The American Income Tax
Long Black Dresses — Harnessing the Camel
Written by Darrell Anderson.
Look to the essence of a thing, whether it be a point of doctrine, of practice, or of interpretation.
Marcus Aurelius Antoninus, Meditations
A tax can be both direct or indirect, and this observation was recognized throughout America’s history. That introducing rules to govern collection would confuse people also was recognized. For example, in 1794 legislators imposed a $16 per carriage tax intended to be an indirect tax in the nature of a duty, specifically a use or consumption tax. The tax was challenged in 1796 in Hylton v. United States. Many people believe the case to be a contrived case. Daniel Hylton owned only one carriage, but agreed to stipulate owning 125 carriages in order to establish a high enough tax liability to establish court jurisdiction. For that reason alone the case should not be used as establishing any precedent.
Hylton claimed the tax was a direct tax — a tax on property — and therefore subject to the rule of apportionment. The Supreme Court justices disagreed. Definitions were discussed in the case, and although recognizing that a tax can fall into either class, the justices thought that a tax on the use of carriages could never be a direct tax.
The idea of apportionment logically impaired collecting direct taxes and renders the process laborious. By implied definition, every direct tax levied by legislators would be a separate and distinct tax, authorized by only one bill of legislation, and once collected, the legislation terminated. The Framers recognized that any direct tax was a one-shot deal. Thus Hylton inadvertently helped establish an intent rationale. To avoid inconsistency and debates, taxing according to the rule of uniformity was easier than the rule of apportionment. All legislators had to do was establish an intent to tax activities or consumption.
Hylton provided the first opportunity to define a direct tax, but the Court justices provided no such distinct definition. The justices did not decide those definitions, although they speculated. The only thing the justices decided in Hylton was that a tax on the use of carriages was an indirect tax in the nature of a duty. The justices never rendered a meaningful definition of direct taxes because the question was not asked.
Although the justices rendered no specific definition of direct taxes, did that mean such a term was not defined? Despite examples of confusion about the term “direct taxation,” history shows that early Americans, as well as the common law from England, generally understood the meaning. That definition was partially derived from Adam Smith’s Wealth of Nations, but also through the practice and customs of England. In general, a direct tax was a tax on any kind of property — both in land, slaves, and revenues and income received — that could not be passed to another individual. Income was understood to be personal property and a tax on personal property was understood to be a direct tax. Humans cannot live without some form of personal property and a tax on personal property is a compulsory and involuntary, and therefore a direct tax. Thus, there did exist a general understanding of the term.
Or so one would think. The Supreme Court justices would have a few more opportunities in the 19th century to address the definition of a direct tax. Whether they settled the issue is debatable.
After the Hylton decision, the next opportunity for the Supreme Court justices to address the issue of direct taxation was in 1868. At issue in Pacific Insurance Co. v. Soule was a tax on insurance premiums and related dividend earnings. The dividend tax was imposed by the revenue act of June 30, 1864, and amended by an act of July 13, 1866. The tax was challenged as an unapportioned direct tax. The justices decided the tax was imposed on the activity of being an insurance company. The dividend earnings, although a form of income, were merely used to measure the tax owed. The dividends were not the subject of the tax. According to the justices in this case, whether a tax was direct or indirect depended upon who the tax ultimately falls. If the tax could be passed to the consumer then the tax was a direct tax. Although lightly discussing the nature of a direct tax, and relying on Hylton dicta, because this tax could be and was passed to the consumer, the justices decided the tax was an indirect duty or excise tax.
Although unrelated to this discussion, another issue at bar was whether payment in taxes in legal tender (Greenbacks) must be accepted at par. The insurance company representatives declared their returns in specie but wanted to pay in legal tender. The act of 1862 that initially circulated the Greenbacks explicitly declared that certain payments in legal tender were to be accepted at par:
Such notes shall be receivable in payment of all taxes, internal duties, excises, debts, and demands of every kind due to the United States (except duties on imports), and of all claims and demands against the United States, of every kind whatsoever (except for interest on bonds and notes, which shall be paid in coin), and shall also be lawful money and a legal tender in payment of all debts public and private, within the United States (except duties on imports and interest as aforesaid). And such United States notes shall be received the same as coin at their par value, in payment of any loans that may be hereafter sold or negotiated by the Secretary of the Treasury, and may be reissued from time to time, as the exigencies of the public interests shall require. [emphasis added.]
