Constitutional Corner – When Governments Take Your Taxes

Constitutional Corner – When Governments Take Your Taxes

Is there anything more American than a good tax protest?

From the Boston “Tea Party” on 16 December 1773, to the nine other colonial “tea parties” which followed it,[1] to the 1794 Whiskey Rebellion, to the 1828 “Tariff of Abominations, to the 2009 protests which gave birth to the modern Tea Party movement, Americans have repeatedly and vividly demonstrated their love affair with tax protests.

Last week we examined the constitutionality of eminent domain as a means governments have of taking your property and the restrictions placed on that power by the Takings Clause of the Fifth Amendment; today we will examine the more “traditional” method governments use to extract your wealth, your property: taxes.

Let’s be clear; as long as there is to be government, a government which provides legitimate, Constitutional services and which keeps its citizens safe from attack, that government requires revenue. “Money is the nerve – the life and soul of a government.”[2]

Conservatives, particularly Tea Party types, are often unfairly accused of rejecting the whole concept of taxes.  I don’t think anyone disputes the necessity of taxes, or the futility of trying to completely avoid them.  In a 1789 letter to Jean-Baptiste Leroy, Benjamin Franklin wrote: “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.

Taxes, in some form or another, are unavoidable if we are to have a functioning government.  The dispute lays principally in what is the proper level of taxation, i.e. how much revenue does government actually need to perform its constitutional duties, what form of taxes will it employ, and how and from whom are these taxes to be collected?   One final concern is expressed in Thomas Jefferson’s view in the Virginia Statute of Religious Freedom that: “To compel a man to furnish contributions of money [i.e. taxes] for the propagation of opinions which he disbelieves and abhors, is sinful and tyrannical.”

We should note that, under the Constitution, taxes are only one means our government has to raise revenue; they can set the value of money so as to make a profit on its creation, they can sell stamps at a profit, and, as we will see shortly, in Article 1, Section 8, Clause 1 they can also set duties, imposts and excises on imports and other goods, which were the primary means the federal government used to fund its activities up until the Civil War.

The Bible contains guidance on both the administration of as well as the payment of taxes. Exodus 30: 11-15 provides for a “half a shekel” capitation tax on everyone 20 years or older. This was not a progressive tax; it was a “flat tax” (in today’s parlance).  Verse 15 states: “The rich shall not give more and the poor shall not give less than half a shekel.”  Ezekiel 46:18 condemns the idea of an inheritance tax, such as we have today.  Both Jesus[3] and Paul[4] supported the idea of paying justly due taxes.

Today’s federal government is bloated with unconstitutional agencies, functions and services, requiring a level of taxation that many Americans find objectionable. Why should anyone have to work until “Tax Freedom Day”[5] before they are truly working for themselves?

The U.S. has nearly the highest corporate tax in the world;[6] the highest among the 34 nations that make up the Organization for Economic Co-operation and Development.  In 1952, the U.S. personal income tax rate reached a high of 92% (back down to 35% today).  Unfortunately, our current level of progressive taxation does not provide the revenue that Congress has appropriated to be spent (that is a separate story), requiring the government to borrow vast sums, unimaginable sums, which will likely never be repaid.  Furthermore, due to the great number of Americans who pay no income taxes and receive services nevertheless, many today see the taxation system as a wealth re-distribution system in disguise, taking from the “rich” to give to the “poor.”

In the colonial period, taxes imposed by the British Parliament without the accompanying representation of the colonies in Parliament, were of course one of the main reasons, but not the only reason for the colonies seeking independence; “Imposing Taxes on us without our Consent” was only one of twenty-nine complaints Jefferson listed in the Declaration.

The inability of the Articles of Confederation Congress to tax the states (they could only ask for “contributions”), and the hardship this imposed on the war effort, led to the several provisions we have today in the body of the Constitution dealing with taxes (ignoring the 16th Amendment for the moment).  These include (emphasis added):

Article 1 Section 8, Clause 1, 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 Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.”

Article 1, Section 9, Clauses 1, 4 and 5 state: “The Migration or Importation of such Persons as any of the States now existing shall think proper to admit, shall not be prohibited by the Congress prior to the Year one thousand eight hundred and eight, but a Tax or duty may be imposed on such Importation, not exceeding ten dollars for each Person.

No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.

No Tax or Duty shall be laid on Articles exported from any State.”

