In Pollock v. Farmers' Loan & Trust Co.,17the U.S. Supreme Court ruled that a federal income taxenacted in 1894 was unconstitutional because a federal income tax is a direct tax subject to theapportionment requirement. The Sixteenth Amendment, which became effective on February 25, 1913,permits Congress to impose an income tax without having to comply with the apportionment requirementapplicable to other direct taxes.The Revenue Act of 1913, enacted on October 3, 1913 but made retroactive to March 1, 1913, is thebasis for our current income tax laws. Commerce Clearing House, Inc. published that tax act andinterpretive regulations in a single volume of a little more than 400 pages. Now the tax law andinterpretive regulations fill tens of thousands of pages.
Objectives of the Federal Income TaxAlthough the primary purpose of the federal income tax is to raise revenue, it also serves economic, social, andpolitical objectives. Much of its complexity is due to its multiple objectives, which often are competing.Economic ObjectivesThe federal income tax has been used to stimulate the economy in general, aid particular industries, and encouragecertain types of investments. For example:Tax rates have been decreased to stimulate the economy.Tax rates on capital gains and dividends have been decreased to encourage investment in businesses.Interest on state and municipal bonds has been made nontaxable to encourage investment in such bonds.Depreciation writeoffs have been accelerated to encourage businesses to purchase property.Percentage depletion encourages exploitation of certain natural resources.Social ObjectivesThe federal income tax has been used to achieve social objectives. For example:Home ownership has been encouraged by favorable tax rules (such as the exclusion of up to $250,000 of gain from the sale of apersonal residence and deductions for mortgage loan interest and property taxes).Businesses have been given tax incentives to provide health insurance and retirement benefits to employees.Parents have been given a child tax credit to help them care for their children. They have been given a credit for child anddependent care expenses to help them care for their children while they work (or look for work).Charitable contributions have been made deductible to encourage gifts to charities.Illegal kickbacks and bribes have been made nondeductible to discourage such payments even though such payments may be anormal expense for certain businesses.Political ObjectivesCongressional members may bargain for particular tax provisions to reward backers and advance their own political careers.
Steps in Calculating Federal Income Tax LiabilityThe following steps must be taken to calculate an individual's income tax liability:Step 1:Add up all of the taxpayer's items of gross income.