First, I should point out that the Constitution says that "Representatives and direct Taxes" shall be apportioned (Article I, section 2) and that "No Capitation, or other direct, Tax" shall be laid unless apportioned (Article I, section 9). The Constitution also refers to "Duties, Imposts and Excises" being uniform (Article I, section
, but the word "indirect" does not appear in the Constitution. (In Hylton v. United States, 3 U.S. 171, 176 (1796), Justice Paterson observed that, "The general division of taxes is into direct and indirect. Although the latter term is not to be found in the Constitution, yet the former necessarily implies it. 'Indirect' stands opposed to 'direct.'")From the FAQ:
The majority opinion in one of the Pollock decisions introduced some confusion about the meaning of “direct tax” and “indirect tax” through the following statement:
“The first question to be considered is whether a tax on the rents or income of real estate is a direct tax within the meaning of the constitution. 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. 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, 558 (1895).
There are several problems with the meaning of “indirect taxes” as “all taxes paid primarily by persons who can shift the burden upon some one else” and “direct taxes” as taxes “the payment of which cannot be avoided”:
- First (and most importantly), there is no support for those meanings in the words of the Constitution, the Federalist Papers, or any writings of the authors of the Constitution. As noted above, both the Federalist Papers and the opinions of the justices in the Hylton decision (some of whom were members of the Constitutional Convention) support the conclusion that a “direct tax” means a tax on the value of property.
- There is no support for those definitions in any previous (or later) decision of the Supreme Court.
- In the Pollock case itself, the Supreme Court admitted in the very next sentence that “the constitution may bear a different meaning.” As explained previously, the Supreme Court has consistently held that a tax on incomes is not a “direct tax” within the meaning of the Constitution. The Pollock court itself held that a tax on incomes from “professions, trades, employments, or vocations,” is not a “direct tax” without ever discussing whether the tax was one “the payment of which cannot be avoided.” (158 U.S. at 637.) The above definition of “direct tax” is therefore inconsistent with the decision of the Pollock court itself.
The same (or similar) arguments were also rejected in Nicol v. Ames, 172 U.S. 509, 515 (1899) (“t it is no part of the duty of this court to lessen, impede, or obstruct the exercise of the taxing power by merely abstruse and subtle distinctions as to the particular nature of a specified tax, where such distinction rests more upon the differing theories of political economists than upon the practical nature of the tax itself.”)
This argument was most recently rejected by a Circuit Court in Murphy v. I.R.S., 493 F.3d 170, No. 05-5139 (D.C. Cir. 7/3/2007), vacating 460 F.3d 79 (8/22/2006).
[End of FAQ quote]
The issue in Murphy was whether damages received in a personal injury lawsuit could be taxed as "income" when the damages were not from "personal physical injuries or physical sickness" within the meaning of IRC section 104(a). This lead the court to a long discussion of the meaning of "income" and the meaning of "direct" and "indirect" taxes.
Murphy court wrote:Murphy and the amici supporting her argue the dividing line between direct and indirect taxes is based upon the ultimate incidence of the tax; if the tax cannot be shifted to someone else, as a capitation cannot, then it is a direct tax; but if the burden can be passed along through a higher price, as a sales tax upon a consumable good can be, then the tax is indirect. This, she argues, was the distinction drawn when the Constitution was ratified. See Albert Gallatin, A Sketch of the Finances of the United States (1796), reprinted in 3 THE WRITINGS OF ALBERT GALLATIN 74-75 (Henry Adams ed., Philadelphia, J.P. Lippincott & Co. 1879) ("The most generally received opinion . . . is, that by direct taxes . . . those are meant which are raised on the capital or revenue of the people; by indirect, such as are raised on their expense"); THE FEDERALIST No. 36, at 225 (Alexander Hamilton) (Jacob E. Cooke ed., 1961) ("internal taxes[ ] may be subdivided into those of the direct and those of the indirect kind . . . by which must be understood duties and excises on articles of consumption"). But see Gallatin, supra, at 74 ("[Direct tax] is used, by different writers, and even by the same writers, in different parts of their writings, in a variety of senses, according to that view of the subject they were taking"); EDWIN R.A. SELIGMAN, THE INCOME TAX 540 (photo. reprint 1970) (2d ed.1914) ("there are almost as many classifications of direct and indirect taxes are there are authors"). Moreover, the amici argue, this understanding of the distinction explains the different restrictions imposed respectively upon the power of the Congress to tax directly (apportionment) and via excise (uniformity). Duties, imposts, and excise taxes, which were expected to constitute the bulk of the new federal government's revenue, see Erik M. Jensen, The Apportionment of "Direct Taxes": Are Consumption Taxes Constitutional?, 97 COLUM. L.REV. 2334, 2382 (1997), have a built-in safeguard against oppressively high rates: Higher taxes result in higher prices and therefore fewer sales and ultimately lower tax revenues. See THE FEDERALIST No. 21, supra, at 134-35 (Alexander Hamilton). Taxes that cannot be shifted, in contrast, lack this self-regulating feature, and were therefore constrained by the more stringent requirement of apportionment. See id. at 135 ("In a branch of taxation where no limits to the discretion of the government are to be found in the nature of things, the establishment of a fixed rule . . . may be attended with fewer inconveniences than to leave that discretion altogether at large"); see also Jensen, supra, at 2382-84.
Finally, the amici contend their understanding of a direct tax was confirmed in Pollock II, where the Supreme Court noted that "the words `duties, imposts, and excises' are put in antithesis to direct taxes," 158 U.S. at 622, 15 S.Ct. 912, for which it cited THE FEDERALIST No. 36 (Hamilton). Pollock II, 158 U.S. at 624-25, 15 S.Ct. 912. As it is clear that Murphy cannot shift her tax burden to anyone else, per Murphy and the amici, it must be a direct tax.
