(I had planned to have this post up by April 15th, tax deadline day. Unfortunately, the week before that was spring break week at the petting zoo, meaning I worked long hours, got home late, and didn't have enough left in the tank to finish this before the artificial deadline I set. Well, having spent so much time on it, I'm not going to just put it aside to run on April 15th of next year, so here it is):
The Sixteenth Amendment was ratified in 1913; it reads:
"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."
There's a misconception about the federal income tax that you hear from time to time; namely, that before 1913 the United States didn't have income taxes. The Sixteenth Amendment, this misconception goes, first gave Congress the power to make us miserable every April 15th.
Not quite. The story goes back to the Constitutional Convention of 1787. Article I, Section 9 lists powers denied to the federal government; one provision enumerated is this:
"No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken."
What the heck is a capitation? It's a poll tax (Edward S. Corwin, The Constitution and What it Means Today, 1978 ed., p.132). This type of revenue generation was prohibited in all instances, federal and state, with the 1964 ratification of the Twenty-Fourth Amendment. But the text of Article I Section 9 clearly indicates there could be other "direct" taxes besides capitations. And when this provision was laid before the delegates in the Constitutional Convention, Rufus King of Massachusetts was puzzled. What, he asked, "was the precise meaning of direct taxation?" And according to James Madison, "No one answered" (Madison's Notes, August 20th). Perhaps that is because Alexander Hamilton was not present that day; later in The Federalist # 36 he wrote that indirect taxes were "duties and excises on articles of consumption" by which one guesses he meant direct taxes were any other kind of levy, and indeed in #21 Hamilton opined that direct taxes "principally relate to land and buildings."
Given the scant explication by the framers, small wonder Akhil Amar calls the direct tax clause "one of the Constitution's murkiest clauses," (America's Constitution: A Biography, 2005, p. 405).
Well in no time at all, a particular tax proposal in Congress led to debate on whether it was "direct" or not. In 1794, Congress assessed a levy on owners of carriages. Was this direct? Representative Theodore Sedgwick of Massachusetts alluded to "the opinion of certain political economists" who believed that taxes imposed on land were direct, those on anything else were indirect (Annals of Congress, Vol 4. p. 644). One might wonder how he could say that only land taxes are direct when the Constitution specifically declares capitations to also be direct taxes, but in Sedgwick's state one had to be a property owner to vote until 1821, so in effect when he spoke a poll tax was a tax on land (Keyssar, The Right to Vote, 2000, p. 343).
Sedgwick's fellow statesman from Massachusetts, Samuel Dexter, then asserted his agreement with a narrowing of Hamilton's proposition:
"(T)hat all taxes are direct which are paid by the citizen without being recompensed by the consumer; but where the tax was only advanced and repaid by the consumer, the tax was indirect" (Annals of Congress, Vol. 4, p. 46).
Note the difference between what Hamilton wrote and what Dexter said: since automobiles are articles of consumption, by Hamilton's reasoning any tax on them is indirect. But by Dexter's standard a tax on General Motors for manufacturing cars is indirect because they're just going to pass the cost down to you, but if you're taxed for having a car it's direct because you have no one to charge to get back your tax debt. (Assuming, that is, that your car is for personal use and not business.)
Small wonder then that Congress argued both about the general premise of what a direct tax is and specifically whether the carriage tax was direct or not. What was it Tocqueville wrote? "Scarcely any political question arises in the United States that is not resolved, sooner or later, into a judicial question," (Democracy in America Vol. 1 Chapter XVI). So when the statesmen are unclear on what is a direct tax, who do you think is eventually going to be called on to decide? And presto, it took only nine years before the U.S. Supreme Court heard a case in which someone argued that they were being assessed a direct tax, not in proportion to any census or enumeration, in violation of the Constitution.
The case was Hylton v. United States, 3 U.S. (3 Dall.) 171 (1796). Hylton lost: http://www.oyez.org/cases/1792-1850/1796/1796_2/
Note that we're not yet talking about an "income" tax, only whether a certain tax was "direct" or not and this, we shall see would become an issue years later. But if you thought the Court in Hylton was going to make it crystal clear just what was a direct tax and what was not, guess what, you're in for disappointment. There were three opinions written; Justice Paterson chirped:
"The question is whether a tax upon carriages be a direct tax? ... The argument on both sides turns in a circle; it is not a duty, impost, or excise, and therefore must be a direct tax; it is not tax, and therefore must be a duty or excise. What is the natural and common, or technical and appropriate, meaning of the words 'duty' and 'excise' it is not easy to ascertain. They present no clear and precise idea to the mind. Different persons will annex different significations to the terms... The term "taxes" is generic, and was made use of to vest in Congress plenary authority in all cases of taxation. The general division of taxes is into direct and indirect. Although the latter term is not to be found in the Constitution, yet the former necessarily implies it. "Indirect" stands opposed to "direct." There may perhaps be an indirect tax on a particular article that cannot be comprehended within the description of duties or imposts or excises; in such case, it will be comprised under the general denomination of 'taxes.'" (Hylton p. 176).
