Constitutional Challenge: Repealing the 16th Amendment wouldn't kill the income tax

Reason Magazine ^ | January 1999 | David B. Levenstam

[ancient_geezer]

Constitutional Challenge:
Repealing the 16th Amendment wouldn't kill the income tax.
By David B. Levenstam

Sen. Richard Lugar (R-Ind.), House Ways and Means Committee Chairman Bill Archer (R-Texas), and the Cato Institute's director of fiscal policy studies, Stephen Moore, all want to replace the federal income tax with a national sales tax. They say that repealing the 16th Amendment will eliminate the income tax. They're wrong. Income taxes existed--and were considered constitutional--before the 16th Amendment.

Ratified in 1913, the 16th Amendment states: "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 amendment gives Congress carte blanche to impose virtually any sort of income tax it desires--including our current labyrinthine system with its multiple rates, surtaxes, alternative taxes, deductions, phase-outs, double taxation of corporate earnings, and tax on phony gains caused by inflation. The current system also includes a combined tax on estates and gifts known as the unified transfer tax.

But contrary to popular belief, repealing the 16th Amendment wouldn't eliminate Congress' power to impose an income tax, because not all income taxes were held unconstitutional by the Supreme Court before the 16th Amendment was ratified. From 1861 to 1872, Congress imposed income taxes without any interference from the high court. In fact, in the 1881 case, Springer v. United States, the Court upheld the 1864 income tax. From 1862 to 1870, Congress imposed inheritance taxes, which applied to certain gifts as well. In 1874 the Supreme Court upheld the Civil War inheritance taxes in Scholey v. Rew, categorizing an inheritance tax as an excise or impost rather than a direct tax.

Embarrassed by large federal budget surpluses and facing re-election in 1872, President Grant and Congress allowed the income tax to lapse. Pressure from voters had already led Congress to repeal the inheritance tax before the 1870 elections.

But budget surpluses then and for the next 30 years didn't prevent supporters of the earlier income tax from clamoring for another one. From 1874 through 1894, members of Congress introduced 68 bills that would have imposed an income tax. Supporters and opponents alike viewed the income tax as "class legislation"--an attempt to redistribute income. Supporters believed that the tax system in use at the time, which relied primarily on tariffs, was regressive, and therefore unfairly distributed income away from the poor to the wealthy. Supporters hoped the income tax would stop or at least reduce regressive redistribution. Opponents saw the income tax as an attempt to set the poor against the wealthy and redistribute income away from those who generated it.

By 1894, a majority in Congress came to support some form of income taxation. It passed a law which imposed a 2 percent flat tax on corporate net income, and on individual incomes in excess of $4,000 ($76,000 in 1998 dollars).

Unlike the current system, however, the 1894 law didn't tax dividends, thus avoiding the current double taxation of corporate income. While the law didn't establish a gift or estate tax, it did include the value of gifts and estates in the income of the recipient for purposes of calculating the income tax.

Opponents of the income tax immediately challenged it in court. In 1895, the Supreme Court, in Pollack v. Farmers Loan and Trust Company, struck down the 1894 income tax as unconstitutional. But the Court didn't rule that every federal income tax would be unconstitutional.

At the core of the Pollack de- cision is the distinction between direct and indirect taxes. Article I, Section 9, paragraph 4 of the Constitution stipulates that "No Capitation [head], or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken." "Publius" (presumed to be Alexander Hamilton), in Federalist 22, held that taxes "of the direct kind, which principally relate to land and buildings, may admit a rule of apportionment. Either the value of the land, or the number of the people, may serve as a standard." In the 1796 case, Hylton v. U.S., Hamilton, as chief counsel for the government, persuaded the Supreme Court that only head taxes and taxes on real estate should be considered direct taxes. A tax on tangible personal property, such as carriages, was not a direct tax.

So in ruling on the constitutionality of the 1894 income tax in Pollack, the Court faced a century-old precedent holding that the only taxes Congress could not impose without doing so proportionately among the states were head taxes and real property taxes. Opponents of the income tax argued that taxing income from property was the equivalent of taxing the property itself.

