Constitutionally, the controversy that resulted in the adoption of the Sixteenth Amendment had nothing to do with the federal government’s power to impose so-called “income taxes.” The issue was a class of tax controversy―not a power to tax controversy.
In order to understand this issue, it is important to review the taxing clauses of the Constitution and some of the events that led to the adoption of the Sixteenth Amendment.
The Constitution divides all taxes into two classes: direct and indirect. Article I, Section 8, Clause 1 grants the federal government its power to impose taxes, irrespective of the name of the tax:
“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.”
The above section is limited by Article I, Section 2, Clause 3:
“Representatives and direct Taxes shall be apportioned among the several States….”
And Article I, Section 9, Clause 4:
“No Capitation, or other direct Tax, shall be laid, unless in Proportion to the Census or Enumeration….”
Pursuant to the Constitution, direct taxes are required to be levied according to the rule of apportionment while indirect taxes are required to be levied according to the rule of uniformity. Apportionment means that anytime Congress wants to impose a direct tax, it is required to apportion the tax among the individual States based on population. For example, let’s say in 1790, two years after ratification of the Constitution, Congress prepared a budget and decided to impose a direct tax to raise the needed revenue. And, based on the census, New York had 30% of the population of these United States. Under the rule of apportionment, New York would have been responsible for 30% of the tax. The tax would not be collected by the federal government. New York would collect the apportioned sum from its citizens and send the money to the federal government.
Direct taxes are inherently unfair because one State, with ten percent of the population, might be one of the richest States while another State, with the same percentage of the population, might be one of the poorest. Yet, under the direct tax formula imposed by the Constitution, both States would be required to pay the same amount. The Founders feared the use of direct taxes so they created a system to discourage their use.
In fact, the Founders intended the federal government to use indirect taxes—imposts, duties and excises as the primary source of revenue to fund the operations of government.
The only rule for indirect taxes is they must be uniform. For example, if Congress had imposed an indirect tax on rum manufacturers in 1791, the rate had to be same in all 13 United States irrespective of population.
It should be noted that the word “indirect” does not appear in the Constitution but was referenced in the Federal (Constitutional) Convention of 1787 as the opposite of direct taxes. The word income, as applied to taxation under the Constitution, is simply a name for a type of tax. Income taxes are not a class of tax recognized by the Constitution. The Founders would have classified an income tax as a subset of either a direct or indirect tax.
In 1895, a legal controversy arose concerning a federal income tax statute. In that year, the United States Supreme Court struck down, as unconstitutional, the federal Income Tax Act of 1894. The Court concluded the tax imposed by the Act on “rents or income of real estate” was not significantly distinct from a tax on the property itself. Therefore, the Court classified the tax as a direct tax requiring apportionment among the several States.
Case: Pollock v, Farmer’s Loan and Trust Company, 157 U.S. 429 (1895), rehearing 158 U.S. 601 (1895).
Following this ruling, even though the Court did not hold that all income taxes were direct taxes, there was uncertainty as to whether the income tax was a direct or indirect tax.
In fact, nine years after the Pollock case, the United Supreme Court sustained an income tax on corporations under the War Revenue Act of 1898 as an excise tax—not a direct tax requiring apportionment among the several States.
Case: Spreckels Sugar Refining Co. v. McClain, 192 U.S. 397 (1904).
On June 16, 1909, a message from President Taft to both Houses of Congress was read in the Senate. Taft stated that “new kinds of taxation must be adopted” and recommended a “graduated inheritance tax” to raise the needed revenue. Taft stated that the House had adopted the tax but there was apprehension in the Senate. There were several senators who were hostile to the Supreme Court’s ruling in the Pollock case. Taft noted that these Senators had:
“[P]roposed to make up the deficit by the imposition of a general income tax in form and substance of almost exactly the same character as that which in the case of Pollack v. Loan and Trust Company (157 U.S. 429) was held by the Supreme Court to be a direct tax, and therefore not within the power of the Federal Government to impose unless apportioned among the several States according to population.”
Taft went on to state:
“The decision of the Supreme Court in the income-tax cases deprived the National Government of a power which, by reason of previous decisions of the court, it was generally supposed that Government had. It is undoubtly a power the National Government ought to have. It might be indispensable to the Nation’s life in crisis.” Although I have never considered a constitutional amendment as necessary to the exercise of certain phases of this power, a mature consideration has satisfied me that an amendment is the only course for its establishment. I therefore recommend to the Congress that both Houses, by a two-thirds vote, shall propose an amendment to the Constitution conferring the power to levy an income tax upon the National Government without apportionment among the States in proportion to population.
