Ways To Make Your Head HurtRead the U.S. Supreme Court decisions concerning the constitutionality of the federal income tax.
Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429 (1895) is one of the more obtuse decisions that I think that I have ever read. I am not surprised that a lot of the "income tax is unconstitutional" crowd gets this wrong--what a messy, ugly, confusing, clumsy decision.
At the core of the question is this claim made by the plaintiffs:
alleged income tax incorporated in the act of congress were unconstitutional, null, and void, in that the tax was a direct tax in respect of the real estate held and owned by the company in its own right and in its fiduciary capacity as aforesaid, by being imposed upon the rents, issues, and profits os said real estate, and was likewise a direct tax in respect of its personal property and the personal property held by it for others for whom it acted in its fiduciary capacity as aforesaid, which direct taxes were not, in and by said act, apportioned among the several states, as required by section 2 of article 1 of the constitution; and that, if the income tax so incorporated in the act of congress aforesaid were held not to be a direct tax, nevertheless its provisions were unconstitutional, null, and void, in that they were not uniform throughout the United States, as required in and by section 8 of article 1 of the constitution of the United States, upon many grounds and in many particulars specifically set forth.
You see, there are
direct taxes and
indirect taxes. Direct taxes, before the 16th Amendment, had to be apportioned among the states by population, because of
Art. I, sec. 9, cl. 4:
No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census of Enumeration herein before directed to be taken.
Art. I, sec. 8, cl. 1, provides for:
The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;
It appears that indirect taxes, including excise taxes and tariffs, were not subject to this same requirement about proportion to population as direct taxes. But makes some taxes "direct" and others "indirect"?
Pollock is awash in discussion and example, but can't seem to give a consistent statement, and admits that there is a bit of contradiction in the precedents and original public meaning (as evidenced by debates in the 1790s about a tax on carriages) of these terms, even admitting in one place that an income tax, in the original public meaning, would have been a direct tax:
The general line of observation was obviously influenced by Mr. Hamilton's brief for the government, in which he said: 'The following are presumed to be the only direct taxes: Capitation or poll taxes, taxes on lands and buildings, general assessments, whether on the whole property of individuals, or on their whole real or personal estate. All else must, of necessity, be considered as indirect taxes.' 7 Hamilton's Works (Lodge's Ed.) 332.
Mr. Hamilton also argued: 'If the meaning of the word 'excise' is to be sought in a British statute, it will be found to include the duty on carriages, which is there considered as an 'excise.' ... An argument results from this, though not perhaps a conclusive one, yet, where so important ad istinction in the constitution is to be realized, it is fair to seek the meaning of terms in the statutory language of that country from which our jurisprudence is derived.' 7 Hamilton's Works (Lodge's Ed.) 333.
If the question had related to an income tax, the reference would have been fatal, as such taxes have been always classed by the law of Great Britain as direct taxes.
Yet otherwise
Pollock cites precedents holding that an income tax was an indirect tax or excise tax, and therefore not subject to the apportionment requirement. (See the discussion on
pages 635-636.)
Pollock is the case which is often referred to as ruling that the income tax was unconstitutional. But to my surprise, what it really ruled was unconstitutional was not a personal income tax, but a tax on income from real estate--which was found to be direct, and therefore subject to the apportionment rule:
Be this as it may, it is conceded in all these cases, from that of Hylton to that of Springer, that taxes on land are direct taxes, and in none of them is it determined that taxes on rents or income derived from land are not taxes on land.
We admit that it may not unreasonably be said that logically, if taxes on the rents, issues, and profits of real estate are equivalent to taxes on real estate, and are therefore direct taxes, taxes on the income of personal property as such are equivalent to taxes on such property, and therefore direct taxes. But we are considering the rule stare decisis, and we must decline to hold ourselves bound to extend the scope of decisions,- none of which discussed the question whether a tax on the income from personalty is equivalent to a tax on that personalty, but all of which held real estate liable to direct taxation only,-so as to sustain a tax on the income of realty on the ground of being an excise or duty.
The net effect of the
Pollock decision was to strike down just one little part of the federal income tax code:
We are of opinion that the law in question, so far as it levies a tax on the rents or income of real estate, is in violation of the constitution, and is invalid.
The
Sixteenth Amendment changed not only the apportionment requirement, but clarified that it didn't matter if the income came from real estate or not:
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.
I see some pretty amazing claims made by the anti-income tax crowd to the effect that the Sixteenth Amendment wasn't intended to tax personal income--only corporations, or "Fourteenth Amendment citizens" (by which they mean those persons who became citizens of the United States because of the Fourteenth Amendment's protection of the freedmen). The claim is that taxing individual incomes is some rather modern perversion of the original intention. But you certainly won't find anything to support that position in
Brushaber v. Union Pacific R. Co., 240 U.S. 1 (1916):
1. The statute levies one tax called a normal tax on all incomes of individuals up to $20,000, and from that amount up, by gradations, a progressively increasing tax, called an additional tax, is imposed. No tax, however, is levied upon incomes of unmarried individuals amounting to $3, 000 or less, nor upon incomes of married persons amounting to $4,000 or less. The progressive tax and the exempted amounts, it is said, are based on wealth alone, and the tax is therefore repugnant to the due process clause of the 5th Amendment.
2. The act provides for collecting the tax at the source; that is, makes it the duty of corporations, etc., to retain and pay the sum of the tax on interest due on bonds and mortgages, unless the owner to whom the interest is payable gives a notice that he claims an exemption. This duty cast upon corporations, because of the cost to which they are subjected, is asserted to be repugnant to due process of law as a taking of their property without compensation, and we recapitulate various contentions as to discrimination against corporations and against individuals, [240 U.S. 1, 22] predicated on provisions of the act dealing with the subject.
Now, the exemptions were large enough that indeed, the original tax code was a tax on rich people. But it was on
people, not corporations. It is the case that very few wage earners had enough income to be subject to that original income tax, because very few people earned that kind of money. But there were some who did. The individual income tax, as unpleasant as it is, was the intention from the beginning. We have the individual income tax because Americans want it.
