The power to tax income in the United States

The right of the U.S. government to levy a federal income tax has been unequivocally assured by the Sixteenth Amendment since its passage in 1913, but was prior to that time a vexing question for the judiciary.

In its original drafting, the Constitution bestowed a broad power “to lay and collect taxes, duties, imposts, and excises”^[1]U.S. Const. art. I, § 8, cl. 1, but tempered this power with a limitation that “direct” taxes must be “apportioned among the several states… according to their respective numbers”^[2]U.S. Const. art. I, § 2, cl. 3; reiterated in § 9, cl. 4 (“No capitation, or other direct, tax shall be laid, unless in proportion to the census…”).

The Constitution does not define “direct”, but the founders generally understood an indirect tax to be something resembling a sales or excise tax, where liability falls on a seller who can pass on their burden to a consumer^[3]Jensen, Erik M., “The Taxing Power, the Sixteenth Amendment, and the Meaning of ‘Incomes’”, 33 Ariz St. LJ 1057, 1075 (2001).

The curious rule about apportionment has its origin in the expectation that federal taxes would be imposed on states, not individuals. It is profoundly ill-suited to a personal income tax: it would require equal sums of tax to be collected from (or in) two states of equal population, even if they differ in per capita income—with the perverse result that the more impoverished state sees a higher rate of tax^[4]See Johnson, Calvin H., “Apportionment of Direct Taxes: The Foul-Up in the Core of the Constitution”, 7 Wm. & Mary Bill of Rights J. 1, 7–17 (1998), and at 3 (“Outside of requisitions … Continue reading.

Undeterred by (or incognizant of) constitutional uncertainty, and facing budget deficits from the demands of the Civil War, Congress created the nation’s first income tax at a simple rate of 3% on income over $800^[5]Revenue Act of 1861, 12 Stat. 292, which certainly did not conform to the apportionment clause.

The power to tax income was subsequently tested in two landmark cases before the Supreme Court.

Springer v. US (1880) decided that the income tax was an indirect tax, not a direct tax, and thus did not require apportionment^[6]Springer v. US, 102 US 586 (1880). Drawing precedent from an earlier case about a tax on carriages^[7]Hylton v. US, 3 US 171 (1796), holding that the tax in question “cannot be laid by the rule of apportionment without very great inequality and injustice” (at 174), the opinion arrives at a narrow construction of “direct tax” (embracing “only capitation taxes… and taxes on real estate”^[8]Springer, at 602 ) by reasoning in a consequentialist manner from the absurdity of apportionment:

“It was well held [in Hylton] that where such evils would attend the apportionment of a tax, the Constitution could not have intended that an apportionment should be made. This view applies with even greater force to the tax in question in this case. Where the population is large and the incomes are few and small, it would be intolerably oppressive.”^[9]Springer, at 600

But income taxation survived Springer only to be dealt a crippling blow in Pollock v. Farmers’ Loan & Trust Co. (1895), which held to the contrary that a tax is direct insofar as it reaches investment and rental income^[10]Pollock v. Farmers’ Loan & Trust Co., 157 US 429 (1895), and rehearing, 158 US 601 (1895).

The analysis in Pollock drew insight from (among other things) a brief by Alexander Hamilton in the Hylton case stating that direct taxes included “general assessments, whether on the whole property of individuals or on their whole real or personal estate”, and concluded that a tax on income from property was not sufficiently distinguishable from a tax on the property itself^[11]Pollock II, at 625 (“A tax upon one’s whole income is a tax upon the annual receipts from his whole property, and as such falls within the same class as a tax upon that property, and is a … Continue reading.

On these grounds, the Court struck down the 1894 income tax as being both direct and unapportioned (thus unconstitutional).

The doors to a federal income tax were reopened nearly two decades later with the Sixteenth Amendment, which largely mooted the question of directness (and of whether the Court erred in Pollock—experts disagree^[12]Jensen, at 1084, and note 127 ) by granting “power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states”^[13]U.S. Const. amend. XVI.

And if there was any lingering doubt, it was put to rest in Brushaber v. Union Pacific Railroad, holding unanimously that income tax was in harmony with the Fifth Amendment as well as the Sixteenth. The Court found meritless a contention that the tax law violated the “due process” clause^[14]U.S. Const. amend. V (“No person shall… be deprived of life, liberty, or property, without due process of law…”), holding that due process is not denied merely because “a tax levied is believed by one who resists its enforcement to be wanting in wisdom and to operate injustice”^[15]Brushaber v. Union Pac. RR, 240 US 1, 26 (1916).

But it conceded that a different result might obtain “in a case where, although there was a seeming exercise of the taxing power, the act complained of was so arbitrary as to constrain to the conclusion that it was not the exertion of taxation, but a confiscation of property”^[16]Brushaber, at 24.

The basic existence of income tax has seen no serious constitutional challenge in the past century. But Brushaber, in the latter concession, reminds us that its legitimacy is assured only to the extent that the power of taxation is exercised in accordance with the rule of law, and that a sufficiently arbitrary “tax” would be a tax in name only, enjoying no constitutional protection.

To the American people I would suggest that an understanding and critical examination of the provisions and effects of the tax law in force is the first line of defense against such an abuse. To remain ignorant, or indifferent, is to invite it.