THE INCOME TAX.
1.—THE DECISION OF THE SUPREME COURT.
By THE HON. GEORGE S. BOUTWELL,
EX-SECRETARY OF THE TREASURY.
THE recent contest before the Supreme Court of the United States,
which involved the validity of so much of the Tariff Act of 1894 as
imposed a tax on incomes, was only less important than the contests
before that Court involving the right of secession and the
constitutionality of the measures of reconstruction.
The importance of the controversy did not depend upon the questions
arising from the peculiarities of the law of 1894, but upon the question
of the validity of any income tax, and more particularly upon the
validity of so much of the act as provided for a levy of a tax upon rent
of land or income from real estate.
Upon one point, there was agreement at the bar, viz.: That, by the
Constitution, Federal taxes are divided into two classes; those which
are direct taxes on the one hand, and those which are either duties,
imposts or excises on the other.
Capitation taxes, and taxes on land, are held to be direct taxes, and
on this point there was no difference of opinion. Nor can there be any
doubt that, under the Constitution, direct taxes must be apportioned
among the States according to the number of inhabitants in each State.
It was held by the Court, six of the eight judges concurring in the
opinion, that taxes on the rent of land or the income from real estate
are, in fact, taxes upon the real estate itself, and upon the theory
that the rent or income from real estate is an incident of the ownership
of the estate. As a result of this opinion, so much of the act of 1894
as provided for the levy of a tax on the income from land, is declared
to be unconstitutional and void.
The Court was also of opinion that the income from bonds of States
and municipalities was not subject to taxation by the national
government. Consequently, so much of the act of 1894 as provided for a
levy of taxes upon incomes from the bonds of States and municipalities
was declared to be invalid.
Upon three other questions of importance the Court was equally
divided, and therefore no opinion was expressed.
(1.) Whether the void provisions as to the income from real estate
invalidated the whole act? (2.) Whether as to the income from personal
property, as such, the act is unconstitutional, as a levy of direct
taxes? (3.) Whether any part of the tax, if not considered as a direct
tax, is invalid for want of uniformity on either of the grounds
suggested in the argument?
The exemption from taxation of the income from State and municipal
bonds was sustained by the whole Court, and is in accordance with the
decisions of the Supreme Court from an early period in its history.
In a public point of view, the validity of the existing tax act, in
so far as its validity depends upon the peculiarity of its provisions,
is of no considerable importance, but the exemption from taxation of the
rent and income from real estate, except the levy is through the rule of
apportionment and among the States, works, practically, a very serious
impairment of the ability of the government to raise revenue. It may
well be assumed, as was suggested in the opinion of the Court, that an
income tax and direct taxes through the States should be resorted to
only in an exigency, but it is of supreme importance that the government
should be able, in an exigency, to raise revenue from rents and incomes
from real estate by some practicable method.
In every government the power of taxation is an essential condition
of continuing existence, and every limitation upon the exercise of that
power is a limitation of the capacity of the government to exist.
By the Articles of Confederation the general government had no power
to levy taxes, and yet it had power to incur debts. At the end of ten
years its insolvency was apparent, and its incapacity, as a government,
had been demonstrated to the thoughtful men of the country. The downfall
of the Confederation was due to its inability to levy taxes; and the
Constitution of the United States had its rise in that experience. With
the power to levy taxes, even with all its other infirmities on its
head, the Confederation might have outlasted, and it is probable that it
would have outlasted, the eighteenth century.
It was in the presence of that condition of public affairs that the
Constitution of the United States was created; and, within the range of
probabilities, nothing can be more reasonable than the supposition that
the framers of that instrument intended to avoid the error which had
caused the wreck of the confederate government.
If this be so, then it may be inferred fairly, that when the
Convention gave to Congress power "to lay and collect taxes,
duties, imposts and excises," the Convention intended to set forth,
as well, the limitations to the exercise of the power, to define the
method of its exercise, and, finally, that, in these particulars,
nothing was to be left for inference, conjecture or argument.