Let’s discuss these provisions one at a time.  The clear reading of Section 8, Clause 1 shows taxes were intended to be simply a revenue-raising mechanism; and the revenue thus raised to only be used to “pay the debts and provide for the common Defence and general Welfare of the United States.”  Over the years, the Supreme Court, in addition to corrupting the original meaning of “general Welfare,” also relaxed previous rulings that taxes should be used solely for raising revenue.  Although the idea of using taxes to discourage consumption was discussed at the 1787 Convention,[7] in 1937 (Steward Machine Co. v. Davis), the Court allowed taxes whose sole purpose was to “encourage” states to adopt laws for funding the unemployment compensation feature of Social Security.  In 2012’s infamous Obamacare case (National Federation of Independent Business v Sebelius), Chief Justice John Roberts allowed the individual mandate’s non-compliance penalty to be sustained as a tax, a “tax” clearly designed to “encourage” people to purchase health insurance and punish those who do not.

Section 9, Clause 1 allowed a tax not exceeding $10 to be assessed on imported slaves even though the slave trade itself could not be prohibited for twenty years — which it was, the moment Congress was free to do so.

Clause 4 requires that a capitation (literally, a tax on each person) or otherwise direct tax on individuals can only be assessed against the states if it is proportioned with respect to the population in each state.  If Virginia had 15% of the total U.S. population they would be required to come up what amounted to 15% of the total tax to be collected.  This is somewhat analogous to the requisition-scheme during the Articles of Confederation period where the amount asked of each state was related to the land values in that state.

Clause 5 prohibits Congress from levying any tax or duty on goods exported from a State.

And then we come to the 16th Amendment.  For long periods of our nation’s history, “no citizen saw a tax collector of the United States unless that citizen was in the business of importing foreign goods.”[8] Until the onset of the Civil War, the federal government obtained most of the revenue it needed from tariffs on imports (one reason the “Tariff of Abomination” became such an issue).  Tariff income was insufficient to fight a war, however.  To pay for the cost of the Civil War, Congress passed the Revenue Act of 1861. It consisted of a flat tax of 3% on annual incomes above $800 ($22,200 in today’s dollars). The following year, the Revenue Act of 1862 substituted a graduated tax of 3–5% on income above $600.  The 1862 act expired in 1866 and the government was back to tariffs, imposts and excises.

Various interest groups advocated re-adoption of an income tax in 1887 and 1892.[9] The Income Tax Act of 1894 (aka the Wilson-Gorman Tariff of 1894) imposed income taxes on any “gains, profits and incomes” in excess of $4,000 (taxed at 2%).  The following year, in Pollock v. Farmers’ Loan & Trust Company,[10] the Supreme Court ruled that unapportioned income taxes, like those in the 1894 statute, were, in effect, direct taxes, and were unconstitutional because of the requirement that all direct taxes be apportioned.

And there things stood until 1909: Congress could not raise revenue by taxing income, it would take a Constitutional Amendment.

On June 16, 1909, President William Howard Taft addressed Congress and proposed a 2% federal income tax on corporations by way of an excise tax (remember that).  He also proposed a constitutional amendment to implement his idea.  Less than a month later, on July 12, 1909, Congress passed a resolution proposing the Sixteenth Amendment and submitted the amendment to the states for ratification.  On February 25, 1913, Secretary of State Philander Knox proclaimed that the amendment had been ratified by the required three-fourths of the states.  Had it?  That is the subject of The Law That Never Was, which you can buy in book form or find around the web in abridged form.

The book’s author, Bill Benson, contends that the 16th Amendment was never legally ratified.  He claims:

Seven states[11] did not ratify the amendment, and this fact was reported accurately.

Two states[12] did not ratify the amendment, but Secretary of State Philander Knox reported that they did.

Eight states[13] were reported by Secretary Knox as having ratified the amendment, but the States actually have missing or incomplete records of the ratification procedures or votes, and there is no conclusive record that they ratified the amendment or reported any ratification to the Secretary of State.

Six states[14] did approve the amendment, but the Governor or another official who was required by their respective state constitutions to sign the legislation into law did not sign the legislation.

In twenty-five states[15] the legislature violated a provision of its state constitution during the ratification process.

Twenty-nine states[16] violated their state law or procedural rules during the ratification process.

Unfortunately, the Supreme Court has been unwilling to accept the argument that the Amendment was not properly ratified; the many people who have taken this argument into court have lost every time.  Since the Constitution is silent as to what constitutes a proper amendment ratification, the Court has said the issue sits with Congress, and Congress accepted the certifications of Secretary of State Knox, discrepancies and all.  Case closed, at least on this issue.

