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From the 16th Amendment to Your Wallet: How Federal Income Tax Transformed American Finances

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You see a pretty big chunk of your paycheck disappear every year to Federal income taxes, right? 

Well, you’re not alone! 

Americans collectively pay nearly $2 trillion in Federal income taxes each year, and to most people, it’s just a normal fact of life (even though hardly anyone looks forward to it).

But have you ever stopped to wonder why we pay income taxes in the first place?

The answer is because of the 16th Amendment. Ratified back in 1913, it represented one of the biggest changes to the U.S Constitution because it gave the Federal government the authority to level an income tax against American citizens.

This completely changed two primary things: how the United States government funded its operations, and how people approach their finances. 

The 16th Amendment Unveiled

Let’s rewind the clock back to 1913. 

Before the 16th Amendment was introduced that year, the government did not collect revenues from an income tax. Instead, the government mostly relied on excise taxes (a tax on goods) and tariffs (a tax on imports).

So why did the government switch to an income tax? The primary reason was to create a revenue stream that would be more predictable as well as stable. Since excise taxes and tariffs were dependent on the production and importation of goods respectively, neither was as stable as receiving an annual income tax from the general population. 

As you can imagine, the introduction of the 16th Amendment almost immediately sparked very intense debate. Many people immediately recognized it as a massive expansion of Federal power and gave the government more direct control over peoples’ individual finances than ever before. 

The ability to levy income taxes, for instance, meant that the government was now directly involved in the financial lives of people. In other words, people now had to plan to pay their income taxes as part of their household budgets.

Today, it’s probably not a stretch to say that our financial lives almost revolve around taxes! After all, we always need to make sure that our taxes are paid. Employees always have money withdrawn from their paychecks by their employers to pay the government, while self-employed people have to set aside money on their own to pay the government quarterly. 

Plain and simple, the 16th Amendment was more than just a ‘new way’ for the government to raise revenue. It directly involved the government in your paycheck!

Taxation as a Power Play

Have you ever wondered about where all your tax dollars actually go? 

Here’s the short answer: it goes to more than just keeping the streets clean or fixing potholes. 

Over the years, the income tax has turned into one of the biggest sources of government revenue: over 40%, to be more specific. And the government spends its money on a lot more things than just funding public services. 

Thanks to the steady flow of revenue from income taxes, the government’s reach has been able to expand a lot. More money in the pocket of the government has meant it can influence everything from workplace standards to environmental regulations to education to running healthcare programs to regulating businesses, among many other things. 

That’s right: more power. 

So basically, the income tax was a major factor that helped to increase the power of the government, as it was only after the introduction of the income tax that the reach of the government began expanding so much. It was only after the income tax’s introduction, for instance, that we began to see the introduction of major government programs, like the New Deal.

So why is this such a big deal? Well…all of this government involvement has naturally raised some pretty big questions. The more the government controls aspects of our lives, don’t we have less freedom to make our own decisions? And in the process of doing so, the more it collects money out of our paychecks, don’t we technically have less financial freedom as well?

High taxes, for example, can make people feel less motivated to invest in innovative ideas or new businesses when they know full well that a large chunk of their earnings is going away as taxes. 

Furthermore, when the government is running all of these programs, how efficiently is that money being spent? It doesn’t take much detective work to find out that literally billions of dollars a year are wasted on duplicative and unnecessary programs and because of payment errors. 

So what’s a better idea? Well, lowering taxes and reducing government intervention in other aspects of our lives could help to boost economic freedom. This is because it would allow everyday people like you to keep more of your hard-earned money and take greater control over your financial destiny. It would also help make people less dependent on government handouts to get by. 

In a nutshell, the Federal income tax has done more than just fund government operations. It’s also been a major factor in expanding government control over both the economy and our personal finances. We’ll talk about the latter in the next section. 



Your Hard-Earned Money: The Real Cost of Federal Income Tax

Look, when a large part of your income is going away to taxes, you have a lot less to put into personal savings, to invest, or to set aside for everyday spending. You have less money for everything from building an emergency fund (which too many people don’t have) to investing in the stock market and even to just enjoying a nice dinner out with your husband or wife. 

Over time, these smaller sacrifices really start to add up, which makes it harder to achieve longer term financial goals that people often have (like buying a home, funding education, or securing a comfortable retirement). Pair that with the massive rise in inflation and the general cost of living that we’ve seen over the last few years, and it’s not hard to see why people struggle!

What if income taxes were reduced (or eliminated) in favor of the government raising revenue through other sources? Just take a moment to think about how your life would change if you didn’t have to pay income taxes. What would you do with that money? 

Only you know the answer to that question based on your circumstances, but there’s no doubt that you would have a lot more money in your wallet and greater freedom with your finances. 

Conclusion

So, that’s the story of the 16th Amendment and how it’s been influencing our wallets for over a hundred years and how it still is today. 

But at the end of the day, understanding this history is just the first step. There are more questions that we can be asking, such as:

  • If the income tax was eliminated in America in the next year, how else could the government raise revenue? What could alternatives mean for the government to raise money? 
  • If people didn’t pay income taxes, how would their lives change? 
  • What are some examples of government programs that are not needed and could be excised to reduce wasteful government spending?

In other words, these questions are about alternative taxation systems that could potentially lighten the load on our earnings while still providing the funds needed for public services. It would certainly represent a major change to the American tax code, but it may be a change that is well-worth it.


Reviewed and edited by Albert Fang.

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Article Title: From the 16th Amendment to Your Wallet: How Federal Income Tax Transformed American Finances

https://fangwallet.com/2025/01/24/from-the-16th-amendment-to-your-wallet-how-federal-income-tax-transformed-american-finances/


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