If you understand that, I wish you'd explain it to me. This is a nice little reminder, however, that there never was a time when law was "quaint" where taxation is concerned; it's always been a mess that you need legions of lawyers to decipher.
Justice Iredell also was a bit vague:
"Perhaps a direct tax in the sense of the Constitution can mean nothing but a tax on something inseparably annexed to the soil -- something capable of apportionment under all such circumstances. A land or a poll tax may be considered of this description... In regard to other articles there may possibly be considerable doubt." (Hylton p. 183).
The next milestone where your income tax is concerned was the Civil War. The South fought pretty hard, didn't they? Well, the Union did two things in retaliation: A) it fought back, and B) in 1862 it created the Internal Revenue Service (12 Statutes at Large 432 http://memory.loc.gov/cgi-bin/ampage, bottom of the page). Somewhere in the South there must have been a shrewd lawyer laughing. "We got those Yankees now!" he roared as he sipped his mint julep, "They may defeat us, they may free our slaves, but they'll NEVER get rid of the IRS!"
Anyway, the bill goes on and on; finally on page 473 you get the nitty gritty: three percent tax on annual incomes over six hundred dollars, five percent on every dollar you make over six hundred bucks IF you make over ten thousand dollars. And on the text continues until coming to a welcome close on page 489, after 119 sections, 119 uses of the phrase: "And be it further enacted," and several payment schedules. The key points to remember are first, Americans DID pay income tax in the nineteenth century, fifty years before the Constitution clarified that was okay, and second, since it took 57 pages of legal text to create and define the IRS, they basically were awash in bureaucracy before they even opened for business.
Again let's remember that by the terms of Article I, Section 9, if an income tax is "direct," it can only be assessed in proportion to the census. So what? Well, as Akhil Amar points out, if states A and B have identical populations, and if an income tax is considered "direct" then the total tax received from A and B must be the same. The problem is, if the people in state A are wealthier than those in B, you've got to lower the tax rates in A or raise them in B to make the revenue equal (America's Constitution, p. 406). That means you're raising taxes on those less able to pay--not a very sound policy.
You know the next step: a case arguing that income tax is direct and thus unconstitutional if its not apportioned. This actually didn't occur until well after the Civil War in Springer v. United States 102 U.S. 586, decided in 1881. (Tediously technical point you probably don't care about: the law challenged was not specifically the 1862 one I cited above, but a similar act two years later, 13 Statutes at Large 223.)
The opinion in Springer was unanimous that the income tax did not run afoul of the Constitution. There wasn't much new here; the Court cited sources we've already talked about, like Hamilton and Hylton, plus a few other authorities, and then declared:
"Our conclusions are, that direct taxes, within the meaning of the Constitution, are only capitation taxes, as expressed in that instrument, and taxes on real estate; and that the tax of which the plaintiff in error complains is within the category of an excise or duty" (Springer, p. 602).
That could be the end of the story, and if it was, there would be no constitutional amendment about the income tax. But you know what happened? Just fourteen years after the unanimous Springer decision, the Court in Pollock v. Farmers' Loan & Trust Co. 157 U.S. 429, rehearing 158 U.S. 601 (1895) ruled five to four that income taxes WERE direct, http://www.oyez.org/cases/1851-1900/1894/1894_893/. This remarkable about face has been commented on by a number of scholars; Edward Corwin called it "the most disabling blow ever struck at the principle of stare decisis in the field of constitutional law" (Court Over Constitution, 1938, p. 204, cited in Currie, The Constitution in the Supreme Court, Vol. 2, p. 25).
What was the majority's justification for this action? It's a bit hard to figure out. Chief Justice Fuller pointed out that the British always considered income taxes to be direct (157 U.S. 429, 572), but by a similar logic Fuller would have driven home from court on the left side of the road. The income tax at issue in Pollock, by the way, was minuscule: two percent on incomes over $4,000 (Przybyszewski, The Republic According to John Marshall Harlan, 1999, p. 171). In that light, check out this mind-boggling comment in Justice Field's concurrence:
"The income tax law under consideration is marked by discriminating features which affect the whole law. It discriminates between those who receive an income of four thousand dollars and those who do not. It thus vitiates, in my judgment, by this arbitrary discrimination, the whole legislation." (157 U.S. 429, 596).
