Income Tax: Direct or Indirect

[Peter]

Obviously what it is now has no bearing on the necessity to apportion among the States thanks to the 16th Amendment, but before then it would have.

I know very little about this issue, so I'm sure that Emsworth and Philip can quickly fill this thread with their theories.

[Emsworth]

This is a very difficult question to answer. I would argue that a personal income tax is an indirect tax; however, a very strong argument can be made that taxes on incomes may be direct depending on the source of the income. (I notice that so far, I am the only one to have voted that the income tax is indirect.)

The term "direct tax" is understood to refer to a tax on persons or on property. Of course, there is no doubt that a capitation is a direct tax; the Constitution explicitly says that it is. Similarly, property taxes were also considered direct taxes. Federalist No. 36, in discussing direct taxes, explicitly addresses land taxes. This is, furthermore, the definition that the Supreme Court has generally accepted, although there is disagreement as to whether only real property, or both real and personal property, are directly taxable.

In an early case about a federal tax on carriages, Hylton v. U.S., Justice Chase said, "I am inclined to think-but of this I do not give a judicial opinion-that the direct taxes contemplated by the constitution are only two, to wit, a capitation or poll tax simply, without regard to property, profession, or any other circumstances, and the tax on land." Justice Iredell said, "Perhaps a direct tax in the sense of the constitution can mean nothing but a tax on something inseparably annexed to the soil; something capable of apportionment under all such circumstances. A land of a poll tax may be considered of this description. ... In regard to other articles there may possibly be considerable doubt." Thus, on the whole, we may accept without doubt that a poll tax or land tax is a direct tax; a tax on personal property, i.e., goods and chattels, may or may not be direct, depending on whether one agrees with Chief Justice Fuller or with Justices Iredell and Chase.

We may also consider another form of the definition was proposed by Justice White in Pollock v. Farmers' Loan and Trust Co.: "Economists teach that the question of whether a tax is direct or indirect depends not upon whether it is directly levied upon a person, but upon whether, when so levied, it may be ultimately shifted from the person in question to the consumer, thus becoming, while direct in the method of its application, indirect in its final results, because it reaches the person who really pays it only indirectly." But this is basically the same definition as above. A capitation or property tax is a direct tax because the burden cannot be shifted to another; a sales tax (for example) is an indirect tax because the burden can be shifted to the consumer.  One important consequence of this definition is that one cannot differentiate between taxes on real and on personal property.

Thus, on the whole, I would define a direct tax as a tax on persons and real property, and possibly personal property as well.

Now, if we accept that a tax on property is a direct tax, we must determine if a tax on income derived from property is a direct tax. Chief Justice Fuller argued, "taxes on real estate being indisputably direct taxes, taxes on the rents or income of real estate are equally direct taxes... " At the same time, it could be argued that a tax on rents is not a direct tax on the real estate, but rather an indirect tax on the transaction or lease. It is the latter view I adhere to.

In any event, this argument cannot apply to wages. Wages are not income derived from personhood or from property, but rather from labor. A tax on the wages of government employees existed in England prior to the passage of the Constitution, and Sir William Blackstone refers to it as a "duty," a term normally reserved for indirect taxes. Thus, while a tax on income derived from property (rents, interest, and the like) may or may not be direct (depending on one's view of Chief Justice Fuller's argument), a tax on wages is undoubtedly indirect. After all, a tax on wages is nothing more than a sales tax on the sale of labor.

On the whole, a tax on income derived from work is indirect. An argument could be made that a tax on income derived from property is also indirect, but there is also a strong counterargument here, although I would not necessarily accept its validity. On the whole, only capitations and property taxes would I consider direct; all income taxes, being only taxes on sales of labor or transactions, I would consider indirect.

[A18]

What the hell does it mean to apportion a tax among the several states?

[Bono]

What the hell does it mean to apportion a tax among the several states?

It meant that a state would only have to pay in regards to its population.
For instance, Wyoming would have to pay 1/435 of the value to be raised, while Texas would have to pay 32/435, for instance.

[A18]

Thanks, but then how can such a tax be levied against anything other than population?

[Bono]

Thanks, but then how can such a tax be levied against anything other than population?

States with smaller populations but larger incomes pay more than states with larger populations but smaller incomes.

[A18]

So if a 2% tax is levied on incomes, Wyoming would pay 1/435 of .02(national income)?

[Bono]

So if a 2% tax is levied on incomes, Wyoming would pay 1/435 of .02(national income)?

in order for the tax to be aportioned yes. But it is impossible to aportion the income tax since income is not corelated to population.

[A18]

So what kind of taxes can be apportioned, other than capitations? The text of the Constitution makes it clear there are others.

[Bono]

So what kind of taxes can be apportioned, other than capitations? The text of the Constitution makes it clear there are others.