Except for the presence of limiting and qualifying clauses in the
Constitution, the phrase quoted gave to Congress power to levy taxes
upon all the persons and property of the nation, and wherever resident,
or situated, and with an authority equivalent to that which might be
exercised by a State over the persons and property within its
jurisdiction.
Beyond this, and exclusive of the power of the States, the right to
levy customs duties was vested exclusively in the general government.
This concession by the States was not made without debate, nor without
hesitation, especially by Rhode Island, but the concession was not
procured through any compromise. It is suggested in the opinion of the
Court that there were inland States, and that those States, in
consideration of the concession by the maritime States of the right to
levy customs duties, agreed to a system of direct taxation upon the
basis of population, and that it was foreseen that under that system a
disproportionate burden would fall upon the inland States. The truth is
that every one of the thirteen States was a maritime State; all were
engaged in commerce; all alike, if not equally, were interested in the
collection of customs duties by States, and they were alike, if not
equally, interested in transferring the power to the national
government. There was in the Convention, at the end, a general agreement
upon two points, namely: that there was manifest injustice in allowing
the duties to pass into the treasury of the State in which the port of
entry might be situated; and that conflicting tariff systems would be
injurious to regular commerce, and to the growth of manufactures.
In the second clause of the tenth section of the first article of the
Constitution, the words "imposts or duties" are limited to
taxes on "imports or exports," and hence it is not within the
competency of the States to levy "imposts or duties," except
for the use of the treasury of the United States as is stipulated in the
said clause.
The taxes, known as "imposts" and "duties,"
having thus passed by the provisions of the Constitution from the States
to the United States, all other taxes which the government can levy fall
under the head of "taxes" or "excises."
There is a large sense and a not uncommon usage, which give to the
word "taxes" a definition whose scope includes duties, imposts
and excises, but in the Constitution the word is so limited and
controlled that "excises," as well as "duties" and
"imposts," are not within the meaning of the word
"taxes." In the extract from the Constitution, already quoted,
"taxes" and "excises" are spoken of as distinct
means of raising a revenue for the specified purposes of the government.
By the third clause of section two, article one, "direct
taxes" were to be apportioned among the several States,
"according to their respective numbers;" and by the fourth
clause of section nine of the same article, it is declared that "no
capitation, or other direct, tax shall be laid, unless in proportion to
the census or enumeration herein before directed to be taken."
Thus are these two provisions of the Constitution connected together
and thus does it appear that the words "tax" and
"taxes," and the phrase "no capitation, or other, direct
tax," were designed by the framers of the Constitution to include
only those "direct taxes" which were neither "excise
levies" nor "duties," nor "imposts." Every tax
upon a man or a thing is a direct tax, and in this large and every-day
meaning of the phrase, it follows that capitation taxes, land taxes,
excises, duties and imposts are one and all "direct taxes." No
one, however, whether advocate or public writer, has ever contended for
this construction of the Constitution.
Again, a land tax has always been classed as a "direct
tax." The same statement is applicable to a capitation tax. Indeed,
a capitation tax is declared in the Constitution to be a direct tax. It
is worthy of notice that in the fourth clause of section nine of article
one, the word "tax" is used in the singular,— "no
capitation, or other direct, tax shall be laid, unless in proportion to
the census or enumeration herein before directed to be taken," thus
giving a basis for the argument that two subjects, and two only, were
marked for direct taxation, and brought within the scope of the third
clause of section two of article one.
These two taxes, by long usage and universal consent, are
"direct" taxes, and they have no quality or peculiarity which
justifies their classification under any other head. By a broad
definition taxes on carriages, on watches, on incomes, on professions,
on produce, as tobacco and cotton, the "imposts and duties"
levied on goods imported, are, one and all, "direct taxes,"
but one and all they are naturally and properly subject to other
classifications.
