Pete says the 16th Amendment did not make income tax into a direct tax.
Why does it seem so much like a direct tax to me (and virtually everybody I ask about it)? If income tax isn't a direct tax, I dont' think I've ever experienced a direct tax from Congress.
What is a direct tax, anyway?
If Congress must apportion it among the states, doesn't that mean Congress must COLLECT it from the states?
Doesn't apportion mean everybody must pay the same amount in a direct tax scheme?
Doesn't "states" mean the states' governments?
How can Congress rightly tax the states (since the 17th Amendment went into effect) when the states have no representation in Congress? Wasn't taxation without representation on of the causes of the American revolution?
Okay, no more pesky questions for now. Here's Pete:
The Fascinating Truth About The 16th Amendment
MY FRIEND, ALL YOUR LIFE YOU’VE BEEN TOLD THAT THE 16TH AMENDMENT was a transformational event in the history of the United States Constitution by which an unapportioned direct federal tax on "all that comes in" was authorized. You’ve been told that the amendment reversed the preceding 137-year-old Constitutional tax structure prohibiting such taxes-- under which the American people had grown to be the freest, most prosperous, and most optimistic people in the history of the world-- in favor of a radically-different structure under which the scandal-ridden and deeply-distrusted denizens of Washington, DC were granted carte blanche to reach directly into every wallet, be it that of a Wall Street tycoon or that of the average working stiff.
Explanations as to why the rich and happy American people of the early 20th Century would do such a thing to themselves have always been vague-- they typically amount to something about a populist or progressive impulse that swept the country in favor of sticking it to the “Robber Barons”. Missing is any reason why such an impulse would embrace a universal tax reaching not just the robber barons, but their alleged victims in the working class, as well (along with every little shopkeeper, and mid-level success story working out the American dream, and everyone else, too).
Also missing from these stories is any explanation of why the several states would ratify such a tax, under which they would inevitably lose power and significance in favor of their federal competitor. Further, these stories leave out the fact that there already WAS an income tax on the books and still in force at the time of the 16th Amendment, which had been successfully deployed over the preceding 52 years without Constitutional problem, save for a single instance in which the US Supreme Court had taken issue with its application to merely two single varieties of realized income.
Indeed, these stories don’t mention that huge portions of our modern body of income tax law entirely pre-date the 16th Amendment, even though Congress actually publishes a comprehensive derivation table explicitly identifying the pre-16th-origins of these still-current statutes.
The fact is, these stories explaining the seemingly inexplicable decision of the prosperous American people of the early 20th Century to chuck a system that had served them so well for so long leave out an awful lot-- because they’re just stories. They’re fiction, so they don’t have to make sense. Those telling these stories want you to believe otherwise for reasons of their own, but the truth is, the 16th Amendment did nothing these story-tellers want you to believe it did.
Instead, the amendment merely overruled a court decision (in Pollock v. Farmer's Loan & Trust, 157 U.S. 429 (1895)) that had briefly interrupted the application of the already-long-standing tax. That decision was based on a novel argument that when applied to excisable gains realized in the form of dividends and rent, the "income" tax was transformed into a property tax on the sources from which the gains were derived.
The 16th Amendment says the Pollock court's reasoning was wrong (or, in any event, is overruled). The amendment provides that Congress can apply the "income tax" to anything that qualifies as excisable "incomes" (a subclass of privilege-based receipts, the nature of which had long been established at the time of the amendment) without the apportionment requirement arising as a result of judicial consideration of the source, as had happened in the Pollock decision:
"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 doesn't transform the "income tax" into a direct tax, nor modify, repeal, revoke or affect the apportionment requirement for capitations and other direct taxes. It simply prohibits the courts from using the overruled reasoning of the Pollock decision to shield otherwise excisable dividends and rents from the tax. As Treasury Department legislative draftsman F. Morse Hubbard summarizes the amendment’s effect for Congress in hearing testimony in 1943:
"[T]he amendment made it possible to bring investment income within the scope of the general income-tax law, but did not change the character of the tax. It is still fundamentally an excise or duty..."