Yeah. He went there. A progressive income tax is discriminatory because you pay more taxes if you're rich than if you're poor. If Fuller expressed a British precedent, Field arguably channeled eighteenth century French nobility: let them eat cake.
Well Justice John Marshall Harlan was not amused, and let his biographer describe the oral delivery of his dissent:
"A friendly witness noted his emotion. After a quiet and restrained beginning, 'the florid face, hitherto pale, assuming its natural color, reddened even to the high crown of the big bald head; pent up indignation burst its bounds and dominated the man; the judge seemed lost in the statesman and patriot, and thenceforth to the end the tone and manner and gesture even were those of indignant advocacy and fervent protest.' Harlan admitted in private the depth of this feeling but denied that he had acted out of turn... He insisted that he had not shaken his finger in the face of the chief justice or glared at anyone on the bench, as some reporters had written." (Przybyszewski, p. 171).
It can be very dangerous to disregard precedent, Harlan growled:
"Since the Hylton case was decided, this country has gone through two great wars under legislation based on the principles of constitutional law previously announced by this Court. The recent civil war, involving the very existence of the nation, was brought to a successful end, and the authority of the Union restored, in part, by the use of vast amounts of money raised under statutes imposing duties on incomes derived from every kind of property, real and personal, not by the unequal rule of apportionment among the States on the basis of numbers, but by the rule of uniformity, operating upon individuals and corporations in all the States, and we are now asked to declare -- and the judgment this day rendered in elect declares -- that the enormous sums thus taken from the people, and so used were taken in violation of the supreme law of the land. The supremacy of the nation was reestablished against armed rebellion seeking to destroy its life, but it seems that that consummation, so devoutly wished and to effect which so many valuable lives were sacrificed, was attended with a disregard of the Constitution by which the Union was ordained." (158 U.S. 601, 663).
Harlan rebutted Field's dismissal of income tax as discriminatory towards the haves:
"The decision now made may provoke a contest in this country from which the American people would have been spared if the court had not overturned its former adjudications, and had adhered to the principles of taxation under which our government, following the repeated adjudications of this court, has always been administered...It was said in argument that the passage of the statute imposing this income tax was an assault by the poor upon the rich, and, by much eloquent speech, this court has been urged to stand in the breach for the protection of the just rights of property against the advancing hosts of socialism. With the policy of legislation of this character, this court has nothing to do. That is for the legislative branch of the government. It is for Congress to determine whether the necessities of the government are to be met, or the interests of the people subserved, by the taxation of incomes. With that determination, so far as it rests upon grounds of expediency or public policy, the courts can have no rightful concern." (158 U.S. 601, 672-674).
And finally, Harlan did something really amazing, he wrote in a judicial opinion that the American people should overturn a Supreme Court decision with a constitutional amendment!
"If this new theory of the Constitution, as I believe it to be, if this new departure from the safe way marked out by the fathers and so long followed by this court, is justified by the fundamental law, the American people cannot too soon amend their Constitution." (158 U.S. 601, 674).
The American people got the message, although not very quickly--the Sixteenth Amendment was ratified eighteen years after Pollock. And just how biting was the first income tax after passage of the Sixteenth Amendment? As with the earlier taxes, not very dreadful at all. Only the rich paid; a mere two percent of America's families had to file a return under the 1913 law; the top bracket was six percent, which applied only to folks earning over a half million dollars a year (Friedman, A History of American Law, 3rd ed., p. 511). Just two years later, however, the top bracket was up to thirteen percent, so you can see where they were heading, towards nearly everybody today paying something.
What strikes me most about this, however, is that when you look at how small those early income taxes were--either the 1862 version, or the one struck down in Pollock, or the first one enacted following the Sixteenth Amendment--it's a friendly reminder that when people blast the income tax they aren't really criticizing the concept so much as the current execution. If America's taxpayers in 2008 paid only four cents to the feds for every buck they made, we wouldn't be hearing all this negative talk about bloated bureaucracies or the IRS, nor would there be so much clamoring for the Fair Tax or other alternatives. Almost nobody really cares how Uncle Sam is going to take a nickel out of every dollar; it's when it becomes, twenty cents, a quarter, thirty cents, etc., out of a buck that we scowl and howl.