Determined to stop what they (correctly, it seems) saw as an entering wedge for wide-scale income redistribution, a majority of the eight justices who initially heard the case accepted the argument and expanded the list of direct taxes to include taxes on the income from real property. The Court also ruled unanimously (on this issue) that a federal tax on income from state and local bonds infringed the right of states and their subdivisions to borrow money.

And after the ninth justice returned from illness, upon rehearing the case the majority expanded the definition of a direct tax even further, to include taxes on income from tangible personal property. With such a large portion of the law disabled, the majority decided to toss it out entirely.

But the Supreme Court did not say that the remaining provisions of the law, had they passed independently, would have been unconstitutional. To the contrary, the Court made clear that Congress could impose a tax on income from wages, salaries, and other compensation for personal services, as well as on income from intangible property such as stocks, bonds, patents, and copyrights. The Court ruled the law unconstitutional because it taxed income from tangible property without apportionment.

So even without the 16th Amendment, Pollack would allow Congress to impose a tax on a broad range of income. The Supreme Court clarified the point in a series of cases, including Brushaber v. Union Pacific Railroad (1915), Stanton v. Baltic Mining Company (1916), and Eisner v. Macomber (1920). In these cases, the Court ruled that the 16th Amendment granted Congress no new power to tax; the 16th Amendment simply reclassified an income tax on tangible property as an indirect tax. Demonstrating that the 16th Amendment granted no new power, the Court held that Congress still couldn't tax interest earned on state and local bonds--much to the chagrin of not only Progressives but also of Secretary of the Treasury Andrew Mellon and other tax cutters, who believed that the tax-exempt status of state and local bonds was redirecting capital from efficient allocation in the private marketplace into bloated state and local government bureaucracies.

Three years after Pollack, Congress passed the War Revenue Act to fund the Spanish-American War. The act imposed a tax of 0.25 percent on the gross receipts over $200,000 of companies in the sugar and oil refining businesses and a progressive estate tax ranging from 0.75 percent to 15 percent. (An estate tax is imposed on the estate, while an inheritance tax is imposed on the recipients of the estate.) In Spreckles Sugar Refining Company v. McClain (1902), the Supreme Court upheld the gross receipts tax as an excise tax. Two years earlier, in Knowlton v. Moore, the Court had decided that Pollack hadn't overturned Scholey, so that an inheritance or estate tax still constituted an indirect excise rather than a direct tax.

Fourteen years after Pollack, Congress imposed a 1 percent flat tax on corporate net income in excess of $5,000 ($95,000 in 1998 dollars). By taxing corporations on dividends from other corporations, the 1909 act began the practice of double taxing corporate income. Opponents challenged the 1909 act in court, too. In 1911 --two years before the adoption of the 16th Amendment--the Supreme Court ruled in Flint v. Stone Tracy Company that the tax on corporations was constitutional as "an excise upon the particular privilege of doing business in a corporate capacity." In other words, according to the Court's reasoning in 1911, just because the corporation tax was a tax on income didn't mean it was an income tax.

So even before the 16th Amendment, the Pollack, Spreckles, and Flint decisions gave a clear signal to Congress that it could impose a tax on wages, salaries, professional service fees, interest, dividends, royalties from intellectual property, estates, gifts, gross receipts, and any income earned by corporations. Congress could even double tax corporate income.

Eliminating Congress' power to tax income, as many supporters of a national sales tax propose, would require more than merely repealing the 16th Amendment. We would have to ratify an amendment prohibiting Congress from imposing any income tax as well as estate, gift, and gross receipts taxes. Otherwise, Congress could rely on the earlier Supreme Court decisions to continue collecting these and other related taxes. And as the residents of Canada and Western Europe could tell us, we'd probably end up with the worst of both tax worlds: paying both a national sales tax and an income tax.

