Phil Hart -- Constitutional Income: Taxes on Vages and Salaries are Direct Part 2

On the issue of income taxes in general, there exists among the circuit courts every conceivable interpretation as to whether or not the constitutional classification of the income tax is direct, indirect, neither, both or irrelevant. For example, in the First Circuit it is difficult to discover if that circuit determined if the tax was direct or indirect because in United States v. Turano, 802 F.2d 10, 12 (1st Cir. 1986), that court held that the "Sixteenth Amendment eliminated the indirect/direct distinction as applied to taxes on income."

Next door in the Second Circuit, there is uncertainty revealed by three completely inconsistent cases. In Jandorf’s Estate v. Commissioner, 171 F.2d 464, 465 (2nd Cir. 1948), that court declared, "It should be noted that estate or inheritance taxes are excises while surtaxes, excess profits and war-profits taxes are direct property taxes." Surtaxes are the graduated taxes of the income tax, so this court holds the personal income tax is a direct tax. But in Ficalora v. Commissioner, 751 F.2d 85, 87 (2nd Cir. 1984), that court stated the personal income tax was an indirect tax. But compare United States v. Sitka, 845 F.2d 43, 46 (2nd Cir. 1988) citing Parker, infra, for the proposition that the income tax is direct.

In the Third Circuit, it has been held in one case that all income taxes are direct, but in another that only some are direct; see Keasbey & Mattison Co. v. Rothensies, 133 F.2d 894, 897 (3rd Cir. 1943)("[A]n income tax is a direct tax upon income therein defined"); and Penn Mutual Indemnity Co. v. Commissioner, 277 F.2d 16, 19 (3rd Cir. 1960)("Pollock *** only held that a tax on the income derived from real or personal property was so close to a tax on that property that it could not be imposed without apportionment. The Sixteenth Amendment removed that barrier").

In the remainder of the Circuits, the difference of opinion as to whether the federal income tax is a direct or indirect tax is likewise as profound and confusing.

In the Fourth and Sixth Circuits, the income tax has been held to be an excise tax; see White Packing Co. v. Robertson, 89 F.2d 775, 779 (4th Cir. 1937)("The tax is, of course, an excise tax, as are all taxes on income"); and United States v. Gaumer, 972 F.2d 723, 725 (6th Cir. 1992) "Brushaber and the Congressional Record excerpt do indeed state that for constitutional purposes, the income tax is an excise tax."

However, in the Fifth, Seventh, Eighth and Tenth Circuits, arguments that this tax is an excise tax have been squarely rejected and determined to be frivolous. The Ninth Circuit claims it is irrelevant whether or not the tax is direct or indirect, while the Eleventh Circuit appears to have not yet decided the question.

b. Income taxes on wages and salaries are direct taxes. In our attempt to discover the meaning of the terms "direct tax" and "indirect tax" we must look back in time to the period of the framing of the Constitution in order to discover what the framers understood these terms to mean. And whatever we discover those terms to mean, we are bound to that discovery. At the time of the writing of the Constitution there were two authors well known to the framers who used the terms "direct" and "indirect" taxes. These were Adam Smith, who wrote Wealth of Nations, and the physiocrat Jacques Turgot from France. Adam Smith published his work Wealth of Nations in 1776, eleven years before the writing of the Constitution.

"If the term ‘direct taxes’ had been used for the first time in the Constitution, and we could not, therefore, trace its source, much might be left to doubt and to surmise. A large majority of the Constitutional Convention were scholars, 35 of its members were college graduates, and the eight leaders of the great debate were all college men. Were they likely to use terms they did not understand? Had they never seen the term direct tax before; and, if so, where? In the books that were in every man’s hand. Many had studied Turgot in the original or in translations of particular passages, and they knew his clear definition of ‘Les impôts directs.’ Turgot today is still the great work put in the hands of French students of the science of finance and government. Every member of that Convention was familiar with the handbook of statesmen of that age - Adam Smith’s Wealth of Nations... Macaulay tells us that Pitt studied only one work on political economy, which guided him through his whole brilliant career in the financial administration of the British Empire, and that was Smith’s Wealth of Nations. If we had only these two works, known to almost every educated man in those days, could we refuse to follow their definitions and explanations in the absence of any other evidence?" Opening argument of Appellant at 7-8, Pollock v. Farmers’ Loan and Trust Co., 158 U.S. 601 (1895). "Mr. CUMMINS. I had referred to the fact that at the time of the Constitutional Convention, so far as I can now recall, this term had been mentioned by but two economic writers - one, Adam Smith, in the Wealth of Nations, and the other a French writer by the name of Turgot. Their general idea was that a direct tax was a tax upon property or [gross] revenue and an indirect tax was a tax upon consumption or expense." 44 Cong. Rec. 3972 (1909)

Although Turgot was from France, he did not fully accept the older taxation doctrines of the French Physiocrats. In Turgot’s work, Plan d’un mémoire sur les impositions, 1764, he wrote: "The tax which the proprietor pays immediately on his revenue is called direct tax.