However, because the Greenbacks had depreciated in value from par, legislators had written the amending 1866 revenue act specifically instructing the assessor to discount the difference if the tax was assessed in coin but paid in legal tender:
That it shall be the duty of all persons required to make returns or lists of income, and articles or objects charged with an internal tax, to declare in such returns or lists whether the several rates and amounts therein contained are stated according to their values in legal tender currency, or according to their values in coined money; and in case of neglect or refusal so to declare to the satisfaction of the assistant assessor receiving such returns or lists, such assistant assessor is hereby required to make returns or lists of such persons neglecting or refusing, as in cases of persons neglecting or refusing to make the returns or lists required by the acts aforesaid, and to assess the duty thereon, and to add thereto the amount of penalties imposed by law in cases of such neglect or refusal. And whenever the rates and amounts contained in the returns or lists as aforesaid, shall be stated in coined money, it shall be the duty of each assessor receiving the same, to reduce such rates and amounts to their equivalent in legal tender currency, according to the value of such coined money in said currency, for the time covered by said returns. And the lists required by law to be furnished to collectors by assessors shall in all cases contain the several amounts of taxes or duties assessed, estimated or valued in legal tender currency only. [emphasis added.]
The two statutes obviously conflicted in intent. The tax collector had tried to force payment in specie coin at the assessed value or at the greater sum if paid with depreciated legal tender. The company representatives paid the full depreciated value of the assessed tax and then sued for recovery of the difference. The Court justices sadly decided that the legislators could renege on their acceptance at par because of the explicit instructions to discount the legal tender in the taxing statute.
A year later, at issue in Veazie Bank v. Fenno was some more political shenanigans. To encourage circulation of their Greenbacks, congressional legislators taxed the activity of circulating bank notes. A 10 percent tax on all non-national currency notes was imposed by the act of 1865, amended in the act of 1866, and went into effect August 1, 1866. The tax was purposely designed to force state bank notes out of circulation and to encourage bank owners to join the recently created national banking system.
The tax assessor assessed the tax against the Veazie Bank, a state bank incorporated in Maine. The bank owners initially refused to pay the tax, but then paid under protest after the threat of distraint. The owners then sued for recovery and challenged the tax as an unapportioned direct tax. In reply briefs the owners wrote that the Hylton dicta discussing direct taxation was “but crudely considered.” In this case the justices relied primarily on the Hylton dicta to discuss the topic of direct taxation. They compared the tax on carriages to be similar to the tax on bank notes as well as compared the tax to that imposed in dispute in Pacific Insurance Co. v. Soule. The justices also decided that the tax could be upheld under the conferred constitutional power to coin and regulate money. They decided the tax was an indirect tax in the nature of a duty. The bank notes were not the subject of the tax, the subject of the tax was the activity of circulating bank notes and the amount of notes circulating was used to determine the tax.
Five years later in 1874, at issue in Scholey v. Rew was a tax on the activity of passing real estate title through death from one individual to another. The tax was imposed by the act of 1864, amended 1866. In short, the tax was an inheritance tax, and the activity being taxed was the succession of legal title. The Supreme Court justices held that the tax was not a direct tax on land or a capitation tax, but a duty tax on the succession of title.
In Hylton, Pacific Insurance Co., Veazie, and Scholey, none of the issues at bar resolved whether a tax on income was a direct or indirect tax. Interestingly, George S. Boutwell, the first Commissioner of Internal Revenue from July 1862 to March 1863, in 1863 published his “Manual of the Direct and Excise System of the United States.” At page 19, he classified the income tax as a direct tax. Boutwell later would be Secretary of the Treasury from 1869 to 1873.
In 1880, the Supreme Court justices once again discussed direct taxation in Springer v. United States. William Springer, an Illinois attorney, challenged the war-time 3 percent “duty” tax on incomes as an unconstitutional direct tax. This is the first Supreme Court case in which taxes on incomes are discussed. Springer received notice in the spring of 1866 for the assessed year 1865 and challenged the collector’s standing. The case actually was an ejectment suit brought against Springer, caused by the tax collector seizing and selling Springer’s real estate property to pay for the alleged tax due.
Springer rejected the argument that the war income tax was an indirect duty tax. He wrote an exhaustive legal brief citing most if not all of the then-current economic and tax experts arguing that a tax upon incomes was a direct tax. The Supreme Court justices upheld the tax, likely to defend the actions of legislators during a time of crisis and peril. In their decision the justices referenced the previous four Court decisions regarding the issue of direct and indirect taxes, but derived their opinion in Springer through faulty logic. As mentioned, none of these cases discussed the topic of taxing incomes in the nature of wages and salaries. Therefore any discussion about direct taxation was off point.
