25
May
09

A Discussion Regarding Taxation on Private Sector Earnings

Taken from a college student’s paper regarding taxation. Author wishes to remain anonymous. I know that the subject of taxes is confusing and somewhat boring but I urge you to read through this and think about it. All sources are listed at the bottom if you want to see the sources used. Enjoy and thank you to the author of this paper.

Even though those whom disagree often site the sixteenth amendment as the law allowing the Congress to tax private sector labor as income, the taxation imposed on the pay of private sector workers is improper because Article 1 Section IX of the United States Constitution prohibits Direct taxation without apportionment, and numerous Supreme Court decisions espouse that trading labor for money is a natural right.

Taxes are a necessary evil. In order for Governments to function, they require a revenue stream – the debts of the government need to be paid, the members of the armed forces need to be paid, and the normal day to day operations of the Government need to be paid. The Constitution of the United States gives Congress the power to generate a revenue stream through the laying and collecting of taxes; this power is given in Article 1 Sec 8 Cl. 2, which states:

“The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;” 

Then, in Article 1 Sec 9 Cl 4; “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.” And in Clause 5 “No Tax or Duty shall be laid on Articles exported from any State.” The Founding Fathers, understanding the need of the Federal Government to have a positive inflow of monies, provided many options of funding the government. The only limits placed on the taxing power of the Congress were that capitations or other direct taxes were to be apportioned in accordance with the census (US Constitution Article 1 Sec 9 Cl 4.) and no tax or duty could be placed on exports (US Constitution Article 1 Sec 9 Cl 5). To further clarify the method of receiving revenue, Alexander Hamilton, in Federalist 12 said:

“The ability of a country to pay taxes must always be proportioned, in a great degree, to the quantity of money in circulation, and to the celerity with which it circulates. Commerce, contributing to both these objects, must of necessity render the payment of taxes easier, and facilitate the requisite supplies to the treasury (¶2).

In so opulent a nation as that of Britain, where direct taxes from superior wealth must be much more tolerable, and, from the vigor of the government, much more practicable, than in America, far the greatest part of the national revenue is derived from taxes of the indirect kind, from imposts, and from excises. Duties on imported articles form a large branch of this latter description.

In America, it is evident that we must a long time depend for the means of revenue chiefly on such duties. In most parts of it, excises must be confined within a narrow compass. The genius of the people will ill brook the inquisitive and peremptory spirit of excise laws. The pockets of the farmers, on the other hand, will reluctantly yield but scanty supplies, in the unwelcome shape of impositions on their houses and lands; and personal property is too precarious and invisible a fund to be laid hold of in any other way than by the inperceptible agency of taxes on consumption (¶4-5).”

Hamilton specifically describes indirect and consumption taxes as the primary means of providing revenue to the Federal Government.

There were many taxes being levied throughout the young United States – taxes on whiskey, tobacco, and import tariffs to name a few, and all of these taxes fell into the indirect category which were in compliance with the Constitution. In 1862, the first “Income Tax” was passed, titled “An Act to provide Internal Revenue to support the Government and to pay interest on the Public Debt.” Many new excises taxes were imposed as well as the establishment of the Commissioner of Internal Revenue. Sec 86 of the act reads:

“…there shall be levied, collected, and paid on all salaries of officers, or payments to persons in the civil, military, naval, or other employment or service of the United States, including senators, representatives, and delegates in Congress, when exceeding the rate of six hundred dollars per anum, a duty of three per centum on the excess above the said six hundred dollars…”(Pg. 472)

The act of 1862 went to say in Sec 90:

“…That there shall levied, collected, and paid annually, upon the annual gains, profits or income of every person residing in the United States, whether derived from any kind of property, rents, interest, dividends, salaries, or from any profession, trade, employment, or vocation carried on in the United States or elsewhere, or from any other source whatever,…if such annual gains, profits, or income exceed the sum of six hundred dollars,…a duty of three per centum on the amount of such annual gains, profits, or income over and above the said sum of six hundred dollars…” (Pg. 473)(emphasis added)

The very first income tax act in our history, allowed for a withholding on the pay above $600.00 per year ($50.00 per month) of all Federal employees, and for the rest of the population, an annual tax on the income over $600.00 derived from various sources. If the withholding from federal employees and the annual tax on the common citizenry were from the same source (payment for work) Sec 90 would not have been needed. The significance of this is the tax levied is on a privilege, NOT on individual persons.