This course is much to be preferred to the one proposed of reenacting a law once judicially declared to be unconstitutional.”
Taft noted that Congress should not assume the Court would reverse itself and said “a much wiser policy was to accept the decision and remedy the defect by amendment in due and regular course.”
Continuing, Taft stated:
“[T]he decision in the Pollock case left power in the National Government to levy an excise tax, which accomplishes the same purpose as a corporation income tax and is free from certain objections urged to the proposed income-tax measure.”
Therefore, he recommended an amendment to the tariff bill under consideration that would impose “upon all corporations and joint stock companies…an excise tax measured by income” and this tax would be imposed “upon the privilege of doing business as an artificial entity….”
Taft stated that this type of tax had already been upheld by the Supreme Court as constitutional:
“The decision of the Supreme Court in the case of Spreckles Sugar Refining Company against McCain (192 U.S. 397) seems clearly to establish the principle that such a tax as this is an excise tax upon privilege and not a direct tax on property, and is within the federal power without apportionment according to population.”
Source for above quotes: Congressional Record—Senate, June 16, 1909, page 3344.
Congress did exactly what President Taft requested. They began debate on a constitutional amendment and passed the Corporation Excise Tax Act of 1909. The legislation imposed a special income tax [excise tax] on corporations for the privilege of doing business in a corporate capacity. Section 33 of the Act stated, in part:
“That every corporation…shall be subject to pay annually a special excise tax with respect to carrying on or doing business…upon the net income…” (Section 38, Act of August 5, 1909 (36 Stat., 112)
Two years later, and two years before the Sixteenth Amendment is “allegedly” ratified, the Supreme Court sustained the federal government’s power to impose an income tax on corporations as an indirect excise tax pursuant to Article I, Section 8, Clause 1 of the Constitution. The syllabus of the case states:
“The Corporation Tax, as imposed by Congress in the Tariff Act of 1909, is not a direct tax, but an excise; it does not fall within the apportionment clause of the Constitution, but is within, and complies with, the provision for uniformity throughout the United States; it is an excise on the privilege of doing business in a corporate capacity….”
Case: Flint v. Stone Tracy Co., 220 U.S. 107 (1911).
Two years after this decision, a so-called income tax amendment is added to the Constitution. The Sixteenth Amendment states:
“The Congress shall have the 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.”
In 1980, the Congressional Research Service (CRS) prepared a report for Congress concerning the federal income tax. (According to CRS web-page, they provide Congress with legal and other analysis that is authoritative, accurate, objective and nonpartisan). This Report discussed two 1916 Supreme Court decisions and the effect of the Sixteenth Amendment on the federal government’s power to tax:
“The Supreme Court, in a decision written by Chief Justice White, first noted that the Sixteenth Amendment did not authorize any new type of tax, nor did it repeal or revoke the tax clauses of Article I of the Constitution… Direct taxes were, notwithstanding the advent of the Sixteenth Amendment, still subject to the rule of apportionment and indirect taxes were still subject to the rule of uniformity.”
Source for above quote: “Some Constitutional Questions Concerning the Federal Income Tax,” Howard M. Zaritsky, (Congressional Research Service, Washington, D.C., 1980) p. 5, Report No. 84-168 A 734/275.
Note: The two cases were Brushaber v. Union Pacific Railroad Company, 240 U.S. 1, (1916) and Stanton v. Baltic Mining Company, 240 U.S.103 (1916).
In the Baltic Mining Company case, Justice White wrote:
“(T)he Sixteenth Amendment conferred no new power of taxation but simply prohibited the previous complete and plenary power of income taxation possessed by Congress from the beginning from being taken out of the category of indirect taxation to which it inherently belonged….”
As stated by above, the Sixteenth Amendment did not authorize any new type of tax or repeal or revoke the existing clauses. Indirect taxes were still subject to the rule of uniformity and direct taxes were still required to be apportioned among the several States based on population. Thus, the Amendment could not have granted Congress a new power to impose income taxes because the Amendment did not authorize a new type or class of tax.
If the Amendment had created a new taxing power, it would have established a third class of tax that was direct in its application but exempt from the rule of apportionment applicable to all other direct taxes. Thus, it would have amended the taxing clauses of the Constitution.