David B. Levenstam was the Louis Pelzer Fellow in American History at the University of Iowa and a Salvatori Fellow at the Heritage Foundation. A tax practitioner since 1982, he is working on his Ph.D. dissertation, titled The Triumph of Competition: The American Political Economy, 1887-1933.

[ancient_geezer]

A recurrent topic, that is as important now as it was in 1999.

John Linder in the House & Saxby Chambliss Senate, offer a comprehensive bill to kill all income and payroll taxes outright, and provide a IRS free replacement in the form of a pure consumption tax:

H.R.25
SPONSOR: Rep Linder, John (introduced 01/7/2003)
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.

S.1493
Sponsor: Sen Chambliss, Saxby [GA] (introduced 7/30/2003)
Title: A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national sales tax to be administered primarily by the States.

Refer: http://www.fairtax.org & http://www.salestax.org

So Ron Paul's amendment has a chance at enactment & ratification:

H.J.RES.15
Sponsor: Rep Paul, Ron [TX-14] (introduced 1/28/2003)
Title: Proposing an amendment to the Constitution of the United States relative to abolishing personal income, estate, and gift taxes and prohibiting the United States Government from engaging in business in competition with its citizens.

(But modified to prohibit all income, payroll, gift estate taxes as HR25 calls for, or we will see European style hidden taxes along with payroll excises to take over in the place of the of the current individual income tax(i.e. personal income tax) that Ron Paul amendment prohibits.)

[ancient_geezer]

A Taxreform bump for you all.

If you would like to be added to this ping list let me know.

[WhiteyAppleseed]

At the birth of our nation, the people were ready to fight, without great debate, when Parliament levied a 20cent tax on any advertising done in newspapers.

How far we've come! We leave a birthright to our children that is nothing less than slavery on the installment plan. While our forefathers were no longer ready to suffer evils that were insufferable, we have tamely surrendered our wages to the convienence of a pay stub and work the equivalent of every fourth year without pay in servitude to government. Over the course of a working man's life, that amounts to more than a decade of slavery. It's high time to end the cancerous growth of government and free up our wealth to do with as we please--we may just have a better world for it.

[WhiteyAppleseed]

.....actually, it was a 2-cent tax and though the people petitioned the king, their legitimate grienvances were ignored and a crisis followed. The people have legitimate grievances today and their petitions usually fall on uncaring ears.

[Lurking Libertarian]

At the birth of our nation, the people were ready to fight, without great debate, when Parliament levied a 20cent tax on any advertising done in newspapers.

The fight was not against taxation; it was against taxation without representation. The states, immediately upon achieving their independence, all imposed taxes-- very substantial ones in some states; and as soon as the U.S> Constitution was ratified, the federal government started levying and collecting taxes.

[ancient_geezer]

At the birth of our nation, the people were ready to fight, without great debate, when Parliament levied a 20cent tax on any advertising done in newspapers.

Actually the fight was over representation not taxation per se.

An interesting quote from the past as regards taxation:

Patrick Henry, Virginia Ratifying Convention June 12, 1788:

• "the oppression arising from taxation, is not from the amount but, from the mode -- a thorough acquaintance with the condition of the people, is necessary to a just distribution of taxes. The whole wisdom of the science of Government, with respect to taxation, consists in selecting the mode of collection which will best accommodate to the convenience of the people.

The fight today is more about representation without taxation under the graduated income tax:

The Honorable James DeMint (R-SC)
United States House of Representatives
THURSDAY, APRIL 5, 2001
12:00 noon

• "There has been a shift in the relationship between individuals and government, he argues, such that fewer and fewer are paying taxes at the same time that more and more are receiving increasingly generous benefits. If it becomes the case that most voters do not bear a financial burden for this largess, then there will be little to restrain--and significant political incentives to encourage--the continued growth of government.

Milton Friedman as quoted by Northwest Florida Daily News, 10-16-2000:

• "If non-taxpayers become a majority in society, what would restrain them from voting for ever higher taxes on others?"