Since 1862 there has been a legal income tax law and it has been revised many times. In 1894 one such revision caused a group of shareholders to appeal to the Supreme Court. In 1895, the Supreme Court heard Pollock v. Farmer’s Loan and Trust Co., in this case Mr. Pollock and many other shareholders were to receive dividends from their investments in Farmer’s Loan and Trust which had intended to pay required taxes before paying out the dividend, Mr. Pollock thought this unconstitutional and the Supreme Court agreed, stating:

“The tax imposed by sections 27 to 37, inclusive, of the act of 1894, so far as it falls on the income of real estate, and of personal property, being a direct tax, within the meaning of the constitution, and therefore unconstitutional and void, because not apportioned according to representation, all those sections, constituting one entire scheme of taxation, are necessarily invalid” (Pollock v. Farmer’s Loan and Trust Co. (1895)(Rehearing)(¶60 part 3). 

The Pollock v. Farmer’s Loan and Trust Co. (1895) decisions invalidated several portions of the Revenue Act of 1894 and led to the 16th amendment to the Constitution. The remaining portions of the 1894 tax act remained constitutional, all indirect (excise) taxes were judged lawful and the Federal Government maintained a revenue stream via excise taxes. There is one other aspect of the Pollock v. Farmer’s Loan and Trust Co. (1895) decisions that bears mentioning, “We are of opinion that taxes on personal property, or on the income of personal property, are likewise direct taxes” (Pollock v. Farmer’s Loan and Trust Co. (1895)(Rehearing)(¶60 part 2). It is here that the Supreme Court clearly states that a tax on personal property is a direct tax.

Previously in 1884, The Supreme Court ruled that an individuals labor is an inalienable right.

“It has been well said that the property which every man has in his own labor, as it is the original foundation of all other property, so it is the most sacred and inviolable. The patrimony of the poor man lies in the strength and dexterity of his own hands, and to hinder his employing this strength and dexterity in what manner he thinks proper, without injury to his neighbor, is a plain violation of this most sacred property” (Butchers’ Union Co. v. Crescent City Co. (1884) ¶11). 

In this ruling, the Supreme Court established that an individual’s labor is personal property, while in the Pollock decisions, the court stated that taxing personal property is a direct tax as defined by the US Constitution, thereby making the taxing of labor without apportionment among the several States an unconstitutional direct tax.

Additionally, in 1900 and 1906, the Supreme Court held that “Direct taxes bear immediately upon persons, upon the possession and enjoyments of rights; indirect taxes are levied upon the happening of an event or an exchange” (Knowlton v. Moore ¶11 (1900), and “His rights are such as existed by the law of the land long antecedent to the organization of the State, and can only be taken from him by due process of law, and in accordance with the Constitution” (Hale v. Henkel (1906) ¶49). Private Property, which includes personal labor, can only be taken away through due process of law, not taxation.

As mentioned earlier, the decisions rendered in Pollock v. Farmer’s Loan and Trust Co. (1895) led to the adoption of the Sixteenth Amendment.  This amendment reads: “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 language used by the Congress, and approved by the several States, appears to have removed from the Constitution the class of “Direct Taxes.” This amendment was ratified by the requisite number of States and applied as law on February 25, 1913. A decision was handed down by the Supreme Court in December of 1913 in which the term Income was defined; “’income’ may be defined as the gain derived from capital, from labor, or from both combined” (Stratton’s Independence, Ltd. v. Howbert, (1913) ¶7), this decision is referenced in numerous follow on decisions and makes clear what is and is not subject to the income tax, this definition is consistent with the language in section 90 of the 1862 Revenue Act as stated above.

In 1916, the Supreme Court ruled that the 16th Amendment is only constitutional as an excise tax:

“We are of opinion, however, that the confusion is not inherent, but rather arises from the conclusion that the 16th Amendment provides for a hitherto unknown power of taxation; that is, a power to levy an income tax which, although direct, should not be subject to the regulation of apportionment applicable to all other direct taxes” (Brushaber v. Union Pacific R. Co. (1916)¶4). 

The decision went further and clarified that if the interpretation held was accurate, it would cause the Constitution to be in direct conflict with itself and would create more confusion regarding the scheme of the taxation power of the Congress:

“…they would result in bringing the provisions of the Amendment exempting a direct tax from apportionment into irreconcilable conflict with the general requirement that all direct taxes be apportioned. Moreover, the tax authorized by the Amendment, being direct, would not come under the rule of uniformity applicable under the Constitution to other than direct taxes, and thus it would come to pass that the result of the Amendment would be to authorize a particular direct tax not subject either to apportionment or to the rule of geographical uniformity, thus giving power to impose a different tax in one state or states than was levied in another state or states. This result, instead of simplifying the situation and making clear the limitations on the taxing power, which obviously the Amendment must have been intended to accomplish, would create radical and destructive changes in our constitutional system and multiply confusion” (Brushaber v. Union Pacific R. Co. (1916)¶5).

