First Century of the XVI Amendment

During lunch yesterday, my son Political Sphere asked if I’d read the 16th Amendment, the one on income tax. Not lately, I said. He’d been re-reading it, to see if it explained the ObamaTax decision last week, because the amendment is pretty unlimited (making me assert, yet again, that the founders knew what they were doing, and messing with it through amendments is always risky). It got me thinking, but I wasn’t ready to write about it yet. Not to worry; Political Sphere put together a guest post. So the rest of this is his. 

Amendment XVI

Passed by Congress July 2, 1909

Ratified February 3, 1913 

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. 

national archive photo, found on Wikipedia

I was reading a piece by Sean Trende yesterday where he set forth a hypothetical tax situation comparing the essential equality of a tax credit and a tax penalty. He basically explained the same thing as well known economist Greg Mankiw has done several times on his blog. And this is what I want to touch on. Economically and legally this argument [that a tax credit and a tax penalty are the same] is correct, but psychologically and politically it is a different story. 

The sixteenth amendment, shown above, was passed by Congress in 1909, and its ratification process was completed in early 1913. It provides essentially unlimited power to Congress to levy taxes on all "income" (individual, corporate, or organizational) without any check. It does not limit it by saying it must be a percentage of income. It does not even clarify what is income. Theoretically, if Congress so chooses, they could levy a tax of $10,000 per individual, per year, regardless of wealth or income, for merely living, so long as the payment of such tax was only exacted on “income."  But it should be noted that no group of politicians has been politically foolish enough to do this—until now, almost exactly 100 years since Congress passed this amendment. 

There are two ways government can affect behavior, either with the carrot or with the stick—in other words through taxation or subsidy. Generally the government subsidizes what it wants to encourage, such as raising children, growing crops, or purchasing a fire hazard (aka Chevy Volt). Also they generally tax whatever actions they want to discourage, such as smoking, drinking, or earning income.   

But the current administration, for the first time since Congress gained unlimited taxing power, will try to use their stick to encourage behavior. I doubt this new method for affecting behavior will be successful—that is, even if it is successfully implemented. I think it will lead to a tax revolt with thousands, or perhaps even millions, like me choosing to "self insure[*]" rather than pay the tax or purchase insurance at the overpriced community rate.

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[*] This is merely the legal term I intend to use as I continue to do as I currently do, remaining uninsured and paying for my own health care bills.  Since there is no possible way for a licensed insurance company to prove that they have enough funding to cover their clients’ unlimited needs, I figure there can be no legal requirement for me to prove my ability to pay.