This isn’t Hubbard’s personal opinion. Almost immediately after the amendment was declared adopted in 1913, and the income tax was revived after its 18-year hiatus since the Pollock decision, the application of the tax was again challenged (in Brushaber v. Union Pacific RR Co., 240 U.S. 1 (1916)). Frank Brushaber, a New Yorker with investments in the Union Pacific Railroad Company, based his suit on a series of contentions about the 16th Amendment. The Supreme Court took the case with the intention of settling all issues regarding the purpose and meaning of the amendment and declaring the ongoing nature of the income tax as affected thereby.
The lengthy, detailed and unanimous ruling issued by the court declares that the amendment has no effect on what is and what is not subject to the income tax, and does nothing to limit or diminish the apportionment provisions in the Constitution concerning capitations or other direct taxes. Here are two more good summaries of the Brushaber ruling to add to F. Morse Hubbard’s:
"The Amendment, the [Supreme] court said, judged by the purpose for which it was passed, does not treat income taxes as direct taxes but simply removed the ground which led to their being considered as such in the Pollock case, namely, the source of the income. Therefore, they are again to be classified in the class of indirect taxes to which they by nature belong."
Cornell Law Quarterly, 1 Cornell L. Q. 298 (1915-16);
"The Supreme Court, in a decision written by Chief Justice White, first noted that the Sixteenth Amendment did not authorize any new type of tax, nor did it repeal or revoke the tax clauses of Article I of the Constitution, quoted above. Direct taxes were, notwithstanding the advent of the Sixteenth Amendment, still subject to the rule of apportionment…"
Legislative Attorney of the American Law Division of the Library of Congress Howard M. Zaritsky in his 1979 Report No. 80-19A, entitled 'Some Constitutional Questions Regarding the Federal Income Tax Laws'.
So, the class of what qualifies as "income" subject to the tax remains the same after the amendment as it had been before it. If something didn’t qualify as taxable without apportionment prior to the 16th Amendment it still cannot be taxed without apportionment. All that changed is that the application of the tax to certain of those objects can no longer be viewed as a property tax on the sources from which the “income” objects are derived, for which apportionment would be required. The Supreme Court reiterates this repeatedly:
"The Sixteenth Amendment, although referred to in argument, has no real bearing and may be put out of view. As pointed out in recent decisions, it does not extend the taxing power to new or excepted subjects..."
U.S. Supreme Court, Peck v. Lowe, 247 U.S. 165 (1918);
"[T]he settled doctrine is that the Sixteenth Amendment confers no power upon Congress to define and tax as income without apportionment something which theretofore could not have been properly regarded as income."
U.S. Supreme Court, Taft v. Bowers, 278 US 470, 481 (1929).
"[T]he sole purpose of the Sixteenth Amendment was to remove the apportionment requirement for whichever incomes were otherwise taxable. 45 Cong. Rec. 2245-2246 (1910); id. at 2539; see also Brushaber v. Union Pacific R. Co., 240 U. S. 1, 240 U. S. 17-18 (1916)"
U.S. Supreme Court, So. Carolina v. Baker, 485 U.S. 505 (1988).
Summing it all up, the 16th Amendment comes down to this: The Pollock court had said, "Congress has laid a tax on a big class of excisable objects (which it calls "incomes"), and it's all good. But when the tax is applied to dividend and rent "incomes", it actually functions as a property tax on their sources and therefore, in regard to those two "incomes", the tax has to be apportioned."
The 16th Amendment simply says, "Nix to that last bit."
