by Ray Raphael
Noticeably absent from Madison’s list was any change to the system of national taxation along the lines proposed by several state ratifying conventions. Thomas Tudor Tucker, a representative from South Carolina who had opposed the Constitution, noticed the omission and introduced an amendment nearly identical to Luther Martin’s defeated motion at the Federal Convention and to the amendments offered at the state conventions: Congress should first levy “duties, imposts, and excises,” then requisition the states, and only if both of these failed to produce sufficient funds for “the public exigencies” would it be authorized to impose direct taxes. Samuel Livermore of New Hampshire declared that Tucker’s amendment had proved extremely popular and was “of more importance” than all the others. The people, he predicted, “would not value” Madison’s amendments “more than a pinch of snuff” if the taxation amendment were rejected.19
However popular the amendment might have been out-of-doors, only nine representatives supported Tucker’s motion, while thirty-nine opposed it. The Senate turned down a similar measure without even a roll-call vote. This defeat dealt amendments seeking to limit congressional taxing power a mortal blow. Despite the efforts of the founding era’s antitax crusaders, Congress’s broad powers of taxation—the central concern of the framers—was firmly entrenched in the United States Constitution.20
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Constitutionally, the matter was closed. Congress could enact both indirect and direct taxes if and when it pleased, provided that it apportion the direct taxes according to each state’s population. Not surprisingly, Congress shied from direct taxes, knowing how unpopular they would be. In 1790, when it adopted Alexander Hamilton’s plan to assume the states’ wartime debts and begin to pay them off, it decided instead to place an excise tax on the sale of liquor, also Hamilton’s idea.21
Yet even excise taxes could fall disproportionately on particular regions, contradicting the spirit (if not the letter) of the Constitution’s command that “all Duties, Imposts, and Excises shall be uniform throughout the United States.” Because domestic liquor was produced primarily in what was then the American West, and since western farmers depended heavily on the income from the sale of their liquor, they bore a disproportionate share of the federal tax burden. In 1794 farmers in western Pennsylvania and other trans-Appalachian regions attacked tax collectors and even considered secession, leading President Washington, again at Hamilton’s urging, to ride at the head of an army headed westward. The Revolutionary cry of “taxation without representation” was simplified to the even more basic complaint of “unfair taxation.”22
In 1794, to provide revenue for an array of defense measures (fortifying harbors, establishing armories, enlisting soldiers, and building or purchasing armed ships), Congress levied what we call today luxury and sin taxes on imported wines and spirits, refined sugar, and snuff. These excise taxes were clearly authorized by the Constitution, but when Congress levied a tax of sixteen dollars for every carriage, some argued that this was a tax on ownership rather than on economic activity; it was therefore a direct tax and would have to be apportioned among the states, they claimed. Massachusetts representative Theodore Sedgwick, a defender of the tax, countered: “It would astonish the people of America to learn that they had made a Constitution by which pleasure carriages and other objects of luxury were excepted from contributing to the public exigencies.” Apportionment would not work, they continued, because several states “had few or no carriages.” Daniel Hylton, a Virginian who owned 125 chariots for his personal use, refused to pay the tax, and his case went all the way to the Supreme Court. In 1796, for the first time, the High Court ruled on the constitutionality of a federal law. The justices determined the tax was an excise and did not have to be apportioned among the states, so it was indeed in accordance with the Constitution. Hylton had to pay the tax.23
In 1798 Congress levied its first avowedly direct tax. To pay for a military mobilization in anticipation of a war with France, it passed “An act to lay and collect a direct tax within the United States,” to be “assessed upon dwelling-houses, lands, and slaves.” The tax on slaves was straightforward: fifty cents per head, with no distinctions. The tax on houses and lands, though, was sharply graduated, starting at two-tenths of one percent for houses and land worth $100 to $500, then three-tenths of one percent for property valued at $500 to $1,000, and so on, ending at a full percent for holdings over $30,000.
