History of Income Tax in America - Constitutional Objections

History of Accounting > Tax History > Early Constitutional Objection

In the early Americas, there was much objection to passing the income tax. The same constitutional objection may be raised against the new income tax, which was overruled when raised against the old, namely, that it is a direct tax which is not apportioned among the states in the manner prescribed by the Constitution.1 Another objection may be made, which has not been previously considered, namely, that the exemption of persons with an income of less than $4,000 is so unreasonable as to make the imposition upon the rest not a tax but confiscation; and consequently unconstitutional as the taking of the taxpayer’s property without due process of law.2 The tax may also be contested as not uniform.3 Persons who receive income from investments in state or municipal bonds, or from dividends in state corporations, may also claim exemption from the tax upon the ground of alleged want of power in the United States to tax such investments, and it may be asserted that the whole act is invalid for the want of such exemptions.4 Non-residents may claim exemption upon the ground that Congress has no power of extra-territorial legislation.6 Contractors with states and municipalities, as well as state and municipal officers, may deny the power of Congress to tax their emoluments.6
Federal officers, whose compensation is secured by the Constitution against reduction, may contest the tax upon
the ground that it is in effect a reduction of their salaries.1 Holders of United States bonds, the principal and interest of which is not by the law of their issue exempt from Federal taxation, may contest the tax as an impairment of the obligation of their contracts.2 The provision of the Revised Statutes authorizing the Federal courts to punish as a contempt the disobedience to a summons by a collector, may be attacked as not judicial power, and consequently a power which cannot be vested in these courts.3 The provision authorizing a collector to thus compel the production of the account books of a taxpayer may further be attacked as an infringement of the Fifth Amendment of the Constitution, by compelling a person to testify against himself.4 These objections will be considered separately.
§ 7.—The Income Tax is not a Direct Tax.
It is settled by repeated adjudications that an income tax is not a direct tax within the meaning of the Constitution, which must be apportioned among the several states in proportion to their inhabitants.6
§ 8.—History of Constitutional Provisions as to Direct Taxation. The Constitution provides that “Representatives and direct taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be deter
1 Infra, §§ 16, 17. »Infra, § 49.
3 Infra, § 18. «Infra, § 18.
4 Hylton v. U. S., 3 Dallas, 171; Pacific Insurance Co. v.. Soule, 7 Wall. 433; Veazie Bank v. Fenno, 8 Wall. 533; Scholey v. Rew, 23 Wall. 331; National Bank v. U. S., 101 U. S., 1 ; Springer v. U. S., 102 U. S. 586.— See, however, an article by Mr. Robert Sewell, in 28 American Law Review, 808, where he argues for a reconsideration of these rulings. An argument by Mr. C. Stuart Patterson, to the same effect, was published in the Sun, December 13, 1894. A former argument by Mr. William O. Bartlett, to the same effect, was reprinted in the Sun in November, 1894.
rained by adding to the whole Number of free Persons, including those bound to Service for a Term of Years, and excluding Indians not taxed, three-fifths of all other Persons. The actual Enumeration shall be made within three Years after the first Meeting of the Congress of the United States, and within every subsequent Term of ten Years, in such Manner as they shall by Law direct.” l A subsequent clause contains the inhibition that “No capitation or other direct Tax shall be laid, unless in Proportion to the Census or Enumeration hereinbefore directed to be taken.” 2 This is one of the results of the three great compromises made in the Federal Convention.
On the day after the meeting of the first Congress of the United States, September 6, 1774, the first legislative act was adopted as follows: ” Resolved, that in determining questions in Congress, each colony or province shall have one vote, the Congress not being possessed of, or at present able to procure, proper materials for ascertaining the importance of each colony.”
The advantage then secured by the smaller states they refused to relinquish, and retained until the Articles of Confederation were abrogated by the Constitution. These articles provided that “in determining questions in the United States, in Congress assembled, each state shall have one vote.”3 All charges of war, and all other expenses that shall be incurred for the common defense or general welfare, and allowed by the United states in Congress assembled, shall be defrayed out of a common treasury, which shall be supplied to the several states, in proportion to the value of all land within each state, granted to or surveyed for any person, and such land, and the buildings or improvements thereon, shall be estimated according to such mode as the United States in Congress assembled shall from time to time direct and appoint.
