Explain the potential for increasing the power of the federal government by the passage of the 16th Amendment (1913) and the Federal Reserve Act of 1913.

Essay by marctstanleyCollege, UndergraduateA-, October 2008

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The sixteenth amendment to the United States Constitution states that, “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.” The amendment was a response to the Supreme Court’s ruling in 1895 on Pollock vs. Farmer’s Loan and Trust Company. With this case, the Supreme Court found the 1894 Income Tax Act to be unconstitutional. The Income Tax Act, which was attached to the Wilson-Gorman Tariff Act, was America’s first attempt at a flat income tax. The income tax was levied against anyone that had an income over $4000 at a rate of two percent. This particular income tax only affected five percent of the nation. At the turn of the twentieth century, the average American income was around $600 (Cooper, (1990) pg. 84). The income tax portion of the Wilson-Gorman Tariff Act was challenged on the basis that a tax on income is a direct tax and the United States Constitution requires direct taxes to be divided and allocated among different people or groups.

The income tax that was passed by congress in 1894 did not follow the intent of the constitution. In response, the Sixteenth Amendment to the Constitution was created and specified that even though direct and indirect taxation existed, a tax on income would be considered as an indirect tax.

The purpose of the Federal Reserve Act of 1913 was threefold. It was designed to establish Federal Reserve Banks, a standard reserve note (currency), and to provide supervision of banking in the United States. The basic premise was to help prevent recessions usually brought on by the collapse of banks and investor panic on Wall Street. The Federal Reserve Act allowed for the creation of...