In my opinion, the statement by Justice White is the key to understanding the effect of the Sixteenth Amendment. If you read between the lines, the Sixteenth Amendment simply prevented Congress from duplicating its mistake in 1894. By restricting income taxes to the category of indirect taxes, the amendment prohibits Congress from structuring and imposing income taxes as direct taxes.
The CRS Report made the following statement concerning the Court’s decisions on the nature of the income tax:
“Therefore, it can be clearly determined from the decisions of the United States Supreme Court that the income tax is an indirect tax, generally in the nature of an excise tax.”
Source for this quote: page 6 of the 1980 CRS Report cited above.
As stated previously, the power to impose excise taxes is Article I, Section 8, Clause 1. Therefore, the Sixteenth Amendment cannot be the source of the federal government’s power to impose the indirect excise taxes known as “income taxes.” This renders the Amendment meaningless when it comes to the federal government’s power to impose these taxes. If the Amendment were repealed tomorrow, the federal government would retain the power to impose the class of excise taxes commonly known as “income taxes” because the power to impose these taxes would remain unchanged.
In 1989, the Congressional Research Service revised and updated its Report to Congress concerning the federal income tax. This Report addressed the nature of an excise tax:
“An excise tax is a tax levied on the manufacture, sale, or consumption of a commodity or any various taxes on privileges often assessed in the form of a license or fee. In other words, it is a tax on doing something to property or on the privilege of holding some property or doing some act, not a tax on the property itself. The tax is not on the property directly, but rather it is a tax on the transaction.
When a court refers to an income tax as being in the nature of an excise, it is merely stating that the tax is not on the property itself.”
Source for this quote: “Frequently Asked Questions Concerning the Federal Income Tax,” John R. Luckey, (Congressional Research Service, Washington, D.C., 1989) p. 5, Report No. 89-623 A.
If the Sixteenth Amendment granted Congress a new taxing power, then why did the legal research arm of Congress make legal conclusions to the contrary? And why, if the Amendment granted Congress the power to impose a non-apportioned direct tax on income, did the CRS state that the income tax is an indirect excise tax?
As shown above, excise taxes are not taxes on income―they are taxes measured by income. Income is not the source of an excise tax―it is the basis for determining the amount of the tax.
This principle formed the basis for the current income tax. On April 26, 1913, Cordell (Judge) Hull, a Representative from Tennessee who had helped draft the legislation, explained the “new” income tax law adopted by Congress following the adoption of the Sixteenth Amendment:
“In any event, the proposed tax is measured by net profits or gains, and is not imposed upon gross income nor capital nor other property. If a citizen has not been successful in his efforts to accumulate profits he is not required to pay the tax, but if he has prospered he is required to contribute to his Government, not the scriptural tithe, but a small percentage of his net profits.” (Bold added)
Mr. Hull went on to state:
“The proposed law should be construed as similar laws have been construed by the courts with respect to the application of the tax [Corporation Excise Tax Act of 1909], and that is that the income in question shall be the measure of the tax and not the specific fund out of which the tax is necessarily payable; the bill takes as the measure of the tax the net income of the proceeding year. Paragraph B defines the net income of a taxable individual or person. Income as thus defined does not embrace capital or principle, but only such gains or profits as may be realized from rent, interest, salaries, trade, commerce, or sales of any kind of property, and so forth, or profits or gains derived from any other source.” (Bold added)
Source for Hull’s quotes: Congressional Record, Volume 50: Part 1, pp., 505-506.
As stated by Hull, the legislation would not impose a tax on income. Income would be the measure of the tax—not be the subject of the tax. In other words, income would be the yardstick to determine the value of the activity being taxed.
If the Sixteenth Amendment granted Congress a new taxing power concerning income, then income would be the subject of the tax—not the measure of the tax. If the Sixteenth Amendment granted Congress the power to impose a non-apportioned direct tax on the income of the people of these United States, as many believe, then why did Congress craft an income tax law that imposed an indirect excise tax measured by income?
In my opinion, there are two irrefutable facts that foreclose any possibility that the income tax is a direct tax. On March 27, 1943, an analysis of the federal income tax was published in the Congressional Record. This compilation of information was written by a former legislative draftsman in the Treasury Department (one of the people who wrote the tax laws) and entitled:
“The Income Tax is an Excise Tax, and Income is Merely the Basis for Determining its Amount.” This commentary stated, in part: “The income tax is, therefore, not a tax on income as such. It is an excise tax with respect to certain activities and privileges which is measured by the income they produce. The income is not the subject of the tax: it is the basis for determining the amount of the tax.