1 Constitution Article I, Section 2. * Constitution Article I, Section ft. * Articles of Confederation, V.
The taxes for paying that proportion shall he levied and paid by the authority and direction of the legislatures of the United States in Congress assembled.”1 On March 6, 1783, the Committee on Revenue reported with other resolutions for the supply of the treasury:
“11. That, as a more convenient and certain rule of ascertaining the proportions to be supplied by the states, respectively, to the common treasury, the following alteration, in the Articles of Confederation and Perpetual Union between these states, be, and the same is, hereby agreed to in Congress; and the several states are advised to authorize their respective delegates to subscribe and ratify the same, as part of the said instrument of union, in the words following, to wit:—
“‘ So much of the eighth of the Articles of Confederation and Perpetual Union between the thirteen states of America as is contained in the words following, to wit: “All charges of war, and all other expenses that shall be incurred for the common defence or general welfare, and allowed by the United States in Congress assembled, shall be defrayed out of a common treasury, which shall be supplied by the several states, in proportion to the value of all land within each state granted to, or surveyed for, any person, as such land, and the buildings and improvements thereon, shall be estimated according to such mode as the United States in Congress assembled shall, from time to time, direct and appoint,” is hereby revoked and made void, and in place thereof it is declared and concluded, the same having been agreed to in a Congress of the United States, that all charges of war, and all other expenses that shall be incurred for the common defence or general welfare, and allowed by the United States in Congress assembled, shall be defrayed out of a common treasury, which shall be supplied by the several states in proportion to the number of inhabitants, of every age, sex, and condition, except Indians not paying taxes in each state; which number shall be triennially taken and transmitted to the United States, in Congress assembled, in such mode as they shall direct and appoint; provided, always, that in such numeration no persons shall be in
1 Articles of Confederation. VIII.
eluded who are bound to servitude for life, according to the laws of the state to which they belong, other than such as may be between the ages of years.’” 1
In the debate upon these resolutions on Thursday, March 27th, 1783:
“Mr. Bland, in opposition, said, that the value of land was the best rule, and that, at any rate, no change should be attempted until its practicability should be tried.
“Mr. Madison thought the value of land could never be justly or satisfactorily obtained; that it would ever be a source of contentions among the states; and that, as a repetition of the valuation would be within the course of the twenty-five years, it would, unless exchanged for a more simple rule, mar the whole plan.
“Mr. Goeham was in favor of the paragraphs. He represented, in strong terms, the inequality and clamors produced by valuations of land in the state of Massachusetts and the probability of the evils being increased among the states themselves, which were less tied together, and more likely to be jealous of each other.
“Mr. Williamson was in favor of the paragraphs.
“Mr. Wilson was strenuous in their favor; said he was in Congress when the Articles of Confederation directing a valuation of land were agreed to; that it was the effect of the impossibility of compromising the different ideas of the Eastern and Southern States, as to the value of slaves compared with the whites, the alternative in question.
“Mr. Clark was in favor of them. He said, that he was also in Congress when this article was decided; that the Southern States would have agreed to numbers in preference to the value of land, if half their slaves only should be included; but that the Eastern States would not concur in that proposition.
“It was agreed, on all sides, that instead of fixing the proportion by ages, as the report proposed it, it would be best to fix the proportion in absolute numbers. With this view,
1 Report of Debates in Congress of the Confederation by Madison. Madison’s Papers, Elliot’s Debates, 2d Edition, vol. v., pp. 63-04.
and that the blank might be filled up, the clause was recommitted.
“Friday, March 28.
“The committee last mentioned reported that two blacks be rated as one freeman.
“Mr. Wolcott was for rating them as four to three.
“Mr. Carroll as four to one.
“Mr. Williamson said, he was principled against slavery; and that he thought slaves an encumbrance to society, instead of increasing its ability to pay taxes.
“Mr. Higginson as four to three.
“Mr. Rutledge said, for the sake of the object, he would agree to rate slaves as two to one, but he sincerely thought three to one would be a juster proportion.