The emphasis on taxing the wealthy was not motivated by class leveling. The tax was enacted by a Federalist-dominated Congress, in fact, and Federalists represented the interests of the well-to-do merchants, manufacturers, lawyers, and other professionals. Allowing the tax burden to fall more heavily on the rich was a long-standing tradition dating back to early colonial times. Because most citizens provided a good share of their own sustenance, they engaged in money transactions as seldom as possible and had little to give to the government beyond their minimal poll taxes. Property taxes, however, could depend on the extent of a person’s holdings, for those with more property were better able to contribute to the public coffers. This position could be justified philosophically, since those with more property had a greater “stake” in protecting that property, a primary responsibility of government.24
Administration of the 1798 direct tax followed another long-standing custom. To assess the value of houses, government agents relied largely on the number and size of windows. Because windows had to be purchased whereas other primary building materials—wood, stone, or brick—could be obtained from the land, they were a better measure than square footage of the owner’s ability to pay. In common parlance, the 1798 direct tax became known as the “window tax,” even though the statute did not specifically mention windows.25
Dutifully abiding by the Constitution, Congress apportioned the two million dollars it demanded according to the population of each state, down to the tenth of a cent. Pennsylvania, for instance, was required to yield “two hundred and thirty-seven thousand one hundred and seventy-seven dollars, seventy-two cents, and three mills.” If the enumerated taxes fell short of that figure, the tax rates would have to be increased until the state met its quota. Taxes were to be “collected by the supervisors, inspectors and collectors of the internal revenues of the United States”—an embryonic Internal Revenue Service. Government agents were empowered to “collect the said taxes, by distress and sale of the goods, chattels or effects of the persons delinquent” from those who refused to pay their due. A slave could thus be taken and sold in lieu of taxes. For a farmer without slaves, “all grass, or produce of farms, standing and growing thereon, shall and may be taken and sold for the said tax.” Further, unless and until taxes were paid, the federal government would hold “a lien upon all lands, and other real estate, and all slaves, of the individuals who may be assessed for the same.”26
Congress’s foray into the world of direct taxation proved extremely unpopular among those opposed to a war with France. This time it was German-speaking farmers in eastern Pennsylvania who actually rebelled, bullying the tax collectors and causing President John Adams to order the suppression of the uprising by force. When the anticipated war with France never materialized, Congress soon repealed these direct taxes and Adams pardoned the leaders of the rebellion. Like the liquor tax before it, the direct tax of 1798 had severe political repercussions, even though it followed the letter of the law as laid down by the United States Constitution.
After the 1798 debacle, Congress tried its best to avoid direct taxation. It did pass a direct tax to finance the War of 1812, but this time, hoping to lessen resistance, it allowed each state to come up with the tax money according to its own scheme, much in the spirit of the tax amendments proposed during the ratification debates of 1788. Careful not to transgress the Constitution, Congress now stipulated the precise amounts to be paid not only state by state but also county by county; clearly, it took the concept of apportionment seriously.
The federal income tax m
ade its debut in the Civil War. Faculty taxes, the predecessors to income taxes, had been used by several states during the Revolutionary War, and in the 1840s six states had experimented with income taxes, but those were all adjuncts, not central features of the states’ taxation programs. By contrast, in 1862 Congress decided to tax “the annual gains, profits, or income of every person residing in the United States, whether derived from any kind of property, rents, interests, dividends, salaries, or from any profession, trade, employment, or vocation carried on in the United States or elsewhere.” The rates were mildly progressive: 3 percent for incomes between $600 and $10,000, and 5 percent on incomes in excess of $10,000. Congress adopted an income tax instead of a property tax for two reasons. First, its reach was broader and could spread the tax burden throughout the population more evenly. Second, it was considered an indirect tax because it taxed an “activity”—making money—not the person himself or his property. Previously, the Supreme Court had ruled that the only direct taxes were poll taxes and property taxes, and that meant the income tax was not subject to the apportionment rule laid down by the Constitution.27
When the federal income tax made its next appearance in the mid-1890s, however, the U.S. Supreme Court, in Pollock v. Farmers’ Loan and Trust Company (1895), overturned precedent and declared that any federal tax on income derived from real property (rents) and even on income derived from ownership of personal property (interest and dividends) was in fact a thinly veiled property tax. Given that taxes on rents, interest, and dividends functioned as property taxes, and given that property taxes were direct taxes, portions of the income tax under consideration—those accruing to these forms of income—needed to be apportioned among the states, as the Constitution required. Further, because the Income Tax Act of 1894 did not distinguish between the income from labor, which the Court still considered indirect, and income from rents, interest, and dividends, which it held were direct, the Court, by a five-to-four majority, declared that all sections of the bill that contained a direct tax were unconstitutional, even if some taxes within those sections were still constitutional.28
Theoretically, Congress could have responded at this point by levying a new indirect tax on wages and a separate direct tax on rents, interest, and dividends, to be apportioned state by state. Apportionment, however, triggered other problems that had become evident over the years. Any time that Congress tried to heed the apportionment requirement of Article I, Section 9, Clause 4, by setting a precise amount that each state must raise, it inevitably created variations in tax rates. Today, for instance, if Congress decided that each state must pay a share of income taxes proportionate to its population, citizens of Mississippi, the poorest state in the Union, would be taxed at a per capita average rate of 17.9 percent, whereas those residing in the rich state of Connecticut, who can better afford to pay taxes, would be charged an average rate of only 9.2 percent. Not only would this be bad policy, but it would also contradict at least the spirit of the “uniform throughout the United States” requirement set forth in Article I, Section 8, Clause 1 of the Constitution. Any form of property or income tax would produce a similar result because wealth and income are not evenly distributed from state to state. Unwittingly, the framers had created a situation in which strict adherence to one section of the Constitution contradicted the intent of another.29
The increasingly unworkable distinctions between direct and indirect taxation, and the different manners in which these were treated in the Constitution, were counterintuitive and counterproductive. A tax on wages, the direct product of a person’s labor, was considered indirect, whereas income from interest was somehow linked to individual citizens in a more direct manner requiring greater constitutional protection. If the federal government were ever to establish a durable system of taxation that included income taxes, it would have to eliminate the cause of the confusion.
