The 16th Amendment to the U.S. Constitution — granting Congress the power to collect taxes on income — turned 100 years old earlier this month. It’s no coincidence that the same time period also saw an explosive growth in the scope and power of the federal government. The 16th Amendment fueled the era of big government and led to a fundamental change in the relationship between the federal government and the people.
Prior to ratification of the 16th Amendment in 1913, the federal government was considerably smaller than today. Federal spending through the first half of the 19th century was typically around 2% of GDP, and other than a spike during the Civil War remained low until WWI. Spending briefly declined again after the war, but unlike the aftermath of the Civil War, did not stay long at reduced levels.
With a newly enacted power to collect taxes on income and the subsequent increase in funds this provided, politicians wasted little time finding new activities to spend them on. Even running out of legitimate functions of the federal government on which to spend money proved no obstacle, as they simply invented new ones — exemplified by the near doubling of federal departments from the turn of the 20th century to today. Federal spending today is now around 24% of GDP.
Aside from providing fiscal fuel for the growth of federal spending, the presence of an income tax has also made almost every aspect of taxpayer's lives open to government scrutiny. The costly and intrusive tax code, in other words, is a burden not just on the economy but also on our privacy. Routinely accepted is the once radical notion that every dime earned — from whom and for what — is the government's business, and for which we must be ready to produce documentation on demand. Given the broad scope of personal activities this encompasses, privacy from government is simply a thing of the past.
Even the relationship between states and the federal government has been drastically altered. More and more, money that is spent by states is collected first by the federal government. There were over 1,700 federal grant programs to state and local governments in 2011, according to the Congressional Research Service. The cost of these programs has grown from around $13 billion in 1940 to over $500 billion today. Waste is also encouraged as state politicians become more focused on gaming the federal system than promoting the interests of constituents.
Further, these programs erode the primary benefit of elections by making it harder and harder for voters to know who to hold accountability for which policies. And since federal dollars rarely come without strings, the process of laundering tax dollars through the federal government before spending it in the states further subjugates state governments to the will of Washington, weakening their sovereign independence. Weak and dependent states are an invitation for bigger, more centralized government.
To be sure, other factors have contributed to the growth of the federal government. For one, the 17th Amendment, adopted the same year as the 16th and which allowed for the popular election of the Senate, also weakened state checks in federal power. But the fiscal power found in the adoption of the income tax has had a significant role in the growth of the federal government.
Politicians have run up against the limits of that power and hit an upper-bound on the amount of funds able to be raised through the existing tax system, a limit that seems to be between 18% and 20% of GDP. Being as it is the nature of politicians to desire ever more power, we can safely expect, and should be weary of, increasingly frequent calls for a new source of revenue — like a VAT — that would make even the era of big government look like a libertarian paradise.