In Springer the Court justices depended largely upon the Hylton dicta and incorrectly stated that a direct tax was a tax only on land, houses, and slaves. By a process of elimination a tax on incomes could not be a direct tax. Although a tax on land, houses, and slaves are indeed direct taxes by traditional definitions, such taxes do not restrict the definition of a direct tax to only those subjects. The Springer Court also ignored the historical context of the phrase “direct tax.”
Unfortunately, despite a long-established historical understanding that a tax on incomes is a direct tax because income is property, the Supreme Court justices decided incorrectly in Springer and affirmed the war tax on incomes as an indirect tax in the nature of a duty. They did not specifically declare all taxes on incomes to be an indirect tax, but only the tax in dispute. In short, the Court justices decided as they did because:
Proceeding after the recession of 1873, subsequent bills were introduced in the legislature in the hopes of resurrecting the income tax. Tariff laws not only contributed largely to starting the War Among the States, but were seen by many people, in combination with the many commodity excise taxes, as regressive to common working people. An economic depression, spurred by events such as the Sherman Silver Purchase Act and McKinley Tariff Act of 1890, the Panic of 1893, farming and manufacturing that had been outpacing consumption, and a currency that had been slowly deflating, all spurred additional debate about the income tax. Many people saw the income tax as a means of modestly reducing the tariff. Thus, legislators again tried another income tax in 1894. Although primarily a tariff bill (Wilson-Gorman Tariff Act), the Revenue Act of 1894 included the first American peacetime national attempt to impose a tax on incomes. Some people believed that such a tax should be reserved for times of war and great crisis, especially with the manner in which the tax was explicitly being used as a “class tax.” The act imposed a flat 2 percent tax on corporate and individual incomes greater than $4,000.
The Pollock Rule
In 1894 Charles Pollock brought suit against the Farmers’ Loan and Trust Company. Pollock held shares of company capital stock exceeding a value of $5,000 and wanted the company managers not to pay the 2 percent net profits income tax imposed in the revenue act of 1894. The company managers refused not to pay and Pollock sued to enjoin the managers from paying the tax. Whether the managers refused to oblige Pollock merely to obtain a justiciable issue remains debatable. Pollock claimed that paying the tax would diminish the company assets, which would reduce stock dividends, which as a stock holder he possessed property interests. From there Pollock argued that the tax was a direct tax subject to apportionment. The dispute quickly reached the Supreme Court.
The court records and published opinion of Pollock v. Farmers’ Loan and Trust Co. provides one of the most thorough legal and judicial examinations and dissertations about the topic of direct taxation. Both proponents and opponents of the income tax agree and disagree with the Pollock decision. Although today carrying only minor impact as legal precedent, the case was and still is controversial. In addition to the legal arguments were numerous social and political arguments raised by both sides. Understand that this period was one of transition and at the height of the Gilded Age. Opponents of this tax feared that any decision upholding the tax would mean ruin for the great American Experiment. There was concern that a graduated income tax, one of the 10 planks of the Communist Manifesto, would open the door to Marxism. Reading the court records and opinions fail to disclose the intensity of the emotional impact this decision had during that era. Even the Court justices reacted emotionally to the dispute.
At issue in that case were certain portions of that revenue act of 1894. Because Pollock’s legal counsel believed the Supreme Court justices might sustain the flawed opinion of Springer under the doctrine of stare decisis, they decided instead to focus on a different issue that never had been argued previously. Presenting the case in this manner meant that there were no precedents to rely. Rather than directly argue the proposition that a tax on incomes was a direct tax subject to the rule of apportionment, which the Springer decision arguably negated, the petitioners decided to alternately argue that a tax on the income and outgrowth of real and personal property was a direct tax and without apportionment was invalid. A tax on the profitableness of the use of property was a direct tax falling on the value of that property. A tax on the income was indistinguishable from the property itself. The primary question was whether income received from the rents of real estate and invested personal property (stocks) was a direct or indirect tax. If direct, then the tax was subject to the rule of apportionment.
The question was hardly new or foreign. In England and Europe, taxes on the income derived from land were considered land taxes. Alexander Hamilton, discussing taxes on income derived from property, wrote, “What, in fact, is property but a fiction, without the beneficial use of it?” The general belief among many people was that a tax on income derived from property was a tax on the property itself.
