James Leroy Wilson's blog

Wednesday, April 18, 2007

On the Income Tax Amendment

I wrote this some time ago, a rough draft of a part of a larger piece that was never finished. But as Income Tax Day has just passed, and I receive a lot of literature about various, supposedly fraudulent aspects of the income tax, I thought I'd post this:


For several years, I viewed the 16th Amendment, ratified in 1913, as a catastrophe. I believed it should be repealed. Authorizing the federal government to tax income was, I thought, the end of the Republic.

It turned out I was wrong. My mistake was that I viewed the 16th Amendment as the “Income Tax Amendment.” But it turns out that the federal government always had power to tax incomes; I know that they had done so on a couple of occasions, but assumed them to be illegitimate. Where I went wrong was in my narrow understanding of an “excise tax.”

When the Constitution was ratified, Congress was authorized to levy what are called excise taxes. Excise taxes are generally understood to be taxes on non-essential items like cigarettes, liquor, and luxuries. But it has a broader meaning. An excise tax is really an “event tax,” or a tax on any economic activity. This means taxes not just on goods and services, but on the manufacture of goods. It could mean a tax on the exchange of labor for money - on income from wages and salaries. “Excise tax” is a very broad term. If the 16th Amendment was concerned about taxing people’s wages and salaries, it was unnecessary – the power was already there under the “excise tax” power.

All that the 16th Amendment did was overturn an 1895 Supreme Court decision that changed the meaning of “direct tax.” A direct tax is essentially an “existence tax.” Real estate is taxed because it’s there, not for what it does; a capitation or “head” tax taxes people for being people, not for what they do or consume. According to the Constitution, direct taxes must be apportioned among the states. This would prevent the states from having to pay more in direct taxes than their population or total land value would warrant. In the 1895 Supreme Court decision Pollock v. Farmers Loan and Trust Company, the Supreme Court stuck down parts of an 1894 income tax law. Congress attempted to tax income derived from property ownership, such as rental income. As David B. Levenstam points out, “Opponents of the income tax argued that taxing income from property was the equivalent of taxing the property itself.” The Supreme Court agreed, saying, “taxes on real estate being indisputably direct taxes, taxes on the rents or income of real estate are equally direct taxes,” i.e., not excise taxes.

The Sixteenth Amendment effectively rendered the Pollock decision moot, by allowing the federal government to tax income increases in wealth from land and other property, not just on earnings from employment: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived [including income from property], without apportionment among the several States, and without regard to any census or enumeration [that is, without regard to the Constitution's previous definition of direct taxes].

But the Amendment did not create a new general power for Congress to tax incomes. As the Court ruled in 1926's Bowers v. Kerbaugh-Empire Co.,, "[i]t was not the purpose or effect of that amendment to bring any new subject within the taxing power. Congress already had power to tax all incomes." The 16th Amendment isn't the Income Tax Amendment, it is merely the Direct Tax Repeal Amendment.

One hundred years ago, Congress wasn't interested in taxing the wages of the workingman. For the most part, it wanted the income tax to tax the very wealthy. But although the power to tax employment income was available to them through the excise tax provision, oftentimes the wealthy didn't even earn any income from work. The Sixteenth Amendment was thus designed to tax all sources of income, so as to include the propertied wealthy.

Is repealing the 16th Amendment desirable? In an abstract sense, yes, in the same way that abbreviating the First Amendment to just read “Congress shall make no law” is also desirable. But if taxes are to be collected, the original intent of the Sixteenth Amendment was on to the right idea. If anything should be taxed, it should be increases in land values and other forms of unearned profit (that is, profiting from monopoly privileges). It is actually the excise taxes – taxes on economic exchanges - that should not be taxed.

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