Footnote: If the tax should be construed as a tax on income as a specific fund the disappearance of the fund before the date of assessment would prevent the collection of the tax.”
Source for this quote: Congressional Record, Volume 89: Part 2, p. 2980.
In other words, if Congress were imposing a direct tax on income, as opposed to a tax measured by income, then the tax liability would be based on the amount of income still in the individual’s possession on April 15th of the following year. If all of the individual’s income from the previous year had been spent as of the assessment date of April 15th, then, as stated above, there would be no tax liability.
The analysis went on to state: “Hitherto the previous year’s income has been used as the basis. But the basis, as well as the rates, may be changed at any time.
Footnote: If income is merely the measure of the tax, it is clearly quite immaterial whether the income that is adopted as a measure is that of the past, or the present, or of the future, provided only that it is practically ascertainable.”
Source for this quote: Congressional Record, Volume 89: Part 2, p. 2980.
The retroactive feature of the income tax verifies that the tax is an excise tax measured by income—not a tax on income. Since the tax is a privilege tax and income is merely the measure of the tax, Congress can change the value of the privilege at any time and make it retroactive to the beginning of the tax year. If the tax were a tax directly on income, then it could not be imposed retroactively.
In August of 1993, President Bill Clinton signed a budget reconciliation bill. This legislation raised income, corporate, estate and gift tax rates retroactively to the first day of the year. Since January 1st was 20 days before Clinton assumed office, it marked the first time in the history of these United States that tax rates were applied retroactively into the administration of a prior president.
This is proof positive that the income tax is not a direct tax on income because if it were, Clinton’s retroactive rate change would have been unconstitutional.
There is another way to prove this. Every 1040 booklet published by the federal government contains the exact same rate charts for individuals to calculate the amount of tax. If an individual in Maine has the same taxable income as another individual in Alaska, the rate of tax is exactly the same. Uniformity is a component of indirect taxes.
If the Sixteenth Amendment did not grant Congress any new taxing power or modify its existing powers, then what did the Amendment accomplish? Since the Amendment states that income taxes are not subject to the rule apportionment applicable to all other direct taxes, the Sixteenth Amendment, by its wording, restricted income taxes to the class of indirect taxes. The reports by the CRS verify this fact.
Constitutionally, the Sixteenth Amendment simply settled the class of tax controversy for the taxes known as “income taxes” and the constitutional rule for imposing them.
End of Article Notes
As stated by the Congressional Research Service, the federal income tax is not a direct tax on income. It is a privilege or excise tax measured by income. Nowhere in any of the CRS Reports referenced above do they identify the so-called privilege that is the basis for this excise tax.
The question no one will answer is—what section in the Internal Revenue Code defines and imposes liability for this so-called privilege? The nature of this “privilege” has been one of the most closely guarded secrets in American history. Neither the Internal Revenue Service nor members of Congress will identify the “privilege” if you contact them. Instead, in letters and publications they assert that the Sixteenth Amendment granted the federal government a new taxing power, i.e., the power to impose a non-apportioned direct tax on the income of the people of these United States. As shown above, this position is patently false and contrary to the Sixteenth Amendment that limited, not expanded, the taxing powers of the federal government.
If Congress is imposing the federal income tax on the erroneous assumption that the Sixteenth Amendment granted the federal government the power to tax income directly, without apportionment among the several States, then the tax is being unconstitutionally applied because it violates the restriction placed on the taxing powers of the federal government, i.e., the Amendment restricted income taxes to the class of indirect taxes.
Social Security Taxes
Social Security taxes, which are also known as employment taxes, are also indirect excise taxes. Here is a breakdown of these taxes.
1) Employees are not making contributions into a retirement program. They are paying a “special income tax” which is deducted from their wages and paid to the federal government by the employer. This indirect excise tax is imposed on the employee for the so-called “privilege” of being employed by an employer.
2) Employers are not making matching contributions into a retirement program for their employees. They are paying a separate excise tax for the so-called “privilege” of having individuals in their employ.
3) Self-employed individuals pay both excise taxes—one as the employee and the other as the employer. All of these taxes are deposited in the general fund of the United States and are not earmarked in any way. There is no special fund or lock box for Social Security!