The tax which is not assessed directly on the revenue of the proprietor, but which falls on the cost of production of the revenue, or on the expenditure of the revenue, is called indirect tax." Teachings of Political Economists defining Direct and Indirect Taxes, at 3, by Max West, Pollock v. Farmers’ Loan and Trust Co., 157 U.S. 629 (1894).

When these writers, Smith and Turgot, used the word "revenue" it was gross revenue to which they were referring. In the This Court’s Decision for the Hylton Case, 3 U.S. (3 Dall.) 171 (1796), the following quote from Adam Smith’s Wealth of Nations was used authoritatively: " The impossibility of taxing people in proportion to their revenue, by any capitation, seems to have given occasion to the invention of taxes upon consumable commodities; the State, not knowing how to tax directly and proportionably the revenue of its subjects, endeavors to tax it indirectly by taxing their expense, which it is supposed, in most cases, will be nearly in proportion to their revenue. Their expense is taxed by taxing the consumable commodities upon which it is laid out." Adam Smith, Wealth of Nations, Book V, 541 (Prometheus Books, Amherst, New York, 1991) (1776).

If we back up two paragraphs from the paragraph of Adam Smith’s Wealth of Nations quoted authoritatively by this Court in the Hylton Case, we read:

"Capitation taxes, so far as they are levied upon the lower ranks of people, are direct taxes upon the wages of labour, and are attended with all the inconveniences of such taxes." id. at 540.

In Book V of Adam Smith’s Wealth of Nations, Smith has a four-page section entitled, "Taxes upon the Wages of Labour." Five times in this section Smith states that a tax on wages is a direct tax. And as we saw above, Smith says it is a species of a capitation tax. id. at 534-38. In the 1909 congressional debates over the Sixteenth Amendment, Adam Smith was quoted far more than any other authority and was always quoted with approval. Adam Smith was quoted 18 times, Albert Gallatin1 four times and Jacques Turgot, three times. There were numerous other political economists quoted, but these three dominated the debate. Just as Adam Smith greatly influenced the framers of the Constitution, he was also the respected and undisputed authority on taxation among those members of Congress who debated the Sixteenth Amendment.

"There is every reason to believe that the framers of the Constitution followed the usage of Adam Smith, who eleven years before the convention met had refuted the Physiocratic doctrine as to the incidence of taxes. Albert Gallatin, writing in 1796, stated emphatically his belief that the distinction in the minds of the framers of the Constitution was that of Adam Smith. Gallatin was born and bred a Frenchman, and would have been as likely as any American of the time to accept the Physiocratic view; and in the absence of any evidence to the contrary the testimony of such an authority as Gallatin should be considered conclusive in any question of finance." Max West, The Income Tax and National Revenues, 8 The Journal of Political Economy 433, 435 (1900).

Albert Gallatin, in his Sketch of the Finances of the United States, wrote:

"The most generally received opinion, however, is, that by direct taxes in the Constitution, those are meant which are raised on the capital or revenue of the people; by indirect, such as are raised on their expense. The taxes which it is intended should fall indifferently upon every different species of revenue are capitation taxes...These must be paid indifferently from whatever revenue the contributors may posses." Rehearing Brief of Appellant at 112, Pollock v. Farmers’ Loan and Trust Co., 158 U.S. 601 (1895).

Quoting the Congressional Record on May 17, 1909 as the Senate continued to debate the issue of an income tax amendment to the Constitution, Senator Sutherland of Utah said:

"This view is confirmed by the comments of Albert Gallatin in his Sketch of the Finances of the United States, written a year or two after the decision [of the Hylton case]. He says: ‘The most generally received opinion, however, is that by direct taxes in the Constitution are those meant which are raised on the capital or revenue of the people; by indirect, such as are raised on their expense... it will not be improper to corroborate it by quoting the author from whom the idea seems to have been borrowed. (Naming Doctor Smith’s Wealth of Nations.)’" 44 Cong. Rec. 2094 (1909).