The Supreme Court justices decided that the tax in question was an unconstitutional direct tax. Some scholars believed the decision overturned a century of legal precedent with respect to direct taxes. The doctrine that was believed overturned was that where apportionment was unreasonable a tax could not be direct within the meaning and intent of the Constitution. However, the Pollock justices did not overturn previous decisions, they merely expanded the concept of direct taxation to additional subjects. In the previous decisions, direct taxes, in dicta, were always referred to as affecting only capitation taxes, land, real estate, and slaves. The subject of taxing the property of incomes was never an issue at bar except in Springer, and even in that decision the concept of a direct tax was merely a rubber stamp of the contrived case of Hylton.
Anybody who spends time reading court cases eventually learns that what is not said is just as important as what is said. Although asked, the Court justices did not address whether all taxes on incomes were direct taxes, they decided specifically only on incomes derived from real estate and invested personal property:
We have considered the act only in respect of the tax on income derived from real estate, and from invested personal property, and have not commented on so much of it as bears on gains or profits from business, privileges, or employments . . . .
Specifically, the Court justices addressed whether a tax on incomes derived from real estate and invested personal property was a tax on the source of that income generation. The Court justices were careful to declare that was the only issue they were ruling, that they were not addressing “gains or profits from business, privileges, or employments”; although the Pollock justices openly hinted that previous opinions about taxation on business, privileges, or employments were flawed by stating that those taxes had been sustained by assuming “the guise of an excise tax”:
. . . and have not commented on so much of it as bears on gains or profits from business, privileges, or employments, in view of the instances in which taxation on business, privileges, or employments has assumed the guise of an excise tax and been sustained as such. [emphasis added]
The statement likely was about the previous cases mentioned including the Springer decision, when the first modern national income tax imposed was labeled a duty. This Pollock dicta seems to indicate that perhaps the Pollock counsel could indeed have raised the question of whether taxes on wages and salaries was a direct tax. As noted, the Springer case was based upon flawed logic. A duty, recognized as an indirect tax, is constitutionally governed by the rule of uniformity, not apportionment. There is little debate that an indirect tax is easier to impose and levy than a direct tax. Notice the lesson about why definitions are important. The Court justices were careful to declare that taxes on sources — regardless of the nature of the source — were direct taxes. Although avoiding any blanket definition of the term direct tax, the justices wrote that they agreed that taxes on incomes were direct taxes. They also agreed that a direct tax is hardly limited to only land, but can be extended to almost any object. Through the Hylton dicta, until this decision direct taxes were thought to include only land, improvements to land, capitation taxes, and ad valorem taxes on personal property.
Nevertheless, the Pollock justices seemed to recognize the illusion of merely labeling a tax a duty or an excise in order to escape the rule of apportionment. Sadly, the decision directly affected only the income derived from real estate and investments. The statement about taxing wages and salaries remained untouched, but considering the depth at which this case involved, had the justices been forced to address that issue they likely would have decided that, consistent with history, if taxes on incomes were a direct tax then so too would a tax on wages and salaries. This fascinating dicta in the Pollock decision should not be used any precedent or case cite about taxes on wages and salaries, however.
A primary problem with using the term income tax is that the term is too broad to stipulate the exact nature of a tax. Is an income tax a tax imposed on incomes or measured by incomes? The former is a direct tax and the latter an indirect tax. A challenge with a national income tax is that often a judge could not easily distinguish whether the tax was an activity tax measured by net profits and gains, or a direct tax on the source of those profits and gains. The problem is recognized in the congressional debates about the proposed 16th Amendment. Legislative representatives understood the difficulty of defining and recognizing income. The Pollock Court suggested the problem could be remedied by amending the Constitution. The Pollock decision was unpopular among those people who advocated taxing “big business” and the wealthy. The overall result, along with the Progressive reform movement, resulted in the push for the 16th Amendment.
The important point to notice is that in the previous cases discussing direct taxes, only Springer addressed the issue of taxing incomes and under the expediency of justifying actions taken during a war, which likely clouded that decision. The other cases had nothing to do with that issue. Although not specifically addressing the topic of taxing wages and salaries, the Pollock decision affirmed the long-held belief that a tax on incomes was a direct tax.