“Mr. Holten as four to three.
“Mr. Osgood said, he did not go beyond four to three.
“On a question for rating them as three to two, the votes were, New Hampshire, ay; Massachusetts, no; Rhode Island, divided; Connecticut, ay; New Jersey, ay; Pennsylvania, ay; Delaware, ay; Maryland, no; Virginia, no; North Carolina, no; South Carolina, no.
“The paragraph was then postponed, by general consent, some wishing for further time to deliberate on it, but it appearing to be the general opinion that no compromise would be agreed to.
“After some further discussions on the report, in which the necessity of some simple and practicable rule of apportionment came fully into view, Mr. Madison said, that in order to give a proof of the sincerity of his professions of liberality, he would propose that slaves should be rated as five to three. Mr. RutLedge seconded the motion. Mr. Wilson said, he would sacrifice his opinion on this compromise.
“Mr. Lee was against changing the rule, but gave it as his opinion that two slaves were not equal to one freeman.
“On the question for five to three, it passed in the affirmative; New Hampshire, ay; Massachusetts, divided; Rhode Island, no; Connecticut, no; New Jersey, ay; Pennsylvania, ay; Maryland, ay; Virginia, ay; North Carolina, ay; South Carolina, ay.
“A motiou was then made by Mr. Bland, seconded by Mr. Lee, to strike out the clause so amended, and, on the question, ‘Shall it stand?’ it passed in the negative; New Hampshire, ay; Massachusetts, no; Rhode Island, no; Connecticut, no; New Jersey, ay, Pennsylvania, ay; Delaware, no; Rhode Island, no; Connecticut, no; North Carolina, ay; South Carolina, no; so the clause was struck out.
“The arguments used by those who were for rating slaves high, were that the expense of feeding and clothing them was far below that incident to freemen, as their industry and ingenuity were below those of freemen; and that the warm climate within which the states having slaves lay, compared with the rigorous climate and inferior fertility of the others, ought to have great weight in the case, and that the exports of the former states were greater than of the latter. On the other side, it was said that slaves were not put to labor as young as the children of laboring families; that, having no interest in their labor, they did as little as possible, and omitted every exertion of thought requisite to facilitate and expedite it; that if the exports of the states having slaves exceeded those of the others, their imports were in proportion, slaves being employed wholly in agriculture, not in manufactures, and that, in fact, the balance of trade formerly was much more against the Southern States than the others.
“On the main question, New Hampshire, ay; Massachusetts, no; Rhode Island, no; Connecticut, no; New York (Mr. Floyd), ay; New Jersey, ay; Delaware, no; Maryland, ay; Virginia, ay; North Carolina, ay; South Carolina, no.”l
Subsequently a proposition, substantially in this language, was approved by eleven of the states, but failed of the unanimity requisite for unanimous adoption.
In the Federal Convention, the larger states contended that representation should be proportioned to population; while the small states fought to preserve their former equality. A compromise was arranged by which the representation of the lower house was to be apportioned in
?Report of Debates in Congress of the Confederation by Madison. Madison Papers, Elliot’s Debates, 2d Edition, Vol. v., pp. 78-80.
accordance with the claim of the larger states, and the smaller states preserve their equality in the senate.
The rule of apportionment of representation in the lower house was another subject of division. The Southern States contended that slaves should be included in the enumeration of the population for that purpose. Those of the North claimed that the proceding was unjust, and that a number of freemen only should be taken as the standard. The present rule was adopted at the suggestion of Gouverneur Morris as a compromise without any clear explanation of its meaning.
“Mr. Gouverneur Morris moved to add to the clause empowering the legislature to vary the representation according to the principles of wealth and numbers of inhabitants, a proviso, ‘that the taxation shall be in proportion to representation.’
“Mr. Butler contended, again, that representation should be according to the full number of inhabitants, including all the blacks; admitting the justice of Mr. Gouverneur Morris’s motion.
“Mr. Mason also admitted the justice of the principle, but was afraid embarrassments might be occasioned to the legislature by it. It might drive the legislature to the plan of requisitions.
