To say, “Ain’t no sure thing in life ‘cept death and taxes,” is an over-simplification of what is a truthful cliché. Just as there is a universe of all possible deaths from accidents, sickness or natural causes, there is also a universe of all possible taxes. The illustrations and explanations below, adapted from Phil Hart’s well-documented book, “Constitutional Income: Do You Have Any?” provide an opportunity to understand one of the two surest things in life. The Constitution prescribes two taxation rules: For direct taxes it is the rule of apportionment; for indirect taxes it is the rule of uniformity. Which rule applies to the income tax? There are only three possibilities:
The question Congress must resolve prior to levying any tax is “What constitutional rule applies to it—the rule of uniformity (for an indirect tax), or the rule of apportionment (for a direct tax)?” The IRS would have us believe that neither rule applies to the income tax. It is illogical to believe our Founders would have fought a war to win independence from a king who taxed his subjects in any way he pleased, then gave the new Congress they just created unlimited taxing power. For Case 1 to be correct, that no constitutional rule applies, the 16th Amendment would have to have created a new class of taxes.
In one of the first income tax cases to go to the Supreme Court, Stanton v. Baltic Mining Co., 240 U.S. 103 (1916), Stanton’s attorney made the point 35 times in his briefs and oral argument that the 16th Amendment created a new class of taxes, that is a direct tax not regulated by the apportionment rule. Rejecting this argument, the Supreme Court stated in its opinion, “By the previous ruling [Brushaber] it was settled that the provisions of the Sixteenth Amendment conferred no new power of taxation.” Therefore, there is no exception to the apportionment rule for direct taxes.
Conclusion: There is no exception to the Constitution’s taxation rules. Possibility I cannot be applied to the 16th Amendment.
The apportionment rule is difficult for Congress to apply. It was intended to be that way. The founding fathers wanted our government to be a limited one with limited powers of taxation. A constitutionally apportioned income tax would have a $250,000-a-year investment banker in New York paying the same dollar amount of tax as the construction worker from a rural area. An income tax on a person is a direct tax. An apportioned income tax on people requires each person pay the same amount of tax.
Reviewing the Congressional Record, Supreme Court rulings and relevant literature both at the time the Constitution was ratified (1789) and the time the 16th Amendment was debated (1910-13), reveals that the most often quoted and universally accepted authority on matters relating to taxation was Adam Smith and his book Wealth of Nations (1776). Smith and those who drafted both the Constitution and the 16th Amendment understood that a tax on “incomes” and a tax on “sources” are two different types of tax. A tax on “income” diminishes the profit while leaving the source of the income intact. A tax on “sources” diminishes the source. (See parables next page)
Conclusion: Because people’s wages and salaries vary too widely, politically and logistically it is impossible to levy a direct income tax on wages and salaries in accordance with the apportionment rule. This case does not apply.
For the uniformity rule to apply, the income tax would have to be an indirect tax. As an indirect tax, it cannot diminish the source of the income, as such a tax would be direct. When the government taxes a chunk out of your paycheck, you’re paying a direct tax. You have less money to show for the labor which you traded for wages. You, the source, were diminished by the tax.
The political activism to amend the Constitution allowing for an income tax started as a result of the Supreme Court’s Pollock ruling. The Pollock Case determined that income taxes on investment and business profit were direct taxes. Pollock was a stretch and, the American People thought, a bad ruling. The income that was taxed in Pollock did not diminish the source, but only took its bite out of profits that were generated from the source. At the time, only about 10 percent of Americans had an income; the rest worked for wages or salaries. The purpose of the 16th Amendment was to take income taxes out of the category of direct taxes, where the Supreme Court put it, and place it back into the category of indirect taxes where it had previously been. Constitutionally speaking, the income tax of the 16th Amendment is an indirect tax and can be levied only on investment income and business profit.
Conclusion: This case correctly illustrates Congress’ Constitutional powers of taxation and would apply to the 16th Amendment.
Apportioned tax: Congress has the authority to levy a direct tax for specific reasons, such as financing a war, so long as the amount needed is identified and each person ( a poor person or a wealthy person) pays the same amount of tax—an equal portion of the total amount levied.
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