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Constitutional Issues Of Taxation

The only section of the U.S. Constitution that authorizes Congress to enact and impose federal taxes is Article 1, Section 8.

U.S. Constitution, Article 1, Section 8, Clause 1

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;

This section also tells Congress that any Duty, Impost or Excise shall be geographically uniform.  This is the class of taxes commonly referred to as the "indirect" class of taxes, the polar opposite of the "direct" class of taxes.

U.S. Constitution, Article 1, Section 2, Clause 3

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 determined 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 14th Amendment converted the three fifths accounting so that the whole number of persons in each state should be counted.)

U.S. Constitution, Article 1, Section 9, Clause 4

No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.

Congressional "authority" to tax comes from Article 1 Section 8. That "authority" is limited by the restrictions of uniformity and apportionment that apply to indirect and direct taxes respectively.

The Sixteenth Amendment will get its own specific examination and presentation shortly.

The purpose of the limitation of apportionment on the class of direct taxes was examined and explained by the Supreme Court.

Nothing can be clearer than that what the constitution intended to guard against was the exercise by the general government of the power of directly taxing persons and property within any state through a majority made up from the other states.

It is true that the effect of requiring direct taxes to be apportioned among the states in proportion to their population is necessarily that the amount of taxes on the individual taxpayer in a state having the taxable subject-matter to a larger extent in proportion to its population than another state has, would be less than in such other state; but this inequality must be held to have been contemplated, and was manifestly designed to operate to restrain the exercise of the power of direct taxation to extraordinary emergencies, and to prevent an attack upon accumulated property by mere force of numbers.

Pollock v. Farmer’s Loan & Trust Co., 157 U.S. 429 (1895)

The constitution intended to guard against ... directly taxing persons and property within any state through a majority made up from the other states ... and to prevent attack upon accumulated property by mere force of numbers.

To explain the operation of this restraint, let us assume a union of two states. One is an urban state with a large population count and a small territory. The other is an agricultural state with a small population count and a large territory.

A direct tax has been passed that intends to raise $70,400,000 by taxing land. This tax is equivalent to a tax of $10 per acre. The Agricultural state's representatives voted unanimously against this tax, The Urban state's representatives voted unanimously for this tax. The following chart shows how the tax actually is applied to the acreage according to apportionment.  (How this chart was calculated.)

Population 500,000
Territory Square Miles 10,000
Territory in Acres 640,000
State's Total
Apportioned Tax Bill
Tax Per Acre $100

Population 50,000
Territory Square Miles 100,000
Territory in Acres 6,400,000
State's Total Apportioned Tax Bill $6,400,000
Tax Per Acre $1

This inequality ... was manifestly designed to ... restrain the exercise of the power of direct taxation.

A direct tax must be laid by the rule of apportionment.

In order to see what taxes must be laid by the rule of apportionment, we must discern what taxes are direct taxes. To help with this discernment I present some Supreme Court citations.

Mr. Chief Justice Fuller delivered the opinion of the court:

By the first clause of 8 of article I. of the Constitution, Congress is empowered 'to lay and collect taxes, duties, imposts, and excises.' 'but all duties, imposts, and excises shall be uniform throughout the United States.'

This division of taxation into two classes is recognized throughout the Constitution.

By clause 3 of 2, representatives and direct taxes are required to be apportioned according to the enumeration prescribed, and by clause 4 of 9, no capitation or other direct tax can be laid except according to that enumeration.
And these two classes, taxes so called, and 'duties, imposts, and excises,' apparently embrace all forms of taxation contemplated by the Constitution. As was observed in Pollock v. Farmers' Loan & T. Co. [...]: 'Although there have been from time to time intimations that there might be some tax which was not a direct tax nor included under the words 'duties, imposts, and excises,' such a tax for more than one hundred years of national existence has as yet remained undiscovered, notwithstanding the stress of particular circumstances has invited thorough investigation into sources of revenue.'

The present case involves a stamp tax on a memorandum or contract of sale of a certificate of stock, which plaintiff in error claims was unlawfully exacted because not falling within the class of duties, imposts, and excises, and being, on the contrary, a direct tax on property.
The sale of stocks is a particular business transaction in the exercise of the privilege afforded by the laws in respect to corporations of disposing of property in the form of certificates. The stamp duty is contingent on the happening of the event of sale, and the element of absolute and unavoidable demand is lacking. As such it falls, as stamp taxes ordinarily do, within the second class of the forms of taxation.