“Mr. Gouverneur Morris admitted that some objections lay against his motion, but supposed they would be removed by restraining the rule to direct taxation. With regard to indirect taxes on exports and imports, and on consumption, the rule would be inapplicable. Notwithstanding what had been said to the contrary, he was persuaded that the imports and consumption were pretty nearly equal throughout the Union.
“Gen. Pinckney liked the idea. He thought it so just that it could not be objected to, but foresaw that, if the revision of the census was left to the discretion of the legislature, it would never be carried into execution. The rule must be fixed, and the execution of it enforced by the Constitution. He was alarmed at what was said (by Mr. Gouverneur Morris), yesterday, concerning the negroes. He was now again alarmed at what had been thrown out concerning the taxing of exports. South Carolina has, in one year, exported to the amount of £600,000 sterling, all which was the fruit of the labor of her blacks. Will she be represented in proportion to this amount? She will not. Neither ought she then to be subject to a tax on it. He hoped a clause would be inserted in the system, restraining the legislature from taxing exports.
“Mr. Wilson approved the principle, but could not see how it could be carried into execution, unless restrained to direct taxation.
“Mr. Gouverneur Morris having so varied his motion by inserting the word ‘direct’, it passed, nem. con., as follows: ‘provided always that direct taxation ought to be proportioned to representation.’” l
“Mr. Ellswobth, in order to carry into effect the principle established, moved to add to the last clause adopted by the House the words following: ‘and that the rule of contribution by direct taxation, for the support of the government of the United States, shall be the number of white inhabitants and three fifths of every other description, in the several states, until some other rule, that shall more accurately ascertain the wealth of the several states, can be devised and adopted by the legislature.’
“Mr. Butleb seconded the motion, in order that it might be committed.
“Mr. Randolph was not satisfied with the motion. The danger will be revived, that the ingenuity of the legislature may evade or pervert the rule, so as to perpetuate the power where it shall be lodged in the first instance. He proposed, in lieu of Mr. Ellsworth’s motion, ‘that, in order to ascertain the alterations in representation that may be required, from time to time, by changes in the relative circumstances of the states, a census shall be taken within two years from the first meeting of the general legislature of the United States, and once within the term of every — years afterwards, of all the inhabitants, in the manner and according to the ratio recommended by Congress, in their resolution of the 18th of April, 1783 (rating the blacks at three fifths of their numbers), and that the legislature of the
1 Madison Papers, Elliot’s Debates, vol. v., p. 302.
United States shall arrange the representation accordingly.’ He urged, strenuously, that express security ought to be provided for including slaves in the ratio of representation. He lamented that such a species of property existed; but, as it did exist, the holders of it would require this security. It was perceived that the design was entertained by some of excluding slaves altogether; the legislature, therefore, ought not to be left at liberty.
“Mr. Ellsworth withdraws his motion, and seconds that of Mr. Randolph.
“Mr. Wilson observed that less umbrage would, perhaps, be taken against an admission of the slaves into the rule of representation, if it should be so expressed as to make them indirectly only an ingredient in the rule, by saying that they should enter into the rule of taxation; and as representation was to be according to taxation, the end would be equally attained. He accordingly moved, and was seconded, so to alter the last clause adopted by the House, that, together with the amendment proposed, the whole should read as follows: ‘provided always that the representation ought to be proportioned according to direct taxation; and, in order to ascertain the alterations in the direct taxation which may be required, from time to time, by the changes in the relative circumstances of the states, Resolved, that a census be taken within two years from the first meeting of the legislature of the United States, and once within the term of every — years afterwards, of all the inhabitants of the United States, in the manner and according to the ratio recommended by Congress in their resolution of the 18th of April, 1783, and that the legislature of the United States shall proportion the direct taxation accordingly.’” l
“On Mr. Pinckney’s motion, for rating blacks as equal to whites, instead of as three fifths,—
“South Carolina, Georgia, ay, 2; Massachusetts, Connecticut, (Dr. Johnson, ay,) New Jersey, Pennsylvania, (three against two,) Delaware, Maryland, Virginia, North Carolina, no, 8.
