Tax Tuesday: Direct Taxes

I have for a long time wondered what exactly a “direct” tax was. After all, it seems pretty central to the Constitutional power to tax. Reading through Chemerinski last night, I found the answer. The Supreme Court has long held that a direct tax is a tax on property (although the distinction between direct and indirect is no longer relevent due to the 16th Amendment). An income tax is not a direct tax. Article I Section 9 Clause 4 of the Constitution provides that no capitation (head tax (e.g. everyone has to pay $100 per year)) or other direct tax shall be lawful unless in proportion to the census. But if an income tax is not a direct tax, then the power to tax laid out in Article I, Section 8, Clause 1 is unrestricted. And this means that Congress's power to tax incomes does not derive from the 16th Amendment.

And, in fact, prior to the ratification of the 16th amendment, Congress did impose income taxes (and other indirect taxes). And the Supreme Court upheld these taxes. The first income tax in the United States was enacted during the Civil War.

So what’s the deal with the 16th Amendment? If we can already tax income without regard to apportionment, then what does the 16th Amendment do for us?

Well, in Pollock v. Farmers’ Loan and Trust Co., (1985) the Court held an income tax unconstitutional. But the income tax was declared unconstitutional only because the statute taxed not only labor income, but also income from property. Thus the property tax portion of the law was a direct tax. In addition, it was not apportioned according to the census. Conclusion: unconstitutional under Article I, Section 9, Clause 4. The labor income portion of the tax was not unconstitutional.

So it seems to me that what the 16th Amendment really does is allow taxation on gains from property (e.g. capital gains, rental income, etc.).

What I really want to hit home about this is that tax protestors who claim that a tax on labor income is unconstitutional, because either the 16th Amendment was not properly ratified or that the Constitution does not authorize a tax on labor income, are so clearly wrong that it boggles the mind. A brief look at Article I of the Constitution should clear a lot of things up.