The Government, unsurprisingly, backs a different approach; by its lights, only "taxes that are capable of apportionment in the first instance, specifically, capitation taxes and taxes on land," are direct taxes. The Government maintains that this is how the term was generally understood at the time. See Calvin H. Johnson, Fixing the Constitutional Absurdity of the Apportionment of Direct Tax, 21 CONST. COMM. 295, 314 (2004). Moreover, it suggests, this understanding is more in line with the underlying purpose of the tax and the apportionment clauses, which were drafted in the intense light of experience under the Articles of Confederation.
The Articles did not grant the Continental Congress the power to raise revenue directly; it could only requisition funds from the States. See ARTICLES OF CONFEDERATION art. VIII (1781); Bruce Ackerman, Taxation and the Constitution, 99 COLUM. L.REV. 1, 6-7 (1999). This led to problems when the States, as they often did, refused to remit funds. See Calvin H. Johnson, The Constitutional Meaning of "Apportionment of Direct Taxes," 80 TAX NOTES 591, 593-94 (1998). The Constitution redressed this problem by giving the new national government plenary taxing power. See Ackerman, supra, at 7. In the Government's view, it therefore makes no sense to treat "direct taxes" as encompassing taxes for which apportionment is effectively impossible, because "the Framers could not have intended to give Congress plenary taxing power, on the one hand, and then so limit that power by requiring apportionment for a broad category of taxes, on the other." This view is, according to the Government, buttressed by evidence that the purpose of the apportionment clauses was not in fact to constrain the power to tax, but rather to placate opponents of the compromise over representation of the slave states in the House, as embodied in the Three-fifths Clause.[*] See Ackerman, supra, at 10-11. See generally SELIGMAN, supra, at 548-55. As the Government interprets the historical record, the apportionment limitation was "more symbolic than anything else: it appeased the antislavery sentiment of the North and offered a practical advantage to the South as long as the scope of direct taxes was limited." See Ackerman, supra, at 10. But see Erik M. Jensen, Taxation and the Constitution: How to Read the Direct Tax Clauses, 15 J.L. & POL. 687, 704 (1999) ("One of the reasons [the direct tax restriction] worked as a compromise was that it had teeth — it made direct taxes difficult to impose — and it had teeth however slaves were counted").
The Government's view of the clauses is further supported by the near contemporaneous decision of the Supreme Court in Hylton v. United States, 3 U.S. (3 Dall.) 171, 1 L.Ed. 556 (1796), holding that a national tax upon carriages was not a direct tax, and thus not subject to apportionment. Justices Chase and Iredell opined that a "direct tax" was one that, unlike the carriage tax, as a practical matter could be apportioned among the States, id. at 174 (Chase, J.); id. at 181 (Iredell, J.), while Justice Paterson, noting the connection between apportionment and slavery, condemned apportionment as "radically wrong" and "not to be extended by construction," id. at 177-78.[*] As for Murphy's reliance upon Pollock II, the Government contends that although it has never been overruled, "every aspect of its reasoning has been eroded," see, e.g., Stanton v. Baltic Mining Co., 240 U.S. 103, 112-13, 36 S.Ct. 278, 60 L.Ed. 546 (1916), and notes that in Pollock II itself the Court acknowledged that "taxation on business, privileges, or employments has assumed the guise of an excise tax," 158 U.S. at 635, 15 S.Ct. 912. Pollock II, in the Government's view, is therefore too weak a reed to support Murphy's broad definition of "direct tax" and certainly does not make "a tax on the conversion of human capital into money . . . problematic."
Murphy replies that the Government's historical analysis does not respond to the contemporaneous sources she and the amici identified showing that taxes imposed upon individuals are direct taxes. As for Hylton, Murphy argues nothing in that decision precludes her position; the Justices viewed the carriage tax there at issue as a tax upon an expense, see 3 U.S. (3 Dall.) at 175 (Chase, J.); see also id. at 180-81 (Paterson, J.), which she agrees is not a direct tax. See Pollock II, 158 U.S. at 626-27, 15 S.Ct. 912. To the extent Hylton is inconsistent with her position, however, Murphy contends her references to the Federalist are more authoritative evidence of the Framers' understanding of the term.
Murphy makes no attempt to reconcile her definition with the long line of cases identifying various taxes as excise taxes, although several of them seem to refute her position directly. In particular, we do not see how a known excise, such as the estate tax, see, e.g., New York Trust Co. v. Eisner, 256 U.S. 345, 349, 41 S.Ct. 506, 65 L.Ed. 963 (1921); Knowlton, 178 U.S. at 81-83, 20 S.Ct. 747, or a tax upon income from employment, see Pollock II, 158 U.S. at 635, 15 S.Ct. 912; Pollock I, 157 U.S. at 579, 15 S.Ct. 673; cf. Steward Mach. Co. v. Davis, 301 U.S. 548, 580-81, 57 S.Ct. 883, 81 L.Ed. 1279 (1937) (tax upon employers based upon wages paid to employees is an excise), can be shifted to another person, absent which they seem to be in irreconcilable conflict with her position that a tax that cannot be shifted to someone else is a direct tax. Though it could be argued that the incidence of an estate tax is inevitably shifted to the beneficiaries, we see at work none of the restraint upon excessive taxation that Murphy claims such shifting is supposed to provide; the tax is triggered by an event, death, that cannot be shifted or avoided. In any event, Knowlton addressed the argument that Pollock I and II made ability to shift the hallmark of a direct tax, and rejected it. 178 U.S. at 81-82, 20 S.Ct. 747. Regardless what the original understanding may have been, therefore, we are bound to follow the Supreme Court, which has strongly intimated that Murphy's position is not the law.
