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Beware Income-Tax Casuistry, Part 3


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In 1895, when the U.S. Supreme Court knocked out an income-tax law in Pollock v. Farmers’ Loan & Trust Co., the champions of income taxation in America suffered a big setback. To reiterate what I said in part two of this series, the Court, contrary to what many people think, did not rule income taxation per se unconstitutional. Quite the opposite. All it did was rule that taxation of income from property had to be apportioned among the states. The reason is that it regarded a tax on such income as equivalent to a tax on the property itself. Since a tax on property was regarded as a direct tax, and the Constitution requires direct taxes to be apportioned according to the census, no such tax could stand without an apportionment clause. Since that clause was lacking in the 1894 tax bill passed by Congress, the Court struck it down. It also struck down the provisions taxing wages and salaries, but only because it believed that putting the full tax burden on workers would violate Congress’s intent to have a broad-based tax.

This left the income-tax advocates only one route: a constitutional amendment. In 1913 the Sixteenth Amendment was added to the U.S. Constitution. (See details about its introduction and ratification in my book Your Money or Your Life, available from FFF. I leave aside the claims that the amendment was ratified improperly by the states. No court accepts this argument, which is based on trivialities. Besides, the case against the procedural integrity of the original Constitution’s ratification is far stronger.)

The Sixteenth Amendment is worded thus: 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.

In light of Pollock one can see the significance of the key phrase in the Amendment, “from whatever source derived.” What the amendment did was remove a restriction, one of the few, from Congress’s power to tax, namely, by relieving it of the need to apportion a tax on income from property. As we shall see, it did not grant Congress the general power to tax incomes because Congress needed no amendment to exercise a power it already had.

The Brushaber decision

The same year that the Sixteenth Amendment was ratified Congress passed a graduated income tax during a special session called by President Woodrow Wilson. As usual, the income tax began as a tax on the wealthy. (World War II turned it into a truly mass tax. That’s war for you.) Shortly after passage, the tax law was challenged in federal court. The case culminated in a revealing Supreme Court decision, Brushaber v. Union Pacific Railroad, which was handed down in 1916. Frank Brushaber, a stockholder in the railroad, contended that the tax on the company violated due process. The Court rejected Brushaber’s claims, arguing that it is “well settled” that the due-process provision is not a limit on the power to tax: “in other words, that the Constitution does not conflict with itself by conferring, upon the one hand, a taxing power, and taking the same power away, on the other, by the limitations of the due process clause.”

For anyone looking for protection from taxation this is an ominous statement. The tax-protest movement attaches great weight to this opinion — for reasons that mystify me. The language of Brushaber should make them cringe.

The Court laid the groundwork for its opinion by rehearsing the ruling in Pollock. It noted that the Pollock Court did not rule that income taxes in general were direct taxes requiring apportionment — only certain income taxes, namely, those on land and securities. The Brushaber Court commented,

Nothing could serve to make this clearer than to recall that in the Pollock Case, in so far as the law taxed incomes from other classes of property than real estate and invested personal property, that is, income from “professions, trades, employments, or vocations,” its validity was recognized; indeed, it was expressly declared that no dispute was made upon that subject, and attention was called to the fact that taxes on such income had been sustained as excise taxes in the past. [Emphasis added.]

In other words, Congress always had the constitutional power to tax incomes, which were regarded as indirect taxes not requiring apportionment. (Tax-protest activists make much of the fact that the income tax is held to be an excise tax, but it’s not clear what this gets them.)

The Court then went on to say that the purpose of the Sixteenth Amendment was to relieve the government of what the Pollock Court had to engage in, namely, an examination of the sources of income. In other words, future courts would no longer have to inquire whether a tax on a particular kind of income was in effect a direct tax. Contrary to Frank Brushaber’s argument, it said, no limitations on the power to tax incomes can be divined in the Sixteenth Amendment. Indeed, all such contentions are “in irreconcilable conflict with the very purpose which the Amendment was adopted to accomplish.”

If the opinion had stopped there, it would have been enough to depress opponents of income taxation. But the Court did not stop there. It went on to describe Congress’s power to tax in the most sweeping terms possible, stressing that this power predated the Sixteenth Amendment and was present from the beginning of the government. For example, the Court said that “the authority conferred upon Congress by 8 of article 1 ‘to lay and collect taxes, duties, imposts and excises’ is exhaustive and embraces every conceivable power of taxation” [emphasis added]. This is followed by: “[There] was authority given, as the part was included in the whole, to lay and collect income taxes”; “the conceded complete and all-embracing taxing power”; “the complete and perfect delegation of the power to tax”; “the complete and all-embracing authority to tax”; and the “plenary power [to tax].”

This is all in one paragraph!

In case someone missed the point, the Court later referred to “the all-embracing taxing authority possessed by Congress, including necessarily therein the power to impose income taxes.”

The legacy of Brushaber

No Court has contradicted the holding in Brushaber. One can quibble with the Court’s opinion that the Amendment did not create a new class of taxation, namely, a direct tax that needed no apportionment. It seems to me that is what the Amendment did. But that is a side issue. The undeniable upshot of Brushaber is that Congress always had the power to tax anything, including incomes, and that the former necessity to examine the source of income was removed by the Sixteenth Amendment.

Thus the income tax is and has always been constitutional. The manufactured argument that the income tax was intended to, and constitutionally could, tax only incomes derived from some federal privilege is entirely lacking in foundation. If you ask proponents of this position to prove their case, they become evasive, or they make ludicrous arguments, along the lines that the word “includes” is a term of limitation rather than “a term of enlargement,” as a court put it. (One writer argues that only government employees are subject to withholding because the code says, “[The] term ‘employee’ includes an officer, employee, or elected official of the United States, a State, or any political subdivision thereof, or the District of Columbia….”)

Libertarians have to understand that they will not invalidate the tax in court by legal legerdemain. Some tax resisters have managed to have money refunded, but the IRS usually catches up with them. Some land in jail.

Where does this leave us? We should start by facing up to reality. Like it or not, the U.S. Constitution empowers the Congress to levy any tax it wants. You may read the Constitution otherwise, but the constitutionally endowed courts have spoken. Reading one’s libertarian values into the Constitution in defiance of the text and court holdings is futile.

Moreover, the Constitution’s words are often vague, purposely so; it is a political document. For better or worse the Constitution means what the occupants of the relevant constitutional offices say it means.

The battle over the taxing power took place long ago — in 1787 — between the Federalists and Anti-Federalists, before the Constitution was ratified. Under the Articles of Confederation, Congress had no power to tax; it could only ask the states to raise money. When the Constitutional Convention (after violating its mandate merely to revise the Articles) proposed to give the central government that fearsome power, the Anti-Federalists objected, predicting terrible things would happen. One Anti-Federalist warned, “By virtue of their power of taxation, Congress may command the whole, or any part of the property of the people.” Right or wrong (I’d say right), the Anti-Federalists lost. We can’t pretend the battle never occurred.

If we want to be free of income taxation (and all the rest) we will have to effect an intellectual revolution that will convince people that no one, no government, has the right to deprive peaceful people of their property. There is no shortcut to freedom.

Part 1 | Part 2 | Part 3

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    Sheldon Richman is former vice president and editor at The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.