It is also interesting to note that the language used by the court in the above quote, “to impose a different tax in one state or states than was levied in another state or states”, this indicates that the direct taxing power of the Congress is limited to States, not individual citizens. Also in 1916, the court held that the 16th amendment did not expand the taxing power of the Congress; “by the previous ruling, it was settled that the provisions of the Sixteenth Amendment conferred no new power of taxation” (Stanton v. Baltic Mining Co. (1916) ¶6).

            The 1918 Case of Southern Pacific Co. v. Lowe, the Supreme Court provided a definition of Gross Income; “We must reject in this case, as we have rejected in cases arising under the Corporation Excise Tax Act of 1909… the broad contention submitted in behalf of the government that all receipts — everything that comes in — are income within the proper definition of the term ‘gross income’”, and “Certainly the term ‘income’ has no broader meaning in the 1913 act than in that of 1909 (see Stratton’s Independence v. Howbert, 231 U. S. 399, 231 U. S. 416-417) and, for the present purpose, we assume there is no difference in its meaning as used in the two acts” (Southern Pacific Co. v. Lowe (1918)¶6), here again, the Court has maintained the same definition for Income- “as the gain derived from capital, from labor, or from both combined” (Stratton’s Independence, Ltd. v. Howbert, (1913) ¶7). In 1920, the Supreme Court found it necessary to restrict the Congress when defining terms:

“In order, therefore, that the clauses cited from article 1 of the Constitution may have proper force and effect, save only as modified by the amendment, and that the latter also may have proper effect, it becomes essential to distinguish between what is and what is not ‘income,’ as the term is there used, and to apply the distinction, as cases arise, according to truth and substance, without regard to form. Congress cannot by any definition it may adopt conclude the matter, since it cannot by legislation alter the Constitution, from which alone it derives its power to legislate, and within whose limitations alone that power can be lawfully exercised” (Eisner v. Macomber, (1920) ¶13).

Again in 1920, the Supreme Court ruled that the 16th amendment did not add to the items or things that were previously taxable:

“As repeatedly held, this did not extend the taxing power to new subjects, but merely removed the necessity which otherwise might exist for an apportionment among the states of taxes laid on income. Brushaber v. Union Pacific R. R. Co., 240 U.S. 1 , 17-19, 36 Sup. Ct. 236, Ann. Cas. 1917B, 713, L. R. A. 1917D, 414; Stanton v. Baltic Mining Co., 240 U.S. 103 , 112 et seq., 36 Sup. Ct. 278; Peck & Co. v. Lowe, 247 U.S. 165, 172 , 173 S., 38 Sup. Ct. 432” (Eisner v. Macomber, (1920) ¶11).

The Supreme Court also affirmed the significance of the language in Article 1 Sec 9 of the Constitution:

“A proper regard for its genesis, as well as its very clear language, requires also that this amendment shall not be extended by loose construction, so as to repeal or modify, except as applied to income, those provisions of the Constitution that require an apportionment according to population for direct taxes upon property, real and personal. This limitation still has an appropriate and important function, and is not to be overridden by Congress or disregarded by the courts (Eisner v. Macomber, (1920) ¶12).

In the Congressional record for the 78th Congress, First Session, Volume 78 pt 2, pg 2580, this excerpt from a statement by Mr. F. Morse Hubbard a former legislative draftsman for the Treasury department, is appended.

“The sixteenth amendment authorizes the taxation of income “from whatever source derived”-thus taking in investment income- “without apportionment among the several States.” The Supreme Court has held that the sixteenth amendment did not extend the taxing power of the United States to new or excepted subjects but merely removed the necessity which might otherwise exist for an apportionment among the States of taxes laid on income whether it be derived from source or another [referring to Brushaber v. Union Pacific 1916; William E. Peck and Co v. Lowe (1918); and Eisner v. Macomber (1920)]. So the amendment made it possible to bring investment income within the scope of a general income-tax law, but did not change the character of the tax. It is still fundamentally an excise or duty with respect to the privilege of carrying on any activity or owning any property which produces income.

The income tax is, therefore, not a tax on income as such. It is an excise tax with respect to certain activities and privileges which is measured by reference to the income which they produce. The income is not the subject of the tax: it is the basis for determining the amount of tax” (¶7-8).