“Mr. Randolph’s proposition, as varied by Mr. Wilson, being read, for taking the question on the whole,—
“Mr. Gerry urged that the principle of it could not be carried
1 Madison Papers, Elliot’s Debates, vol. v., pp. 303-304.
into execution, as the states were not to be taxed as states. With regard to taxes on imposts, he conceived they would be more productive where there were no slaves than where there were, the consumption being greater.
“Mr. Ellsworth. In case of a poll-tax, there would be no difficulty. But there would probably be none. The sum allotted to a state may be levied without difficulty, according to the plan used by the state in raising its own supplies.
“On the question on the whole proposition, as proportioning representation to direct taxation, and both to the white and three fifths of the black inhabitants, and requiring a census within six years, and within every ten years afterwards,—
“Connecticut, Pennsylvania, Maryland, Virginia, North Carolina, Georgia, ay, 6; New Jersey, Delaware, no, 2; Massachusetts, South Carolina, divided.”1
“On the question for agreeing to the whole report, as amended, and including the equality of votes in the second branch, it passed in the affirmative.
“Connecticut, New Jersey, Delaware, Maryland, North Carolina (Mr. Spaight, no,) ay, 5; Pennsylvania, Virginia, South Carolina, Georgia, no, 4; Massachusetts, divided (Mr. Gerry, Mr. Strong, ay; Mr. King, Mr. Gorham, no).
“The whole, thus passed, is in the words following, viz.:
“Resolved, That, in the original formation of the legislature of the United States, the first branch thereof shall consist of sixty-five members, of which number New Hampshire shall send 3; Massachusetts, 8; Rhode Island, 1; Connecticut, 5; New York, 6; New Jersey, 4; Pennsylvania, 8; Delaware, 1; Maryland, 6; Virginia, 10; North Carolina, 5; South Carolina, 5; Georgia, 3. But as the present situation of the states may probably alter in the number of their inhabitants, the legislature of the United States shall be authorized, from time to time, to apportion the number of representatives; and in case any of the states shall hereafter be divided, or enlarged by addition of territory, or any two or more states united, or any new states created, within the limits of the United States, the legislature of the United States shall possess authority to regulate the number of representati ^s, in any of the foregoing
1 Madison Papers, Elliot’s Debates, vol. v., pp. 305-306.
cases, upon the principle of their number of inhabitants, according to the provisions hereafter mentioned; provided, always, that representation ought to be proportioned according to direct taxation. And in order to ascertain the alteration in the direct taxation, which may be required from time to time by the changes in the relative circumstances of the states,
“Resolved, That a census be taken within six years from the first meeting of the legislature of the United States, and once within the term of every ten years afterwards, of all the inhabitants of the United States, in the manner and according to the ratio recommended by Congress in their resolution of the 18th day of April, 1783; and that the legislature of the United States shall proportion the direct taxation accordingly.
“Resolved, That all bills for raising or appropriating money, and for fixing the salaries of officers of the Government of the United States, shall originate in the first branch of the legislature of the United States, and shall not be altered or amended in the second branch; and that no money shall be drawn from the public treasury but in pursuance of appropriations to be originated in the first branch.
“Resolved, That, in the second branch of the legislature of the United States, each state shall have an equal vote.”l
In this form, the matter was referred to the committee of detail. In their report the resolution was separated. Section 4 of Article IV. reads as follows:
“As the proportions of numbers in different states will alter from time to time; as some of the states may hereafter be divided; as others may be enlarged by addition of territory; as two or more states may be united; as new states will be erected within the limits of the United States,—the legislature shall, in each of these cases, regulate the number of representatives by the number of inhabitants, according to the provisions hereinafter made, at the rate of one for every forty thousand.”a
Sections 3 and 4 of Article VII. read as follows: “The proportions of direct taxation shall be regulated by the whole number of white and other free citizens and inhabitants