In every case thus enumerated, and in every other case that might be
added to the enumeration, the tax acts will aim and must aim at the
thing to be taxed and at the possessor of the thing to be taxed. Thus
are they all "direct taxes "; but they are all something else,
and they are all to be taxed under other classifications, or they must
fall in with capitation and land taxes, and thus would the government be
forced to rely upon customs duties and levies upon the States.
Thus indirectly would the old Confederation be revived, and thus a
government that had withstood the assaults of war might be disintegrated
by processes of law in time of peace.
Of all the objects of taxation an income tax is an "excise
tax," practically, etymologically, and without a rival. As to all
other objects of taxation, the "excise" can only be secured in
form to be useful as public revenue, by a process of conversion; while
an income may be divided and the "excise," or the part cut
out, can be used as revenue without change of fact or form.
Further, if this analysis be accepted, it follows that the phrase
"excise taxes," as used in the Constitution, must include
every form of taxes which are not "imposts and duties" on the
one side, or "direct taxes" on the other; and if the phrase
"direct taxes" is held to include any tax other than a land
tax and a capitation tax, then there will remain no subject of taxation
to which the phrase "excise tax" can be referred.
To assume that any one of the proper objects of taxation which may be
found between a capitation tax and a land tax on the one side, and
"customs imposts and duties" on the other, was to be taxed in
conformity to the third clause of section two, article one, is to assume
that the authors of the Constitution were incapable, not merely of
framing a government, but of providing for its continued existence. Is
it conceivable that taxes on incomes, on professional service, on
carriages, on silver-ware and gold-ware, on cotton, on tobacco, can be
levied upon the States in proportion to population and collection
thereof be made ?
And if not, can we assume that the men who made the Constitution
anticipated that the experiment would ever be tried?
And if the experiment was not to be tried, did they intend to limit
taxation to lands, to heads, and to customs duties?
They made a contrary declaration when they gave to Congress unlimited
power to levy taxes. The power remains. A reasonable way for its
exercise must be found.
Is it too much to say that this proposition is absurd, viz. that a
tax on a carriage and the owner of a carriage is an excise tax and may
be assessed directly and personally, and that a tax upon the receiver of
an income in money is a "direct tax," and can only be assessed
upon the States, and that without any inquiry as to the existence of
persons in the enjoyment of incomes?
The last branch of this proposition was asserted by Mr. Edmunds
(Argument, pp. 16, 17), and he assumed that the first branch of the
proposition was already the law of the land (p. 12).
The Levy and collection of an income tax through the States, and upon
the basis of population, would be an impossibility, on account of the
manifest injustice of the proceeding. Mr. Edmunds' proposition was, in
substance, a declaration that the possessors of incomes, however
derived, and whatever the public exigencies, should be relieved of all
liability to contribute to the public revenues. To say that an income
tax of fifty million dollars may be assessed upon the States in
proportion to population, is to declare, in effect, that it shall not be
collected by any process; inasmuch as no just man or equitable court
could say that it ought to be paid.
When Mr. Choate approached the conclusion of the argument, aimed at
the existence of a power in Congress to levy an income tax, and not
merely an argument against the constitutionality of the statute of 1894,
he shrank from a full indorsement of the position that had been taken by
his two associates.
He qualified the claim, but the new position seemed to be equally at
variance with the opinions of the Court in the Hylton case and the
Springer case. He precipitated a theory upon the Court, which for a
hundred years had lain dormant in the Constitution of the country,—a
theory of which neither Marshall nor Story had had knowledge. That the
theory, in its main feature, was accepted by the Court, is a marked
tribute to Mr. Choate's quality as an advocate.
With the approval of his associates he thus states his new
position—a change of front in the face of the enemy. "Therefore,
for the purposes of this argument, I shall assume what my adversaries
claim. I shall assume that it may possibly be decided by this court, as
it has so often been decided before, that all duties, all excises, all
imposts, are shut out from the class of direct taxes by the necessary
meaning and effect of the Constitution, and that they are to be
administered by the rule of uniformity, as they ought to be in this law
and are not. I shall claim, upon the other hand, that at any rate, so
far as regards the direct, inevitable, necessary income, and outgrowth
of real estate and personal estate, the tax is a direct tax levied upon
the proper subject of a direct tax within the meaning of the
Constitution, and is therefore invalid." (Argument, p. 11.)