As recently as 1943, the Congress understood that the 16th amendment did not extend the income tax to income which was untaxable before the amendment.  Looking to the most current version of 26 U.S.C, The Internal Revenue Code, it is clear that the language used reflects the same understanding of the limits of the income Tax:

“There is hereby imposed on the taxable income of…” (Title 26, Subtitle A, Ch 1, subchapter A, pt 1 Sec 1(a)).

“There is hereby imposed on the taxable income of every head of household…” (Title 26, Subtitle A, Ch 1, subchapter A, pt 1 Sec 1(b)).

“There is hereby imposed on the taxable income of every individual…” (Title 26, Subtitle A, Ch 1, subchapter A, pt 1 Sec 1(c)).

“There is hereby imposed on the taxable income of every married individual…” (Title 26, Subtitle A, Ch 1, subchapter A, pt 1 Sec 1(d)).

The term “Income” is not defined anywhere within Title 26. The term “Gross Income” is defined at Title 26, Subtitle A, Ch 1, subchapter B, pt 1 Sec 61(a) as: “Except as otherwise provided in this subtitle, gross income means all income from whatever source derive, including (but not limited to) the following items…” There are 15 items listed under Sec 61(a), item (1) says, “Compensation for services, including fees, commissions, fringe benefits, and similar items”. In legal terms, the words “include and including” have a specific function, they limit what is defined. The legal canon of “Inclusio unius est exclusio aterius” means “the inclusion of one is the exclusion of all others” (Garner et al. 2005). This does not mean only the things listed, it means the definition is limited to those items within the category of the items defined. If the Congress created a law that read “Fruit shall be sold for $1.00 per pound,” and defined the term “Fruit” as such; “For the purpose of this chapter, the term “Fruit” includes apples, oranges, and bananas.”  A fruit vendor would, by law, be able to sell watermelons, grapes and peaches for any price he chooses, but apples, oranges and Bananas are limited to $1.00 per pound.” Any item that falls into the category of, for example,  an apple- Granny Smiths, Red Delicious, Macintosh etc. are limited to $1.00 per pound. As it relates to Sec 61, Compensation for services does not include Labor.

            The Constitution of the United States provides the Congress with the power to lay and collect taxes to generate revenue for the federal government the revenue stream for the Federal government was designed to come from consumption, or excise taxes. The Constitution specifies that excise taxes must be uniform throughout the several states, and that direct taxes must be apportioned among the several states. A person’s labor has been decided to be personal property, and that said property is an inalienable right as described in the Declaration of Independence. The Supreme Court has held that taxing personal property is a direct tax, which is subject to apportionment. In other words, the trading of ones labor for any form of compensation, is not taxable as that would be a direct tax which requires apportionment among the several States.

            The 16th amendment was ratified and brought investment income into the vein of indirect taxes, and that is all it did. Nothing that was previously immune from the taxing power of the Congress was added. Personal labor is still personal property and only subject to a direct tax through apportionment. The Internal Revenue Code, although confusing in its wording, has not changed or expanded from what has always been legally taxable. Any income derived from personal labor, as well as many other sources, I taxable as an excise. If one were to receive interest income from a bank account, this would be income that derived from personal property, and as such, taxable under the Income tax category.

—-

BIBLIOGRAPHY:

An Act to Provide Internal Revenue to Support the Government and to Pay Interest on the Public Debt, ch. 119, 12 Stat. 472-473 (1862). This is the first income tax law.

Brushaber V. Union Pacific R. Co, No. 240 U.S. 1 (U.S. Jan. 24, 1916). The Supreme Court clarifies the 16th amendment is only constitutional as an excise tax.

Butchers’ Union Co. V. Crescent City Co., No. 111 U.S. 746 (U.S. May 5, 1884). This Supreme Court decision establishes individual labor is a natural right.

Eisner V. Macomber, No. 252 US 189 (U.S. Mar. 8, 1920). This decision of the Supreme Court reiterates the definition of income.

Garner, B. A., Jackson, T., Newman, J., Melendez, B., Schwing, A. T., & Spaniol, J. F., Jr. (Eds.). (2005). Inclusio unius est exclusio alterius. In Black’s Law Dictionary (Abridged 8th  ed., p. 632). St. Paul, MN: Thomas/‌West. (Original work published 1891). Definitions of legal terms.

Hale V. Henkel, No. 201 US 43 (U.S. Mar. 12, 1906). The Supreme Court explained the rights of man existed before the State existed, and as such; rights can only be taken away by due process of law.

Hamilton, A. (1787, November 27). Federalist 12. In The New York Packet [Federalist Papers]. Publius (Hamilton) discusses the method in which the Federal Government will generate revenue.