THE EASIEST WAY TO COMPREHEND THE LEGAL REALITY OF THE "INCOME TAX" TODAY in light of the actual meaning and effect of the 16th Amendment is to simply think of the Pollock decision as having gone the other way. Simply imagine that the Pollock Court had upheld the application of the tax to excisable dividends and rent without apportionment, and the 16th Amendment had never happened. What we would have had from that course of events is exactly what we have now-- federal authority for an indirect excise tax falling only on objects suitable to that type of tax, unthwarted by the argument that if applied to excisable dividends and rent, that excise tax becomes a property tax requiring apportionment.
Another easy way to grasp the legal reality of the "income" tax today in light of the actual meaning and effect of the 16th Amendment is to remember that the amendment caused no change in the apportionment rule in regard to direct taxes. This means taxes on general revenues and/or the unprivileged activities which produce them-- which, as the Supreme Court has acknowledged, are among the class of direct taxes known as "capitations" in the Constitution-- remain subject to the apportionment requirement. Thus, whatever difficulty anyone may have in understanding what IS taxable under the "income" excise can be relieved by considering what ISN’T taxable under an unapportioned excise.
"If [a] tax is a direct one, it shall be apportioned according to the census or enumeration. If it is a duty, impost, or excise, it shall be uniform throughout the United States. Together, these classes include every form of tax appropriate to sovereignty. Whether the [income] tax is to be classified as an "excise" is in truth not of critical importance [for this analysis]. If not that, it is an "impost", or a "duty". A capitation or other "direct" tax it certainly is not."
U.S. Supreme Court, Steward Machine Co. v. Collector of Internal Revenue, 301 U.S. 548 (1937) (Emphasis added; citations ommitted.)
Thanks to that persistent Constitutional prohibition of unapportioned capitations, the "income tax" cannot fall on or be measured by:
"all that comes in";
"every different species of revenue";
"the fortune or revenue of each contributor";
"the [common-meaning] wages of labour";
"what is supposed to be one's fortune [per] an assessment which varies from year to year"; or
"[an assessed percentage] of [one's] supposed [commonly-defined] income").
Nor can the "income tax" fall on any other object whose nature would make the tax direct, regardless of its label.
NOW, GUESS WHAT? THE "INCOME TAX" LAWS MAKE NO ATTEMPT TO VIOLATE THESE RULES!
Though the mechanisms by which it does so are a bit difficult to find, the tax law, as written, confines itself carefully and scrupulously to gains resulting from the exercise of federal privilege, just as a federal excise tax must do. It is not by accident or oversight that the "wages" by which the application of the tax to the pay of workers is measured are custom-defined in the law to describe only payments made to federal workers, for instance, or that "trade or business" is defined only as "the performance of the functions of a public office."
***
THAT’S IT, MY FRIEND! Now you know that the 16th Amendment never authorized an unapportioned general tax (and I suspect you’re beginning to realize that for all of your working life you’ve probably been victimized by the misapplication of what the “income tax” really is).
Frankly, I imagine that you’ve always suspected this. After all, the 16th Amendment is a Constitutional amendment, the highest possible expression of the popular will possible, and the mythology about the amendment says it was intended to authorize a universal tax on everyone’s revenue. And yet, 30 years goes by after its adoption in 1913 before more than a small fraction of Americans are affected in any way by the income tax!
Plainly, had the 16th Amendment actually been meant to authorize a universal tax, we would have seen income tax filings by every adult American no later than 1914 and every year from there forward. In reality though, only 9.36% of all money-making Americans had occasion to file any kind of tax document in any year from 1913 to 1939, on average.
This was a period at the very beginning of which even simple factory workers were making $1,500 a year (with pay-rates climbing), and while the tax-rates only exempted $1,000 of “income”. But back then everyone understood that the $1,000 of exempted gains-- and the amounts above that to which the “income tax” applied-- were different kind of gains from the unprivileged variety received by factory workers and most everyone else.