Thus leaving to the Court the general proposition "that all
duties, all excises, all imposts fall under the rule of uniformity and
not under the rule of apportionment among the States," he excepts
incomes which are "the outgrowth of real estate and personal
estate" from classification as "duties, excises, or
imposts," and claims that they are direct taxes, and that they can
only be levied upon the States and according to population. So much of
this claim as relates to the outgrowth of real estate was accepted by
the Court.
In practice the distinction would seem to be this: A citizen who owns
a carriage, or raises cotton or tobacco, or who follows a business that
yields a profit, or pursues a profession from which some gains are
derived, may be compelled personally to pay a tax on the thing owned, or
on the article produced, or on the income earned, and upon the theory
that these levies fall under the head of "excise taxes" while
the rent of lands and houses and stores, and the earnings of moneys
invested in bonds, stocks and securities of every sort, can only be
reached through the apportionment system, by which the new, frontier,
and not yet wealthy State of Nebraska, as an example, would be assessed
three times the amount that would be levied upon the State of Rhode
Island, where wealth has been accumulating in families and in
institutions for more than two and a half centuries.
Again, as a system of taxation, as a practical scheme for raising a
revenue, who does not foresee that never, never in the centuries, will
the poorer States consent to a levy of an income tax of fifty million,
of ten million, of one million, in presence of the known truth that the
tax was to be paid by States in which the incomes did not exist?
If it be true, as was asserted by Mr. Choate, that the States of
Massachusetts, New York, New Jersey, and Pennsylvania will pay
nine-tenths of the income tax under the statute of 1894, is it within
the range of conjecture, or the sphere of any man's faith or hope, that
the forty other States in the year 1895, or that the poorer States in
any time future, destined always to be a majority, will consent to the
levy of an income tax under the rule of apportionment? And will any man,
whether supporter or opponent of the income tax system, say that the
poorer States ought to assume such a burden?
Nor is the case relieved by the suggestion, if the suggestion were
well founded, that there was a compromise in the Convention by which
rents of lands and gains from personal property were to be counted as
the incidents of land, and to be treated as land for the purposes of
taxation.
The nation is bound by the Constitution, and not by anything that was
said or done in the Convention. The Constitution is silent. It furnishes
no direct support to the theory that rents of land are distinguishable
from other incomes.
Nor is the theory supported by the Madison Papers. There was one
compromise, and one only, touching the subject of taxation, and that
compromise was incorporated in the Constitution. The slave States
claimed that the slaves should be exempt from the capitation tax. The
free States claimed that, as the slaves were producers, they should be
subject to a capitation tax, as though they were free. At the end, the
scheme of a capitation tax was connected with the basis of
representation. The slaves were divided into blocks of five, and for the
purpose of assessing a capitation tax, and for the purpose of
apportioning representatives among the States, each block of five was to
be counted as three free persons. In this arrangement the taxation of
land was not touched, nor considered, except that the population of the
slave States was reduced in the proportion of two-fifths of the slave
population.
The modern suggestion that the rent of lands and the outgrowth of
personal property could only be taxed as real estate, was not made by
anybody. Neither in the Madison Papers nor in the Federalist is there a
hint that such a thought was entertained by anybody.
The quotation by Mr. Choate (p. 18) of a remark made by Mr. Langdon,
of New Hampshire, and reproduced in the opinion of the Court, had no
application to any feature of the Constitution that is involved in the
present discussion.
I do not find in the Madison Papers the remark of Mr. Langdon, as
quoted by Mr. Choate in these words: "It will be very hard upon New
Hampshire, but we will submit to it for the purpose of carrying this
Constitution through."