---

Walter Williams, World Net Daily, 10-25-2000

According to the most recent U.S. Treasury Department figures, in 1997 the top 1 percent of income-earners (those with income of $250,000 and higher) paid 33 percent of all federal income taxes. The top 5 percent of income-earners ($108,000 and over) paid 52 percent, and the top 50 percent ($36,000 and over) paid 96 percent of income taxes. Guess what the bottom 50 percent of income earners paid?

If you're among those who pay little or no federal income taxes, what do you care about tax cuts? Moreover, if you think tax cuts pose a threat to government handout programs, you might be openly hostile and support Al Gore's silly "risky scheme" talk. So many Americans paying little or no federal taxes makes for a natural spending constituency. It's like me in the restaurant: What do I care about extravagance if you're footing the bill?

To remove taxation of the individual, is to remove the goad which assures accountability of government to the electorate. Federal tax rates are high because a majority of the electorate do not share proportionately in the burden their demand for largesse imposes on the minority of citizens.

The siren call for representation without taxation is the formula that got us where we are at today. The ability to hide or disguise taxation from the view of large sectors of the electorate allows the Congress to get away with the creation of the evergrowing monster that it fosters.

A government which robs Peter to pay Paul can always depend on the support of Paul.
-George Bernard Shaw

Liberty and freedom have a price, responsibility. If that price is avoided there are no brakes on the growth of government, the ultimate result is the end of freedom through creeping socialism.

[You Dirty Rats]

I agree it's as important now as in 1999 -- which is to say, not important at all.

No change any repeal of the 16th Amendment gets a floor vote in either house anytime soon, much less receive 2/3 of each house and 3/4 of the states to ratify.

Consumption taxes replacing income taxes would DRAMATICALLY shift the tax burden from those that make higher incomes to those who make lower incomes. Won't happen.

[ancient_geezer]

Consumption taxes replacing income taxes would DRAMATICALLY shift the tax burden from those that make higher incomes to those who make lower incomes.

You haven't bothered to read the legislation or find out about the NRST have you.

All legal residents will receive a FCA equivalent to the FairTax paid on essential goods and services. The FCA will be paid in advance, in equal installments each month. The size of the monthly FCA will be determined by the government's Poverty Level for a particular family size, multiplied by the tax rate.

Every year, the Department of Health and Human Services [HHS] determine the "poverty level" for each family size.

The 2001 "FairTax" Family Consumption Allowance Figures
Family Size	HHS Poverty Level	Annual FCA	Monthly FCA
One	$8,590	$1,976	$165
Two	$17,180	$3,951	$329
Three	$20,200	$4,646	$387
Four	$23,220	$5,341	$445
Five	$26,240	$6,035	$503
Six	$29,260	$6,730	$561
Seven	$32,280	$7,424	$619
Eight	$35,300	$8,119	$677

1) Federal Register: February 16, 2001, Pages 10695-10697).

[ The monthly FCA for each adult is .23 * (HSS poverty level for a single person)/12 to assure no marriage penalty due to the manner in which the poverty level is dependant on family size. The monthly FCA for each child is .23 * (the incremental increase of HSS poverty level for a family with one child over no child) ] A. Geezer

A family of four, for example, could spend $23,220 per year free of tax because they will have received over the course of the year rebates totaling $5,341. $5,341 is the amount of sales tax paid on $23,220 in expenditures. A family spending double the "poverty level" or $46,440 per year will effectively pay tax on only half of their spending and, therefore, have an effective tax rate of 11 ½ percent or half the FairTax rate.

The beauty of the FairTax is that you can control how much you pay in taxes. If you happen to save, invest or spend a portion on used [previously taxed] items, you can get your effective tax rate below 9%.

[71] To illustrate the plan's progressive nature we can examine the tax burden that a family of four will have at various annual income levels (or in this case, annual spending levels).