In fact, the very highest annual percentage of “income tax”-filing money-making Americans for the whole period (which included World War I and the "Roaring Twenties") was only 17.3%. It was not until the early 1940s, in the midst of World War II, that the percentage cracked 50%, which only happened after decades of relentless disinformation about the nature of the 16th Amendment and the meaning of "income" by corrupt elements of a revenue-hungry state, beneficiaries of misunderstanding in professions like tax law and accounting, and “progressives” who had always wanted a universal tax and saw an opportunity to get one by subterfuge.
This campaign of corruption on behalf of spreading misunderstanding of the income tax was assisted by increasingly widespread public-schooling in which was taught a worship of the state, propaganda resources which included exhortations by the likes of Donald Duck, and ten years of deep mental softening taking place during the rigors of the Great Depression. Needless to say, no such campaign would have been undertaken had the 16th Amendment actually authorized the general tax in which you are constantly invited to believe. When was the last time you were regaled with appeals to “pay property taxes” by a cartoon animal in a state-financed film?
Unfortunately, the campaign succeeded. You were invited to believe the Leviathan-serving mythology about the 16th Amendment, and you did. In thrall to that myth, you have made the income tax a reality in your own life, despite it likely having no actual legal application to your activities. In thrall to that myth, you have been actively declaring your unprivileged earnings to be the privileged kind to which the “income tax” that we really DO have actually applies. You can get a good idea of how that works by reading the little story of ‘Bob’s Bicycles’.
I’LL LEAVE IT TO YOU TO DECIDE the significance of this truth about the “income tax amendment”. But if you wish, go to losthorizons.com, where you’ll find it all laid out in painstaking detail, including, among much else, exactly what this knowledge has meant for the tens of thousands of Americans who have been using it to reclaim complete authority over property they otherwise had lost (or would lose) to a tax which has proven to not apply to their activities and earnings (including the “Social Security” and “Medicare” versions of the tax). I’m not talking about some abstract legal claim. I’m talking about checks in the mailbox-- refund checks of every penny withheld and every penny paid-in, plus interest in many cases. See a representative sampling of 850 or so checks, credits, transcripts, and so on at the losthorizons.com bulletin board.
More important by far than the money, though, is the reclaiming of rightful authority over the power which attends control of that wealth. Individual control of that power is central to the Founders’ Constitutional design for maintaining a limited government subject to the rule of law, because the Constitution does not enforce itself, and left undefended by grown-up American men and women, it is the natural course of things for liberty to yield and for government to gain ground.
The Founders’ design relies on you acting on behalf of your own interests and retaining control of your own wealth and property. By doing so, you function as part of an invisible hand imposing restraint and discipline on the federal government, keeping it small, obedient and respectful, as it is intended to be. Small, obedient and respectful government results in freedom and prosperity for all Americans.
This "invisible hand" restraint operates just like Adam Smith's better-known economic "invisible hand" engine-of-prosperity. Like its counterpart, the restraint-engine is fueled by millions of decisions intended only to benefit each American individually, which nonetheless act organically to benefit all by keeping the state small and harmless to liberty. For nearly all of the 150 years or so during which the restraint-engine ran strong before sputtering into "idle" in the 1940s, the state remained in harness and the American people grew in prosperity while preserving their liberties.
This "invisible hand" engine of freedom is, in fact, the ONLY mechanism whereby effective constraints can be laid on the state. Certainly the founding generation felt this way, as evidenced by the prescriptions and proscriptions within the federal charter. Had the framers been willing to rely upon the political process to keep the state under control, no rules concerning the taxing power would have been seen as necessary.
AS I NOTED ABOVE, THOUGH, RESPONSIBILITY FOR KEEPING the framers' engine of freedom humming along is on you and me. In the absence of countervailing pressure from individual men and women, dangerous-- even ruinous-- state power automatically grows.
We’re suffering from the effects of long years of individual irresponsibility today. Still, even as far gone to neglect as we are right now, all that is needed to set things right is for each of us to rise to our feet and do our part.
Learn more, spread the word, and act, my friend. Liberty is just over the horizon.