The remark, as reported by Madison, reads thus (p. 1377) "This
would bear unreasonably hard upon New Hampshire, and he must be against
it." It was this proposition that was to bear unreasonably hard
upon New Hampshire, viz.:
"Mr. Gerry moved to add to article seven, section three, the
following clause : That from the first meeting of the Legislature of the
United States until a census shall be taken, all moneys for supplying
the public treasury by direct taxation shall be raised from the several
States, according to the number of their representatives respectively in
the first branch."
As early as the 10th of June, 1787, three representatives in Congress
had been assigned to New Hampshire, and that when that State was not
represented in the Convention.
A motion to reduce its representation to two members had failed. In
the debate on the Gerry motion, Mr. Langdon said that he was not present
"when New Hampshire was allowed three members. It was more than her
share; he did not wish for them." (Madison Papers, p. 1,381.)
Mr. Langdon's protest was not against the scheme of taxation, nor can
it be forced, properly, into service in support of the claim that he was
engaged in drawing a distinction between incomes that are "the
outgrowth of real estate and of personal estate," and other
incomes, and agreeing, reluctantly, to a constitution in which the first
mentioned were to be levied upon the States in the form of "direct
taxes." In truth, he was protesting against the assignment to New
Hampshire of three representatives in Congress, when, in his opinion,
the State was entitled to two only, upon the basis of population; and
for the sufficient reason that the additional member added fifty per
cent. to the tax that New Hampshire would be required to pay in case
there should be a levy in advance of the census. This was the hardship
that was to "bear unreasonably hard upon New Hampshire."
Nothing was said in the Convention, of which any record remains, that
touches in the slightest degree the issue raised by Mr. Choate; and had
there been pages of record in the line of his contention, his own words
would contain a conclusive answer.
"The mere talk of this man or that in the Convention, mere talk
of this man or that upon the bench of any court, unless it was a solemn
adjudication upon his oath of office and the decision of a case, is of
very little weight."
The Constitution is our only guide. That does not furnish any direct
support to the new theory of taxation. Turning again to the practical
side of this question, is it not apparent that the new theory works the
exemption of all incomes derived from real estate and personal estate?
Mr. Choate admits as much when he attempts to show that there will
remain adequate sources of revenue, as though a suggestion of that
nature could have value in presence of the historical fact that within
thirty-five years the resources of the country were taxed to the
uttermost, including a levy of five per cent., and an additional levy of
five per cent. upon "the outgrowth of real estate and of personal
estate," and of all other incomes as well. At the close of an
enumeration of the sources of revenue that will remain to the general
government after the abstraction for which he contends, Mr. Choate says:
"It will leave to the federal government, to be applied by the rule
of uniformity, all taxes on transportation of every kind, from the
$100,000,000 railroad down to the cart of the licensed vendor."
This, then, is the Constitution, of which four generations of
Americans have been boastful, and on which the leaders of thought in
other lands have bestowed unmeasured encomiums!
The incomes derived from real estate and from personal estate are
eliminated, practically, from the body of taxable property, and we are
invited to accept in set-off, and as full satisfaction, the reservation
of other means of raising a revenue, including a transportation tax on
all articles produced and on all articles consumed by the mass of the
people, down to, and including also, the street vendors of peanuts and
fruits.
Not so thought Alexander Hamilton. In combating the notion that what
was called internal taxation, including incomes, should be reserved to
the States, he said of the national government: "Its future
necessities admit not of calculation or limitation; and upon the
principle more than once adverted to the power of making provision for
them as they arise ought to be equally unconfined. I believe it may be
regarded as a position, warranted by the history of mankind, that, in
the usual progress of things, the necessities of a nation, in every
stage of its existence, will be found at least equal to its resources. .
. . As the duties of superintending the national defence, and of
securing the public peace against foreign or domestic violence, involve
a provision for casualties and dangers, to which no possible limits can
be assigned, the power of making that provision ought to know no other
bounds than the exigencies of the nation and the resources of the
community." (Federalist, Nos. XXX. and XXXI.)
