Income Tax History

 I ran into this decision because I was curious why municipal bond interest is exempt from taxation by the national government,  While Pollock v. Farmers' Loan & Trust Co. (1895) determined that the national government could not tax state and local governments, the more interesting part of the decision is what led to adoption of the 16thb Amendment which authorized a national income tax:

The Congress shall have the 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.

Why was this required?  The Constitution granted Congress authority to tax but with a few limitations:

Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be determined by adding to the whole Number of free Persons, including those bound to Service for a Term of Years, and excluding Indians not taxed, three fifths of all other Persons. [Art. I, sec. 2, cl. 3]

Direct taxes, those that applied to individuals or corporations (who by now qwer legally considered "persons," had to be appportioned by state population.  What does that mean?  Pollock quoted from debates in the First Congress:

In the course of the debates, and after the motion of Mr. Ellsworth that the first census be taken in three years after the meeting of Congress had been adopted, Mr. Madison records: "Mr. King asked what was the precise meaning of direct taxation. No one answered." But Mr. Gerry immediately moved to amend by the insertion of the clause that "from the first meeting of the legislature of the United States until a census shall be taken, all moneys for supplying the public treasury by direct taxation shall be raised from the several States according to the number of their representatives respectively in the first branch." This left for the time the matter of collection to the States. Mr. Langdon objected that this would bear unreasonably hard against New Hampshire, and Mr. Martin said that direct taxation should not be used but in cases of absolute necessity, and then the States would be the best judges of the mode. 5 Elliot (Madison Papers), 451, 453.

 It appears that this clause was understood to require direct taxes to be based on representaion in the House.  Under this understanding, apportionment would require each state to collect and pay those direct taxes based on their fraction of the population.  So a state like California with a a bit more than 10% of the population could only ber required to pay that percentage of the tax.  California's billionaires would be overjoyed to pay so little.

The problem with an income tax assessed based on individual income under this rule should be obvious.

Among the direct taxes imposed by Congress in  1796:

The act provided in its first section "that there shall be levied, collected, and paid upon all carriages for the conveyance of persons, which shall be kept by or for any person for his or her own use, or to be let out to hire or for the conveyance of passengers, the several duties and rates following," and then followed a fixed yearly rate on every coach; chariot; phaeton and coachee; every four-wheel and every two-wheel top carriage; and upon every other two-wheel carriage; varying according to the vehicle.

Carriages were luxuries and thus only wealthy people would be paying them.  There wasc no general agreement when this went to the Court:

Mr. Justice Chase said that he was inclined to think, but of this he did not "give a judicial opinion," that "the direct taxes contemplated by the Constitution, are only two, to wit, a capitation, or poll tax, simply, without regard to property, profession, or any other circumstance; and a tax on land;" and that he doubted "whether a tax, by a general assessment of personal property, within the United States, is included within the term direct tax." But he thought that "an annual tax on carriages for the conveyance of persons, may be considered as within the power granted to Congress to lay duties. The term duty, is the most comprehensive next to the generical term tax; and practically in Great Britain, (whence we take our general ideas of taxes, duties, imposts, excises, customs, etc.,) embraces taxes on stamps, tolls for passage, etc., and is not confined to taxes on importation only. It seems to me, that a tax on expense is an indirect tax; and I think, an annual tax on a carriage for the conveyance of persons, is of that kind; because a carriage is a consumable commodity; and such annual tax on it, is on the expense of the owner." 

The reason for the adoption of the income tax was that reduction of tariffs, the national government's primary source of funds required some other source.

Fourteen years after the Pollock decision, President William H. Taft proposed to Congress a new income tax of 2% on corporations. This would be imposed by an excise tax on manufactured goods and an amendment to the Constitution to legally sanction the most recent federal income tax. Several conservative senators proposed different versions of the new amendment throughout 1909. Many citizens living in the West and the South supported an income tax on the grounds that it would be an easier way to raise funds on those less well-off. 

An excise tax on manufactured goods is certainly simpler than a general income tax.