Sweet Sixteen?

For the first time since abolition, the Constitution of the United States is amended. Taxes, revenues and complexity all grew exponentially, so make sure you are prepared.

The man with dusty boots rose when called, removing his wide brimmed hat and stroking his long mustache. He looked around at the rest of the men present, all with  dusty boots and sun weathered faces. It was time. He’d made up his mind and it was time.

“Well, I suppose I vote yes!”

To the north, men in cowboy hats, frontier jackets and denim pants milled about before being herded into the state senate chamber to record their votes. A majority of them also voted “yes.”

And far to the east, a man in a dark suit rose when his name was called. In a clear, commanding voice with a twinge of an urban east coast accent, he said :“I look out of that “winda”, and across the “wooder” and I see a great nation that can do more if it has more to do it with. And so, I vote yes.” It was an exaggeration, he could see nothing out the window and the only water was in the form of snow.

On February 3rd, 1913 three states, Wyoming, New Mexico and Delaware,  ratified the first amendment to the United States Constitution in 43 years, making a federal income tax the law of the land. The Amendment was part of a wave of federal and state governmental changes championed by early twentieth century Progressives. While eleven of the Constitution’s first twelve amendments added more restrictions on the federal government than the Constitutional Convention, amendments like the income tax and prohibition began to change the power dynamic in American government, removing barriers to federal action. 
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The Sixteenth Amendment 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.”  In essence, the vote removed the obstacle, embedded in the Constitution, that forced direct taxes to be allocated or apportioned by state. Without the amendment, a state with ten percent of the country’s population would contribute 10% of the funds raised by the income tax. At the time, that was thought to be so unwieldy as to be unworkable. Then again, no twentieth century progressive ever got a peek at the thousands of pages in the current tax code to compare unwieldiness. But I digress. Before long, the income tax was to become, by far, the federal government’s largest source of revenue.
 
Here are a few lessons from  the passage of the Sixteenth Amendment:
 

1. Government of the people, by the people can be messy, as if anyone needs reminding in an election year. And risks of changing government policy are real. But they are usually less pronounced in developed democracies with free markets because of protections for property rights. This is one reason why developing markets (like Brazil, China or Russia) are seen as riskier investments. No exaggeration, markets simply can’t function properly when property can arbitrarily be seized by any entity, including government. Sometimes gridlock isn’t a dirty word.​
2. History moves in cycles and so does the market. Up until the end of the Civil War, Constitutional Amendments limited federal power. After that, not so much. What’s next? Who knows? Markets are like this too, progressing and occasionally regressing on a timeline that is at best difficult, and more likely impossible to predict. History is a guide, but never a blueprint.
3. It is time to get ready for tax season and commence the great document gathering. This is another unwieldy process, but trust me it is worth a little advance work to have everything ready to file your taxes or have them prepared by someone else. By now, most tax documents should be available to  you. Check the mail, your files and online to see if you have the following:​

Income: 

• W-2s from employers
• 1099s from banks, third party employers, pensions, IRA distributions etc.​
  

Deductions: 

• Proof of retirement account contributions
• Educational expenses (1098-E and/or 1098T)
• Medical bills (If over the Adjusted Gross Income threshold)        
• Mortgage interest & property tax (Form 1098)
• Charitable donations
• Classroom expenses, documented for teachers
• State and local income or sales taxes. You don’t need receipts for sales tax, the IRS provides tables of what you can claim. State taxes withheld are on your W-2 or 1099s

Credits: 

• Education credits (1098-T)
• Child Tax Credit. Have a social security number for the child and be sure you meet the qualifications. 

Payments: 

• W-2 withholdings
• 1099 withholdings
• Estimated withholdings paid through the year

    If you are missing something call your provider. And until you have everything you need call them, as they used to say in the old days of getting out the vote,“early and often.”

Photo: Bing.com, Free to share and use
Links & Sources:

1. https://history.house.gov/Historical-Highlights/1901-1950/The-ratification-of-the-16th-Amendment/
2. https://constitutioncenter.org/interactive-constitution/interpretation/amendment-xvi/interps/139