The main point of the opinion remains to be considered. It being
conceded that land is the subject of direct taxation, and that a land
tax must be apportioned among the States upon the basis of population,
it is decided that the income of land is an incident of land, and that a
tax on the rent is a tax on the land, as the tax on the rent can only be
paid from the land. The authority is a quotation from Lord Coke to the
effect that a grant in due form of a perpetual right to the rent of
land, works, in law, a conveyance of the land from which the rent is
derived. "For what," says he, "is the land but the
profits thereof ?"
This rule of English law was allied to the system of entail, and it
had its origin in that system probably. Of its soundness there is no
question. It would not follow, however, even in Great Britain, that an
income tax on rents would be treated as a tax on land. However that may
be, the rule should be otherwise in the United States. The common law of
England extends not beyond the definition of words and phrases known to
that law. In many of the States, and with great probability of truth, it
may be said that in all the States, the rent of land, when earned, is
not distinguishable from other personal property. Upon the death of a
landowner his land vests immediately in his heirs-at-law, but rents,
earned and uncollected, pass to the executor or administrator. This
general policy has its basis in sound reason, and, if it had been
accepted, it would have disposed of the contention that for the purposes
of taxation the rent of land is not distinguishable from the land
itself.
Holmes speaks of a rule of English law touching entailed estates,
calls it "early law," and refers it to the times of the
Seventh and Eighth Henrys, by which uncollected rents, earned in the
lifetime of a tenant, passed with the estate to the new tenant. if such
a system existed in this country the quotation from Lord Coke would give
some support to the contention.
In this summary view, rather than review, of the opinion of the
Court, I have not been influenced by any partiality for the statute of
1894. There ought not to have been occasion for the passage of an income
tax act, and it is not improbable that the law will fail, in part, if
not altogether, and upon the ground that it is lacking in the quality of
uniformity.
The gravity of the decision is in the exemption of rents and incomes
of real estate from taxation, except through the system of
apportionment, which, in my opinion, has ceased to be a practical and
practicable means of raising a revenue.
If the immense incomes derived from real estate are exempt from
taxation, there is no moral foundation for the levy of a tax upon
professions or pursuits, or upon earnings or upon incomes other than
rents. At the end it appears difficult to escape two conclusions—one
of law and one of fact:
First: The provision of the Constitution by which direct taxes are
apportioned among the States upon the basis of population, is a dead
provision, it having become inoperative by the extension of territory
and by the unequal distribution of wealth, especially between the old
States and the new.
The levy in 1861 of a direct tax of twenty million dollars upon the
States was a failure. It was paid by some of the States and neglected by
others. The experience under the Confederation was renewed, and after a
quarter of a century the States that had paid the tax were reimbursed.
It is not probable that the experiment can be again tried under
circumstances more favorable. The power of the general government to
levy taxes on, or by, or through the States, has been annihilated by
events, and every attempt to transfer additional subjects of taxation to
the jurisdiction of that clause is, quoad hoc, an attempt to impair the
means by which alone the continuing existence of the national government
is made secure.
Second: Inasmuch as the Constitution gives to Congress power "to
levy and collect taxes, duties, imposts and excises," and inasmuch
as the full and free exercise of that power is the chief, if not the
only, means by which Congress can "pay the debts and provide for
the common defence and general welfare of the United States," which
is the injunction laid upon Congress, it follows that the limiting
clauses in the Constitution are to be construed strictly. Nothing is to
be excepted out of the powers of Congress beyond what is expressly
declared to be so excepted.
Such, manifestly, was the rule of construction adopted by the Court
in the case of Hylton, when, of the four members of the Court, two had
been members of the Convention of 1787.
GEORGE S. BOUTWELL.
The North American review.
Volume 160, Issue 462
University of Northern Iowa
May 1895