Senator Sutherland then quotes from Smith the same statements contained in Justice Paterson’s opinion given on the Hylton Case, and continues:

"The remarkable coincidence of the clause of the Constitution with this passage in using the word ‘capitation’ as a generic expression, including the different species of direct taxes, an acceptation of the word peculiar, it is believed, to Doctor Smith, leaves little doubt that the framers of the one had the other in view at the time, and that they, as well as he, by direct taxes meant those paid directly from and falling immediately on the revenue; and by indirect, those [falling] upon the expense. It has indeed been held by some that ‘direct taxes’ meant solely that tax which is laid upon the whole property or revenue of persons.... instead of admitting only one kind of direct tax [in the Constitution], expressly recognizes several species by using the words ‘capitation’ or ‘other direct tax’ and ‘direct taxes.’" 44 Cong. Rec. 2094-5 (1909).

In debate over the income tax amendment in the Senate, Mr. Sutherland has again quoted from the Hylton Case and said:

"He [Mr. Justice Chase] then says he will close his ‘discourse’- he does not call it an opinion or decision - by reading a passage or two from Smith’s Wealth of Nations. Let me read one quotation:

‘The impossibility of taxing people in proportion to their revenue, by any capitation, seems to have given occasion to the invention of taxes upon consumable commodities; the State, not knowing how to tax directly and proportionably the revenue of its subjects, endeavors to tax it indirectly by taxing their expense, which it is supposed, in most cases, will be nearly in proportion to their revenue. Their expense is taxed by taxing the consumable commodities upon which it is laid out.’ Clearly, in the opinion of Adam Smith, which the Supreme Court in this earliest case cited with approval, a direct tax is upon the revenue of the taxpayer, while an indirect tax is a tax upon his expense..." 44 Cong. Rec. 2093 (1909).

So here we have the words of Adam Smith quoted multiple times in the Hylton Decision from 1796, quoted again in Gallatin’s work of 1796, quoted again in the Pollock Decision, and quoted many times in the Congressional Record during the debates on the Sixteenth Amendment. All agreed that a tax on the revenue of a person is a capitation tax. Because this Court says the Sixteenth Amendment did not create a new type of tax, then the tax on the revenue of a person is still a direct tax.

Point two in the Pollock Decision states: "Second. We are of the opinion that taxes on personal property or on the income of personal property are likewise direct." The purpose of the Sixteenth Amendment was to overturn Pollock. According to the American People, this Court had expanded the definition of "direct taxes" too far. Using the constitutional amendment process, the American People sought to redefine the boundary line between direct taxes and indirect taxes. The Pollock Case dealt only with taxes on net income from real estate and net income from personal property. These taxes did not diminish the underlying source of the income and are therefore inherently indirect taxes. It was only these taxes that the American People sought to exclude from direct taxes by moving the boundary line that separated direct taxes from indirect taxes. Taxes on wages and salaries were outside of the scope of the Pollock Case and were likewise not part of the Sixteenth Amendment debate.

In writing about the income tax of 1894, which was the subject of the Pollock Case, Professor Seligman2 said: "The first point that arrests our attention is that the tax is really an income tax - i.e. a tax on net gains or profits, and not, as in some other countries, on gross income with or without certain deductions." Edwin R.A. Seligman, The Income Tax, 9 Political Science Quarterly 610, 620 (1894).

Direct taxes on real estate and personal property, which diminish the source of the income, i.e. taxes on gross receipts, were outside the scope of the Pollock Case. Wages and salaries are considered to be personal property and the question of taxes on these was not squarely addressed by the Pollock Court.

The general rule is that whenever a tax is on gross receipts, or as Adam Smith said, "on the revenue" of something, the tax is direct. This is true because a gross receipts tax diminishes the value of the thing taxed. The tax falls directly on the thing taxed. Whereas an income tax, which taxes only the gains and profits (net income) of a source of income, does not diminish the underlying source of the income. Income is that which can be severed from the source without diminishing the source. An income tax diminishes only the income flowing from the source. The source of the income remains whole.

"A tax levied on property that produces no income can be paid only through the confiscation of a part of the property." Prof. Isaac A. Loos; Allen Ripley Foote, The Power of Taxation Should be Regulated, State and Local Taxation, Second International Conference, International Tax Association, 203, 206 (1909).