Internal Revenue Code, 26 U.S.C. § VARIOUS. Defines taxation in the United States and US Territories.

Knowlton V. Moore, No. 178 US 41 (U.S. May 14, 1900). The Supreme Court defined direct and indirect taxes.

Pollock V. Farmer’s Loan & Trust Co., No. 157 US 429 (Apr. 8, 1895). The Supreme Court distinguishes between direct and indirect taxes.

Pollock V. Farmer’s Loan & Trust Co., No. 158 US 601 (May 20, 1895). Rehearing, the Supreme Court distinguishes between direct and indirect taxes.

Southern Pacific V. Lowe, No. 247 US 330 (U.S. June 3, 1918). The Supreme Court limits the definition of gross Income.

Stanton V. Baltic Mining Co., No. 240 US 103 (U.S. Feb. 21, 1916). The Supreme Court reiterates that the 16th amendment did not expand the congressional power of taxation.

Stratton’s Independence, Ltd.  V. Howbert, No. 231 US 399 (U.S. Dec. 1, 1913). The Supreme Court defines income as gain derived from capital, labor or both.

United States Congress. (n.d.). Proceedings and Debates Of The 78th Congress First Session. Congressional Record, Volume 89(Pt. 2), 2579-2581. The Congress distinguishes that compensation for labor is not profit.

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7 Responses to “A Discussion Regarding Taxation on Private Sector Earnings”


  1. 1 Alan Scott
    13 June 2009 at 18:39

    I have often challenged our liberal friends to give me examples of where their left wing hippie feel good tax and spend policies work. They have so far failed to ever answer me, at least with any real examples. Their failures are too many to list, but I will give a few. At the state level California, New York, Michigan, and Illinois come to mind.

    I will now give what I believe is an example where fiscal restraint and not raising taxes has worked. The state is Indiana and the Governor is Mitch ” the knife ” Daniels. I don’t agree with everything he did, but the overall results are impressive. First of all Indiana has all of the mid western economic disadvantages of other states. Double digit unemployment. It is the most manufacturing dependent state economy in the nation. With this as a back drop, Gov.Daniels has turned an $800 million deficit in to a $1.3 billion surplus. This is separate from $3.5 billion he got from selling off their turnpike. This last part I don’t agree with. This was also done by correcting the accounting tricks that previous governments used to hide $760 million it owed to local gov.s and schools.

    Contrast this with the out right lies and accounting tricks President Obama is using to hide the costs of his socialist vision for our country. As usual I invite all comers to challenge my facts or give me examples of socialistic success.

  2. 2 Alan Scott
    13 June 2009 at 20:28

    Let us discuss how the Obama administration uses the stimulus bill to reward and punish. The Service Employees International Union receives a subsidy from California of $12.10 per hour for it’s health care workers who help the sick in their homes. We all know that Guvenor Arnold presides over a financial basket case. Caleefornia wanted to cut a $74 million pittance from this subsidy. This would reduce the contribution to $10.10 per hour. Obama, the Great wants to withhold $6.8 billion in stimulus money from California as a penalty. This is a 92 times penalty. The union is a big Democratic and Obama money source. This goes to show that a good ole Illinois machine politician still knows how to play hardball from Washington DC, and that the taxpayer can go screw himself. Even when the California taxpayers try to cut, Obama blackmails them in to perpetual insolvency.

  3. 3 Alan Scott
    14 June 2009 at 08:03

    Now, another example of the results of class warfare. The great state of Maryland got the novel idea of putting a 6.25% extra tax on millionaires. So what happened? A third of Maryland’s millionaires left the state and now Maryland gets $100 million less than before from it’s rich. Who says class warfare and socialism don’t work? The state is poorer but, there is more equality and that’s all that really matters. The Commissars in Annapolis are well pleased.

  4. 14 June 2009 at 08:21

    I believe the city of NY was going to do the same thing, but didn’t in fear of all the rich leaving.

  5. 5 DJ
    15 June 2009 at 23:11

    K2,

    You are correct, NYC has discussed a “RICH ASSHOLE TAX”, when the word “snuck out”, those that would be affected, let it be known they would leave. The mayor then (sorta) backed off.

  6. 6 DJ
    15 June 2009 at 23:25

    K2,

    The link embedded in “United States Congress. (n.d.). Proceedings and Debates Of The 78th Congress First Session. Congressional Record, Volume 89(Pt. 2), 2579-2581. The Congress distinguishes that compensation for labor is not profit.” Does not connect to anyhing, it generates an error page.

  7. 16 June 2009 at 05:14

    @DJ: Good catch. Thank you and it has been fixed.


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