THOMAS v. U S, 192 U.S. 363 (1904)

The Supreme Court addresses the same issue seven years later:

The tax under consideration, as we have construed the statute, may be described as an excise upon the particular privilege of doing business in a corporate capacity, i. e., with the advantages which arise from corporate or quasi corporate organization; or, when applied to insurance companies, for doing the business of such companies. As was said in the Thomas Case, 192 U. S. supra, the requirement to pay such taxes involves the exercise of privileges, and the element of absolute and unavoidable demand is lacking.

FLINT v. STONE TRACY Co., 220 U.S. 107 (1911)
Ordinarily, all taxes paid primarily by persons who can shift the burden upon some one else, or who are under no legal compulsion to pay them, are considered indirect taxes; but a tax upon property holders in respect of their estates, whether real or personal, or of the income yielded by such estates, and the payment of which cannot be avoided, are direct taxes.

Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429 (1895)

The court continues:

Nevertheless, it may be admitted that, although this definition of direct taxes is prima facie correct, and to be applied in the consideration of the question before us, yet the constitution may bear a different meaning, and that such different meaning must be recognized.

Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429 (1895)

The Court goes through a very long winded examination of previous historical accounts that covers the drafting of the Constitution and the view afforded of the founder's thoughts on the meaning of a "direct" tax. The five citations that follow are from the different sources that the Supreme Court looked into to insure that its prima facie view was the correct definition of a "direct" tax.

Luther Martin, in his well known communication to the legislature of Maryland in January, 1788, expressed his views thus: 'By the power to lay and collect taxes they may proceed to direct taxation on every individual, either by a capitation tax on their heads, or an assessment on their property.
Mr. Dexter observed that his colleague 'had stated the meaning of direct taxes to be a capitation tax, or a general tax on all the taxable property of the citizens; and that a gentleman from Virginia [Mr. Nicholas] thought the meaning was that all taxes are direct which are paid by the citizen without being recompensed by the consumer; but that, where the tax was only advanced and repaid by the consumer, the tax was indirect.

He thought that both opinions were just, and not inconsistent, though the gentlemen had differed about them.

He thought that a general tax on all taxable property was a direct tax, because it was paid without being recompensed by the consumer.'
Albert Gallatin, in his Sketch of the Finances of the United States, published in November, 1796, said: 'The most generally received opinion, however, is that, by direct taxes in the constitution, those are meant which are raised on the capital or revenue of the people; by indirect, such as are raised on their expense.
The general line of observation was obviously influenced by Mr. Hamilton's brief for the government, in which he said: 'The following are presumed to be the only direct taxes: Capitation or poll taxes, taxes on lands and buildings, general assessments, whether on the whole property of individuals, or on their whole real or personal estate.

All else must, of necessity, be considered as indirect taxes.' 7 Hamilton's Works (Lodge's Ed.) 332.
Mr. Hamilton also argued: 'If the meaning of the word 'excise' is to be sought in a British statute, it will be found to include the duty on carriages, which is there considered as an 'excise.' ... An argument results from this, though not perhaps a conclusive one, yet, where so important a distinction in the constitution is to be realized, it is fair to seek the meaning of terms in the statutory language of that country from which our jurisprudence is derived.' 7 Hamilton's Works (Lodge's Ed.) 333.

If the question had related to an income tax, the reference would have been fatal, as such taxes have been always classed by the law of Great Britain as direct taxes.

Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429 (1895)

The Supreme Court then sums up the review of the history of the direct tax as follows:

From the foregoing it is apparent

(1) that the distinction between direct and indirect taxation was well understood by the framers of the constitution and those who adopted it;

(2) that, under the state system of taxation, all taxes on real estate or personal property or the rents or income thereof were regarded as direct taxes;

(3) that the rules of apportionment and of uniformity were adopted in view of that distinction and those systems;

(4) that whether the tax on carriages was direct or indirect was disputed, but the tax was sustained as a tax on the use and an excise;

(5) that the original expectation was that the power of direct taxation would be exercised only in extraordinary exigencies and down to August 15, 1894, this expectation has been realized.

Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429 (1895)

One last, and important, Supreme Court citation:

Direct taxes bear immediately upon persons, upon the possession and enjoyments of rights; indirect taxes are levied upon the happening of an event or an exchange.

KNOWLTON v. MOORE, 178 U.S. 41 (1900)
Direct taxes bear immediately upon the possession and enjoyment of RIGHTS.

This much is known from all of the above:

A direct tax is an unavoidable tax on property.  Property is anything you own. 

You own:

A direct tax is a tax on ANY of the above listed property.

Excise taxes will be examined in more detail on a later page.