H.R.2525 "The FairTax Act

Not only does every family receive a FCA based on family size, not income, but they will also receive 100% of their paycheck:

Fedup Smith makes $39K per year...once the FairTax is the law of the land he will receive an instant increase in pay of $200.00 per week. Since he has a family of four, he will receive a FCA of $445 per month, for a total of $1,305.00 additional income per month that he can do with as he sees fit

[ancient_geezer]

No change any repeal of the 16th Amendment

LOL, not enough anyway, read the article again.

gets a floor vote in either house anytime soon, much less receive 2/3 of each house and 3/4 of the states to ratify.

That is why it is necessary to work for replacement of the income tax statutes first. Make the income tax obsolete, the appropriate amendment to PROHIBIT all income and payroll taxes will happen much sooner.

We are much closer than you may realize to the repeal of the statutes and the NRST.

Last session of congress there weres only 7 co-sponsors and a bill in the house.

Today there are the sponser & 43 co-sponsors with a bill in the house 2 sponsors for the sister bill introduced in the senate.

(43) HR25 Co-Sponsors

As well as support growing through out both houses of Congess,

FairTax - Congressional Score Card

and among challenger running with the NRST in their campaigns.

Time to put that stake in the heart of the income/payroll tax system and the IRS, and the National Retail Sales Tax bill HR25 is the way to do it.

Congress Critter's In the News

Senate

Herman Cain, position regards tax reform, May 9 2002:

Herman Cain for United States Senate, state of Georgia 2004

Herman Cain on National Review Online

House

Dennis Umphress, libertarian (California 16th District)

Dr. Paul DeWeese, (Michigan 7th District)

Vernon Robinson, (North Carolina's 5th District)

Jeb Hensarling, (Texas' 5th District)

Ben Streusand, (Texas 10th District)

Bill Lester (Texas 11th Congressional District)

With more out there each day the election season advances.

[Terpfen]

"The fight was not against taxation; it was against taxation without representation"

No, it wasn't. Parliament offered the Colonies three representative seats. The Colonies declined.

[fire_eye]

Repealing the 16th Amendment wouldn't kill the income tax.

No, but it would be a good start. We will never get the income tax repealed *without* repealing the 16th Amendment.

The Federal tax system is so entrenched that it will have to be dismantled piecemeal, and the cumulative mistakes which led to its creation, reversed incrementally. We can *start* by repealing the 16th Amendment.

Then, while the sodden, putrescent old crows (and bats) on the Supreme Crotch debate the implications of *that*, we can go about revamping the tax system one Socialist edifice at a time.

In the end, it should be possible (if necessary) to pass another Amendment, explicitly *disallowing* income taxes, so as to guard against any future formation of a Socialist tyranny of the sort to which we all now perform ritual sacrifice on April 15 (On your knees, scum!).

[WhiteyAppleseed]

And today we have tamely surrendered and most have willingly given up the fight to make peaceful change and the arguments about representation helped create two bodies in Congress.

Patrick Henry: We contended with the British about representation. They offered us such a representation as Congress now does. They called it a virtual representation. If you look at that paper, you will find it so there. Is there but a virtual representation in the upper house? The states are represented, as states, by two senators each. This is virtual, not actual. They encounter you with Rhode Island and Delaware. This is not an actual representation.

And what kind of representation do we encounter today? Unelected bureaucrats who get paid at the end of the day whether they do their job or not. How many are there? Five million? At the birth of our nation, the debate concerned questions about two senators from small states having as much voice as two senators from large states.

I suspect that we'd have a second revolution if everyone had to pay that 2-cent tax, instead of having it deducted by their employer. I wonder what the colonists would have thought of a tax refund that so many look forward to today?

[an amused spectator]

The fight was not against taxation; it was against taxation without representation.

We don't have representation.

The states, immediately upon achieving their independence, all imposed taxes-- very substantial ones in some states; and as soon as the U.S> Constitution was ratified, the federal government started levying and collecting taxes.

Misdirection. The federal government didn't dare levy a direct tax on the income of average folk until the Founders, and their children, were long dead and in their graves.

As for the states, only taxes that were palatable to the Founders were levied. My state didn't dare lay an income tax until the 1960s.