1 Madison Papers, Elliot’s Debates, vol. v., pp. 316, 317.
5 Madison Papers, Elliot’s Debates, vol. v., p. 377.

of every age, sex, and condition, including those bound to servitude for a term of years, and three fifths of all other persons not comprehended in tbe foregoing description (except Indians not paying taxes); which number shall, within six years after the first meeting of the legislature, and within the term of every ten years afterwards, be taken in such a manner, as the said legislature shall direct.”1
“No tax shall be laid by the legislature on articles exported from any state; nor on the migration or importation of such persons as the several states shall think proper to admit; nor shall such migration or importation be prohibited.” *
In the subsequent debate, “Mr. King asked what was the precise meaning of direct taxation. No one answered.” 3 Subsequently Luther Martin said:
“The power of taxation is most likely to be criticised by the public. Direct taxation should not be used but in cases of absolute necessity; and then the states will be the best judges of the mode. He therefore moved the following addition to article 7, § 3:—
“‘ And whenever the legislature of the United States shall find it necessary that revenue should be raised by direct taxation, having apportioned the same according to the above rule on the several states, requisitions shall be made of the respective states to pay to the Continental treasury their respective quotas, within a time in the said requisitions specified; and in case of any of the states failing to comply with such requisitions, then, and then only, to devise and pass acts directing the mode, and authorizing the collection of the same.’
“Mr. M’hjenry seconded the motion. There was no debate; and, on the question,—
“New Jersey, ay, 1; New Hampshire, Connecticut, Pennsylvania, Delaware, Virginia, North Carolina, South Carolina, Georgia, no, 8; Maryland divided (Jenifer and Carroll, no).” «
1 Madison Papers, Elliot’s Debates, vol. v., p. 379.
* Madison Papers, Elliot’s Debates, vol. v., p. 379.

3 Madison Papers, Elliot’s Debates, vol. v., p. 451.
4 Madison Papers, Elliot’s Debates, vol. v., p. 453.
The phrase “direct taxes,” as used by modern economists, applies to taxes, the burden of which falls upon the taxpayer, such as a poll-tax or sumptuary tax. All taxes, the burden of which may be shifted by the taxpayer upon others, through the sale of the taxed article at a higher price, are called indirect taxes. This is not the distinction intended by the Constitution.1 At that time, the Manchester School, although founded by Adam Smith, had not obtained general recognition, and Smith himself nowhere clearly applies these definitions to the terms direct and indirect taxes. The French economists had the most influence upon the leaders of American thought. They taught that agriculture is the only productive employment; and that the net product from land, which is found in the hands of the land-owner, is the only fund from which taxation can draw without impoverishing society. Taxes were classified by them as direct, when laid immediately upon the land-owner, and as indirect, when laid upon some one else, but according to their doctrine, destined to be borne ultimately by the land-owner. Taxes upon land or its returns, they called direct taxes. Taxes upon commodities, or consumption, indirect. They disagreed upon the question whether taxes upon persons were direct or indirect.3
1 The British North America Act (30 and 31 Vic, c. 3, § 92) provides that ” in each province the legislature may exclusively make laws in relation to matters coming within the classes of subjects next hereinafter enumerated, that is to say :” * * * * “2d. Direct Taxation within the Province in order to the raising of a Revenue for Provincial purposes.” It has been held that the term is used with the sense given to it by modern economists such as Mill. (Bank of Toronto v. Lambe, L. R. 6 P. C. 272; Attorney-General (Quebec) v. Reed, 10 Appeal Cases, 141); that a stamp tax on policies of insurance companies was an indirect tax * L’Ordre Naturel des Societes Politiques, in Daire’s Physiocrates, 474. For Quesnay’s use of the terms in question, see Daire, i. 83, 127 ; and
Turgot, however, classified taxes upon persons as direct.1
The apportionment of taxes upon real estate had been previously applied in England as well as France. The English land tax, since the reign of William III., had been apportioned among the counties and other local subdivisions, leaving the rate for each locality to be settled at the point necessary to give the due quota.2 The French taille r&elle, a tax on the income of real property, was laid by apportionment among the provinces, each of which determined the manner in which its quota should be collected ; and its substitute, the impdt fonder, since 1790, has been similarly collected. The French capitation tax, before the Revolution, was also similarly collected.3 It seems probable that the French definitions were in the mind of Gouverneur Morris when he introduced the term into the Constitution.4

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