Politically, the narrow five-to-four decision in Pollock was a bombshell. Democrats were outraged that the Supreme Court required taxes on rent, interest, and dividends to be apportioned among the states but allowed Congress to tax income derived from labor without this restriction. Further, because the contradictions inherent in the apportionment of direct taxes had become apparent, the Supreme Court had effectively prohibited any federal tax related to property. At this point in time, as the Gilded Age collided with the growing Populist movement, the terms “property” and “labor” were particularly loaded, and it became increasingly more difficult to defend the notion that only labor, and not property, could be taxed. Progressive Republicans like Theodore Roosevelt eventually joined Democrats on the tax-reform bandwagon, and Congress finally responded to the widespread pressure for reform by proposing to amend the Constitution: “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.” The latter part of the amendment, italicized here but normally overlooked, is actually the heart of the matter. The Sixteenth Amendment did not render income taxes suddenly constitutional, as is commonly assumed. Some income taxes were already deemed constitutional, even after the Supreme Court’s decision in Pollock.
The Sixteenth Amendment solved the problem created by the distinctions of taxation within the Constitution and by the Supreme Court’s rather bizarre interpretation of those distinctions. Income from wages should not be easier to tax than income deriving from ownership of property, most Americans believed, and the only way to resolve that disparity was to eliminate the strange and seemingly artificial disparity between direct taxes, which needed to be apportioned, and indirect taxes, which did not. The Sixteenth Amendment settled that matter by announcing clearly that any and all income taxes Congress levied did not have to be apportioned among the states. In today’s parlance, it simplified the tax code.
The Sixteenth Amendment, ratified in 1913, was the first since Reconstruction and the first to address the vast inequities in wealth and income that had emerged in the Gilded Age. It was certainly in keeping with the larger goal of securing a reliable source of income for the federal government via the taxing power. In 1787, the framers of the Constitution wanted to create a workable and enduring tax structure that did not vary in its impact by region. True, they preferred indirect taxes such as imposts and excises, which were voluntary, but they correctly envisioned that these would not always produce the needed revenues, so they made certain that Congress possessed the power to levy direct taxes as well. They did not foresee that the distinction between direct and indirect taxes would cause such confusion and impede their goal. By altering the tax structure to eliminate unexpected and unwanted consequences, the Sixteenth Amendment completed the framers’ work.
Why did the Federal Convention, when it was creating the taxing power, not specifically authorize Congress to levy taxes on income? The neglect was casual, not purposive. Because they lived in a predominantly agricultural society in which income was difficult to define or quantify, income taxes were incidental at that time. When levied at all, the predecessors to today’s income taxes took the form of faculty taxes that focused on what a person was likely to earn, not on what he did earn—and that, by definition, was conjectural and therefore inexact. Property, on the other hand, was easy to define and quantify and therefore easy to tax. Even so, the distinction between property and income at that time was cloudy and not particularly significant. In fact, in the late eighteenth century, property often was valued according to the rent, or income, that it could produce. The framers neither authorized nor prohibited income taxes as we know them today because such taxes, made possible by industrial and post-industrial societies, were not within their known world. They did not imagine a time when nearly everyone would depend on income from wages and salaries.
From the framers’ point of view, the central idea was to facilitate Congress’s ability to tax, not to limit it. All taxes except those on exports were on the table, with the one restriction on
apportionment. Once that restriction proved unworkable, however, would the framers have wanted all direct taxation to cease? It is highly doubtful that they would wish to weaken the hand of the national government, determined as they were to strengthen it. Would they have wanted to grant the federal government a reliable source of revenue, thereby ensuring its credit, through a broadly based system of taxation? Of course. That was the very heart of their mission in Philadelphia in 1787.
George Washington certainly thought that way. In September 1796, after serving two terms as president, he published his Farewell Address to the American people. In it, he told his fellow citizens as politely as he could to pay their taxes without too much complaint. “As a very important source of strength and security, cherish public credit,” he told the nation. “It is necessary that public opinion should co-operate…. [I]t is essential that you should practically bear in mind that towards the payment of debts there must be revenue; that to have revenue there must be taxes; that no taxes can be devised which are not more or less inconvenient and unpleasant.” Finally, he pleaded “for a spirit of acquiescence in the measures for obtaining revenue, which the public exigencies may at any time dictate.”30
These might not be the words we want to hear, but that’s why Washington said them. A strong and prosperous nation cannot exist without sound taxation, and that is precisely why the framers granted the people’s representative in Congress such sweeping authority to raise revenues sufficient to meet “the public exigencies.”
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POLITICS
Myth: The framers were impartial statesmen, above interest-driven politics.