[Taxman]

Geezer,

Add thisun to your list:

---

108th CONGRESS

1st Session

H. J. RES. 61
Proposing an amendment to the Constitution of the United States to abolish the Federal income tax.

IN THE HOUSE OF REPRESENTATIVES

June 24, 2003
Mr. SAM JOHNSON of Texas (for himself, Mr. CRANE, Mr. LINDER, Mr. TAUZIN, Mr. DOOLITTLE, and Mr. CULBERSON) introduced the following joint resolution; which was referred to the Committee on the Judiciary

---

JOINT RESOLUTION
Proposing an amendment to the Constitution of the United States to abolish the Federal income tax.


Resolved by the Senate and House of Representatives of the United States of America in Congress assembled (two-thirds of each House concurring therein), That the following article is proposed as an amendment to the Constitution of the United States, which shall be valid to all intents and purposes as part of the Constitution when ratified by the legislatures of three-fourths of the several States within seven years after the date of its submission for ratification:

`Article --

`Three years after the ratification of this article of amendment, the sixteenth article of amendment to the Constitution of the United States is repealed, and the Congress shall have no power to lay and collect taxes on incomes, except in time of war declared by the Congress.'

[ancient_geezer]

The federal government didn't dare levy a direct tax on the income of average folk until the Founders

Interestingly Congress had considered a federal income tax during the war of 1812 and would very likely have enacted it had that war not ended when it did.

http://www.tax.org/Museum/1777-1815.htm

1815

Secretary of the Treasury Alexander Dallas contemplated the enactment of an income tax to raise up to $3 million dollars for the war effort. He modeled his idea after the income tax Britain adopted in 1799 to finance the Napoleonic Wars. Dallas assumed that such an income tax constituted an indirect tax, and would not require apportionment. The House Ways and Means Committee responded lukewarmly to the proposal, and the war ended before any income tax could be enacted.

Strickly speaking Congress was quite willing to do so, but only under conditions that could make it politically feasible, like the Civil War, when the first income tax acually did take effect and was infact extended several years beyond that war until the electorate turned against it.

Interesting little ditties in history, when one goes looking.

[ancient_geezer]

We will never get the income tax repealed *without* repealing the 16th Amendment.

And why not? The 16th does not mandate an income tax by any means. Income tax statutes have been repealed by Congress in the past under public pressure to do so, specifically the income tax of the Civil War.

The only thing keeping the income tax statutes in place to day is apathy of the voter, not anything more than that. With public interest growing in the NRST, so is support in Congress refer reply#9.

The Federal tax system is so entrenched that it will have to be dismantled piecemeal, and the cumulative mistakes which led to its creation, reversed incrementally. We can *start* by repealing the 16th Amendment.

Starting with the repeal of the 16th is incremental, ROTFLMAO.

When the income/payroll taxes are dimantled and shown to be obsolete, there will be plenty of pressure political will to repeal the 16th and prohibit income taxes. However, there will be no such move out of Congress without a proven replacement in place. NRST achieves that necessary step up to the plate.

[ancient_geezer]

Thanks I'll make the necessary addition.

[phil_will1]

This is certainly an eye opening article. It seems that repealing the 16th isn't the safeguard against having both taxes that we had thought it would be. I guess we have a little further to go than we thought. At any rate, once we get the FairTax passed, it should be a lot easier to enact whatever safeguards we need to prevent this from happening.

[ancient_geezer]

You might find it interesting as to how the 16th amendment actually got proposed & ratified since the article above did not really go into that piece in history.

Seems the amendment was a runaway political ploy intended to kill enactment of a proposed income tax. A ploy that backfired badly:

read: The Bailey Bill

[eyespysomething]

It's so nice to be represented in Congress. I'm in GA, and I believe all of our House members co-sponsered the bill by Linder.

How many years has he brought the bill up? 5? 6?

Its only a matter of time now. The tide is turning, and people has reached the breaking point of taxes.