based on whether you did or not. This decision, National Federation of Independent Business v. Sebelius, underscored the broad authority granted to Congress to impose taxes, even in the context of health care reform.¹¹

Affordable Care Act

Mandate or Tax?

The Supreme Court ruled that it was within the powers granted to Congress to Tax, not to compel the purchase of Healthcare, but to Tax based on the decision of whether or not a purchase was made. In essence, a tax on the decision, not the mandate, but none the less a tax.

Conclusion

From the early colonial taxes to the sweeping changes brought by the 16th Amendment and the ACA, the authority of the U.S. government to tax has been defined and redefined over centuries. Each step, from the Constitution’s establishment of congressional tax powers to landmark Supreme Court decisions, has built the framework within which the federal tax system operates today. This journey through history reveals how taxation has been integral to the nation’s development, much like the continuous upgrades and expansions needed to keep a massive, intricate machine running smoothly.

In essence, the U.S. tax system’s evolution reflects the broader narrative of American governance—constantly adapting to meet new challenges and needs, ensuring the government can function and provide for its citizens.

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