 Hart, Constitutional Income, p. 103, citing Edwin .R. A. Seligman, in “The Income-Tax Amendment,” 25 Political Science Quarterly, p. 197, 1910.
 Holland, The Law That Always Was, p. 93.
 3 U.S. (Dallas) 171 (1796).
 Holland, The Law That Always Was, p. 93.
 Book V.
 Holland, The Law That Always Was, Chapters 2, 3, and 4.
 Holland, The Law That Always Was, pp. 23–53.
 Wells, “Communism of a Discriminating Income-Tax,” p. 242.
 74 U.S. (Wall.) 433 (1868).
 Volume 13 Statutes at Large, 13th Congress Session I, Chapter 173, sections 105, 120, pp. 276, 283, enacted June 30, 1864.
 Volume 14 Statutes at Large, 39th Congress Session I, Chapter 184, section 9, p. 138, enacted July 13, 1866.
 Volume 12 Statutes at Large, 37th Congress Session II, Chapter 33, section 1, p. 345, enacted February 25, 1862. Taxes on imports and interest on Treasury bonds and notes (public debt) were exempt from being paid at par.
 Volume 14 Statutes at Large, 39th Congress Session I, Chapter 184, section 9, p. 147, enacted July 13, 1866.
 75 U.S. (Wall.) 533 (1869).
 Volume 13 Statutes at Large, 38th Congress Session II, Chapter 78, section 6, p. 484, enacted March 3, 1865.
 Volume 14 Statutes at Large, 39th Congress Session I, Chapter 184, section 9, p. 146, enacted July 13, 1866.
 A 2 percent annual tax was first imposed in Volume 12 Statutes at Large, 37th Congress Session III, section 19, p. 670, enacted February 25, 1863. The rate was reduced to 1 percent in Volume 12 Statutes at Large, 37th Congress Session III, section 7, p. 712, enacted March 3, 1863.
 Volume 12 Statutes at Large, 37th Congress Session III, Chapter 58, p. 665, enacted February 25, 1863.
 Article I, § 8, cl. 5.
 90 U.S. (Wall.) 331 (1874).
 Volume 13 Statutes at Large, 13th Congress Session I, Chapter 173, sections 126–150, pp. 287–291, enacted June 30, 1864.
 Volume 14 Statutes at Large, 39th Congress Session I, Chapter 184, section 9, pp. 140–141, enacted July 13, 1866.
 Doris, The American Way in Taxation, p. 33.
 Holland, The Law That Always Was, p. 138.
 102 U.S. 586 (1880).
 Hart, Constitutional Income, p. 29. Some idea of the authorities Springer cited in his legal brief is seen on pages 590–591 of the court opinion.
 Holland, The Law That Always Was, p. 140.
 Holland, The Law That Always Was, pp. 140–146.
 Holland, The Law That Always Was, Chapters 2, 3, and 4.
 Ekirch, “The Sixteenth Amendment,” pp. 165–166.
 Johnson, “Fixing the Constitutional Absurdity,” p. 340.
 Volume 28 Statutes at Large, 53rd Congress Session II, Chapter 349, p. 509, enacted August 27, 1894.
 Volume 28 Statutes at Large, 53rd Congress Session II, Chapter 349, sections 27–34, pp. 553–557, enacted August 27, 1894.
 Ekirch, “The Sixteenth Amendment,” p. 167.
 Volume 28 Statutes at Large, 53rd Congress Session II, Chapter 349, sections 27, p. 553, enacted August 27, 1894.
 Hall, Oxford Guide to Supreme Court Decisions, p. 241.
 157 U.S. 429 (1895), 158 U.S. 601 (1895).
 Carson, “The Income Tax and How It Grew,” http://www.americanheritage.com.
 Holland, The Law That Always Was, p. 150.
 Hall, Oxford Guide to Supreme Court Decisions, p. 241.
 Holland, The Law That Always Was, p. 151.
 Wells, “The Communism of a Discriminating Income-Tax,” p. 237.
 Ekirch, “The Sixteenth Amendment,” p. 167, citing Alfred H. Kelly and Winfred A. Harbison, The American Constitution: Its Origins and Development (New York: Norton, 1963), p. 573.
 Johnson, “Fixing the Constitutional Absurdity,” p. 298.
 158 U.S. 601, at page 635.
 158 U.S. 601, at page 635.
 158 U.S. 601, at pages 630–632.
 Hart, Constitutional Income, p. 20.
 158 U.S. 601 (1895), at page 635.