In a brilliant 1910 article on the Sixteenth Amendment appearing in the Yale Law Journal, Author Arthur Graves wrote:

"Practically, it is not every kind of income tax which is a direct tax. The term ‘income tax’ has been too generally and broadly used to cover a variety of taxes imposed on persons and property which may ultimately be payable out of income...Some of the taxes imposed under the internal revenue provisions of our Civil War, while payable out of income or revenue, were not properly income taxes, as, for instance, the tax on premium receipts of insurance companies, and possibly that on bank profits and undivided surplus. But the income tax levied against the general income of the citizen is of a very different nature. It is distinctly a personal tax and undoubtedly a direct tax; in fact, it is difficult to conceive of a tax more direct or personal in its nature than the general income tax. It may be said in defense of the earlier decisions of the Supreme Court, regarding income taxes, that as the question is not at all a simple one, but surrounded with a great many economic perplexities, the failure to distinguish between the general income tax levied against the person and an excise tax levied against specific sources of revenue, or against property of business, but payable out of income, is not surprising. It is very interesting to notice in this connection that George Ticknor Curtis, who became one of our foremost American jurists, writing in 1866, declared that the personal income tax was undoubtedly a direct tax and ought to be levied by apportionment among the several States. He had the courage to suggest that, ‘the personal income tax of the Civil War was unconstitutional and the revenue therefrom illegally collected.’" Arthur C. Graves, Inherent Improprieties in the Income Tax Amendment to the Federal Constitution, 19 Yale Law Journal 505, 508-9 [1910]. "Certainly it would be difficult to conceive of any tax, or legislative assessment, more direct in its operation and nature than a tax on a man’s income." George Ticknor Curtis, An Inquiry into one of the Constitutional Restrictions on the Revenue Powers of the United States, 33 Harper’s New Monthly Magazine 354, 355 (1866). "To speak of a poll tax (or other direct tax on a natural person) as a tax on property requires resort to the legal theory that a freeman is owner of himself and his labor force in a sense analogous to a master’s ownership of his slave." Prof. Isaac A. Loos, Allen Ripley Foote, The Division Between State and Local Taxation, supra at 206. "Direct taxes are those that are levied ‘upon the very person who it is supposed as a general thing will bear their burden.’ The general property, the income tax, the poll tax, may be classed as direct taxes for the reason that when a person pays one of these taxes, he is likely to bear the burden himself and is not likely to shift it to another." Israel Freeman, Constitutionality of Federal Corporation Tax Law, 72 Central Law Journal 59 (1911).

In the case of Butchers’ Union Co. v. Crescent City Co., 111 U.S. 746 (1883), Justice Field wrote in his concurring opinion at page 757:

"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.’" <

Here Justice Field was quoting from Adam Smith’s Wealth of Nations, book I, chapter 10. The point being made is that a tax on labor is a tax on property.

There were several times in the early history of America when direct taxes were imposed. These included taxes on slaves levied in 1798. Now what is it that gives a slave value such that it can be a thing taxed? The value of a slave is determined by the present worth of the expected future value of the slave’s labor. A direct tax on a slave is a tax on labor. Just as the historical taxes on slaves were direct taxes so is today’s tax on labor a direct tax. Labor is property. An income tax that diminishes one’s wages or salary is a tax that diminishes the value of that property. Such a tax is wholly different from a tax that diminishes net income after that income has been severed from the source.

The rule created by the Sixteenth Amendment, that one must not consider the source when determining if an income tax is direct or indirect, only applies to an income tax on net income that has been severed from the source. This rule cannot also apply to income taxes on gross income unsevered from the source, as the source is diminished by the tax. When the tax is on gross income, one must consider the source in determining whether the tax is direct or indirect. If this statement is wrong, then we are claiming we are not taxing something that we are taxing. Such logic is Orwellian and no different than claiming war is peace, ignorance is strength and slavery is freedom. A tax which diminishes a man’s wage or salary is a direct tax. It is a capitation tax. Capitation taxes are required by the Constitution to be apportioned among the several States. Capitation taxes are outside the scope of the Sixteenth Amendment. An exhaustive search of the relevant literature on this point yielded no authorities to rebut this position.

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Mr. Hart is also the author of a 428 page book entitled "Constitutional Income: Do You Have Any?" In this book, author Hart defines the term "constitutional income" and in the process proves that wages and salaries are without this definition. Mr. Hart also has a Petition for Writ of Certiorari before the Supreme Court on the "are wages income" question. A complete copy of the Petition and its Appendix can be purchased for $35. A copy of the book may be purchased for $25. Prices include shipping. As a combo the price is $55, shipping is included. To order by credit card visit www.constitutionalincome.com

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