There is another issue surrounding the 16th Amendment however: the commonly held belief that the 16th Amendment requires everyone to pay taxes on their income “from whatever source derived.”  First we should note that the 16th Amendment, by itself, did not make taxing anything lawful, Congress still needed to pass statute law setting up a tax structure.

And that’s where things get interesting.  Peter Eric Hendrickson has studied carefully what Congress actually passed in our tax code and he contends, in “Cracking the Code- The Fascinating Truth About Taxation In America,” that the vast majority of Americans have been dutifully paying taxes on “income” that they shouldn’t have.  Unfortunately, no one in the government is going to say: “You’re doing it wrong,” they are more than happy to have the “contributions.”   I’m not going to try to explain all the reasoning behind Hendrickson’s claims, because I confess to not understanding all of it myself.  But this document and Hendrickson’s book are worth the read (I’ve read the book).  The author sums his whole argument by stating:  “As written, the ‘income tax’ remains a proper excise, and as such, doesn’t apply to the earnings of most Americans.”  Read the book and decide for yourself.

Moving on; nearly everyone agrees that our current tax code (whether the 16th Amendment is being interpreted correctly or not) is a complete disaster and in need of reform.  At 60,000 pages it is obviously too complex, written in language that only a tax accountant or lawyer can understand, and contains so many loopholes that many corporations and individuals alike pay no tax whatsoever.  There have been near non-stop attempts by the Congress to reform the tax code – both the Senate and House have committees at work year round – without any meaningful reform emerging.  The reason for this lack of progress is clear: no one wants to give up their hard-fought-for tax advantage.

In his superb book: “By the People, Rebuilding Liberty Without Permission,” Charles Murry shows why we are unlikely to ever completely abandon our present tax structure in favor of a Flat Tax or Fair Tax (the two main contenders to replace the current system — here’s a comparison of them): “institutional sclerosis.”  Institutional sclerosis results in advanced democracies like ours (don’t shoot me, I know we have a republic, not a democracy, I’m using Murray’s terminology) becoming unable to make significant changes due to “the dynamics of collective action.”  These dynamics are easy to illustrate but beyond the scope of this essay.  Suffice it to say that, despite widespread agreement that the tax system is “broken,” the present system nevertheless contains some feature or another, some deduction, some benefit, that each of us will fight to retain, be it the home mortgage deduction, or the educational deduction, or the charitable deduction, or whatever. (I’ll have more to say about Murray’s book in a later essay – it is a book every American should read.  Get a head start by buying or borrowing a copy now.)

On tomorrow’s “We the People” radio show we’ll be discussing our current tax fiasco and we will devote the second half of the show to an analysis of both the Flat Tax and Fair Tax proposals (as we understand them).  I encourage you to call in to tell us what you think Congress should do.  You may also use this simple survey to tell us what should be done (note: only one response per computer is allowed).

Of course, nothing’s going to happen until sufficient Americans are willing to communicate with their Congressmen and women and demand the system be fixed.  I guarantee Congress will act once enough people demand they act.

[1] See Ten Tea Parties; Patriotic Protests That History Forgot, by Joseph Cummins, Quirk Books, Philadelphia, 2010.

[2] Edmund Randolph, 7 June 1788, at the Virginia Ratifying Convention.

[3] Matthew 22:17-21

[4] Romans 13:6-7

[5] Defined as “the day when the nation as a whole has earned enough money to pay its total tax bill for the year,” April 24th this year.

[6] The third highest general top marginal corporate income tax rate in the world at 39.1 percent, exceeded only by Chad and the United Arab Emirates.

[7] The Original Constitution, What it Actually Said and Meant, by Robert Natelson, Tenth Amendment Center, 2011, p. 88.


[9] The Socialist Labor Party in 1887, and the Populist Party in 1892.

[10] Pollock v. Farmers’ Loan & Trust Company, 157 U.S. 429 (1895).

[11] Connecticut, Florida, Oregon, Pennsylvania, Rhode Island, Utah, Virginia.

[12] Kentucky and Tennessee.

[13] Delaware, Michigan, Nevada, New Hampshire, South Dakota, Tennessee, Vermont and Wyoming.

[14] Idaho, Iowa, Kentucky, Minnesota, Missouri, Washington.

[15] Arizona, Arkansas, California, Colorado, Georgia, Idaho, Illinois, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Montana, New Jersey, New Mexico, North Dakota, Tennessee, Texas, Vermont, Washington, West Virginia and Wyoming.

[16] Arizona, Arkansas, California, Colorado, Georgia, Idaho, Indiana, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Jersey, New Mexico, New York, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Vermont, West Virginia and Wyoming.