I must confess my ignorance.
Maybe simply asking state governments for money in proportion to the population?
Say the feds need $10,000,000. The state governent of Wyomingould have to pay out of its revenue 1/435 of $10,000,000.

[A18]

Perhaps, but that wouldn't be much different from dividing ten million dollars by the national population, and calling it a capitation.

[Emsworth]

Whenever a direct tax is levied, each state must contribute a portion of the revenue proportional to its population. Thus, to comply with the apportionment rule, Congress may be forced to impose different tax rates in different states.

For example, consider if Congress wishes to lay a direct tax per acre of land. If the population of state A is equal to the population of state B, and if the area of state A is twice the area of state B, then the rate of taxation in B must be double the rate of taxation in A.

This might seem like a very irrational method of taxation, but it is precisely in line with the tax clause's purpose. As Justice Paterson said in Hylton v. United States, "The southern states, if no provision had been introduced in the Constitution, would have been wholly at the mercy of the other states. Congress in such case, might tax slaves, at discretion or arbitrarily, and land in every part of the Union after the same rate or measure: so much a head in the first instance, and so much an acre in the second. To guard them against imposition in these particulars, was the reason of introducing the clause in the Constitution, which directs that representatives and direct taxes shall be apportioned among the states, according to their respective numbers."

There are a couple of important points to note, however. Firstly, a direct tax (although apportioned) must still be collected from the people. It does not constitute a demand for money to be paid out of each state treasury in proportion to population. Any tax on the state government itself would be an unconstitutional infringement of its sovereignty.

Secondly, the only direct taxes aside from capitations are taxes on land. A tax on personal property is not a direct tax, as the Supreme Court made clear in Hylton v. United States.

[A18]

The meaning of direct taxation was disputed.

"Mr. King asked what was the precise meaning of direct taxation? No one answered." -- Madison's Notes on the Philadelphia Convention

In the late 18th century, Congress levied, according to the rule of uniformity, a tax upon carriages, as you noted.

Hamilton argued it was constitutional, calling it an "excise tax." Madison bashed it as "direct" and void, in so far as it was not apportioned among the several states.

In Hylton v. United States, the Court simply held that no tax should be considered "direct" that could not be conveniently apportioned. This makes no legal sense at all, and can safely be ignored.

[Emsworth]

In Hylton v. United States, the Court simply held that no tax should be considered "direct" that could not be conveniently apportioned. This makes no legal sense at all, and can safely be ignored.

In Hylton, Justices delivered their opinions per seriatim; there was no single "opinion of the Court." The view that only taxes which can be apportioned can be considered direct was advanced by Justice Iredell and Justice Chase. I do not believe, however, that this was the position held by Justice Paterson.

Hamilton once lamented, "'What is the distinction between direct and indirect taxes? It is a matter of regret that terms so uncertain and vague in so important a point are to be found in the Constitution. We shall seek in vain for any antecedent settled legal meaning to the respective terms. There is none. We shall be as much at a loss to find any disposition of either which can satisfactorily determine the point."

I would agree that the distinction between direct and indirect taxes is difficult to make. I would adhere to the view that only capitations and taxes on real property are direct taxes, simply because that view is supported by precedent. Taxes on personal property, therefore, should be considered indirect.

The jurists of the early nineteenth century seem to have been in accord with this view. Chancellor Kent proposed, "[T]he direct taxes contemplated by the Constitution were only two; viz., a capitation or poll tax and a tax on land." Similarly, Justice Story wrote in his Commentaries that taxes "are usually divided into two great classes, those, which are direct, and those, which are indirect. Under the former denomination are included taxes on land, or real property, and under the latter, taxes on articles of consumption." Any personal property is necessarily an "article of consumption"; thus, a tax on personal property should be deemed indirect.

Congress, similarly, seems to have interpreted "direct taxes" in a similarly narrow manner. Every time Congress passed an act apportioning a tax among the states, the tax was either a capitation or a tax on land. On the other hand, taxes on personal property (such as the tax on carriages) were never apportioned.

Finally, the Supreme Court confirmed this view in a variety of cases after Hylton. In Pollock, the Court calmly dismissed these precedents as a "century of error," without sufficient basis.

[A18]

I don't think precedent should factor into this conversation much. As a judicial matter, the issue of direct taxation is pretty much dead... the Sixteenth Amendment explicitly authorizes taxes on incomes without apportionment, and all other federal taxes I'm aware of are undisputedly indirect (excise, tariffs, etc.).

[Emsworth]

I don't think precedent should factor into this conversation much. As a judicial matter, the issue of direct taxation is pretty much dead... the Sixteenth Amendment explicitly authorizes taxes on incomes without apportionment, and all other federal taxes I'm aware of are undisputedly indirect (excise, tariffs, etc.).

For the sake of argument, how would you distinguish between "direct" and "indirect" taxes?

[A18]

The phrase in impenetrable and should be treated as if obliterated by an ink blot.