Direct Taxes
Income Tax is a Direct Tax yet Classified as an Indirect Tax
In approaching this subject, congressional enactments levying taxes, as other laws of the federal government when acting within constitutional authority, are the supreme law of the land. However, observers note that Supreme Court rulings have always upheld the classification of income taxes as indirect taxes, while the rest of the world has classified income taxes as direct taxes, including the IRS.
The Supreme Court has repeatedly sustained income taxes and excise taxes as indirect taxes, and has never ruled otherwise.
We think that they were used comprehensively to cover customs and excise duties imposed on importation, consumption, manufacture, and sale of certain commodities, privileges, particular business transactions, vocations, occupations, and the like. Thomas v. United States, 192 U.S. 363 (1904)
But the reality remains that individual income taxes are direct taxes. These taxes attach to individuals in a direct manner and create liability, as oppose to indirect taxes which falls onto acts or transactions and collected in the course of commerce and trade. The founding fathers knew that labor and property or wealth were the proper subjects of direct taxation; they cited Adam Smith and others in their debates concerning the subject of direct taxes.
The great object of the Constitution was, to give Congress a power to lay taxes, adequate to the exigencies of government; but they were to observe...the rule of apportionment, according to the census, when they laid any direct tax. Hylton v. United States, 3 U.S. (3 Dall.) 171, 173 (1796) (opinion of Chase, J.)
The Founding Fathers had a distaste for direct taxes; they believed that direct taxes could be oppressive and burdensome. For this reason, they included two provisions in the Constitution that required direct taxes to be apportioned among the states based on their population. This meant that each state would pay a share of the direct tax based on the number of people living in that state, and would be represented proportionately. History has shown that taxes on wealth, land, and labor are direct taxes in practice and opperation; this is the opinion of the world, found in ALL investment literature and in ALL foreign taxing authorities. ]
They preferred indirect taxes, as less intrusive and more equitable.
As we have found it necessary to give very extensive powers to the federal government both over the persons and estates of the citizens, we thought it right to draw one branch of the legislature immediately from the people, and that both wealth and numbers should be considered in the representation. We were at a loss, for some time, for a rule to ascertain the proportionate wealth of the states. At last we thought that the productive labor of the inhabitants was the best rule for ascertaining their wealth. In conformity to this rule, joined to a spirit of concession, we determined that representatives should be apportioned among the several states,.. We thus obtained a representation for our property; The Debates in the Several State Conventions vol. 4, Gen. CHARLES COTESWORTH PINCKNEY Thursday, January 17, 1788 The Debates in the Several State Conventions vol. 4, Gen. Mr Goudy, 1788 Mr. Goudy:
Mr Goudy opposed the direct taxing clause because it would allow Negroes to be counted in the census, and thus increase the number of representatives from slave states. Mr. Goudy stated:
Taxes are equal to our representation... I wish not to be represented with negroes, especially if it increases my burdens. Mr Davie replied:
... It was attempted to form a rule of representation from a compound ratio of wealth and population; but, on consideration, it was found impracticable to determine the comparative value of lands, and other property, in so extensive a territory, with any degree of accuracy; and population alone was adopted as the only practicable rule or criterion of representation.
The Debates in the Several State Conventions vol. 4, 1827. Direct Taxes. May 6, 1794. Mr. SEDGWICK said, ...there had been a general concurrence in a belief that the ultimate sources of public contributions were labor, and the subjects and effects of labor; that taxes, being permanent, had a tendency to equalize, and to diffuse themselves through a community. According to these opinions, a capitation tax, and taxes on land, and on property and income generally, were a direct charge, as well in the immediate as ultimate sources of contribution. He had considered those, and those only, as direct taxes in their operation and effects. On the other hand, a tax imposed on a specific article of personal property, and particularly of objects of luxury, as in the case under consideration, he had never supposed had been considered a direct tax within the meaning of the Constitution.
Mr. Madison, June 16, 1788: Let us consider the most important of these reprobated powers; that of direct taxation is most generally objected to. With respect to the exigencies of government, there is no question but the most easy mode of providing for them will be adopted. When, therefore, direct taxes are not necessary, they will not be recurred to. It can be of little advantage to those in power to raise money in a manner oppressive to the people. To consult the conveniences of the people will cost them nothing, and in many respects will be advantageous to them. Direct taxes will only be recurred to for great purposes. The Debates in the Several State Conventions vol. 3, 1827
In The Dbates in the Several State Conventions vol. 3, 1827 Mr. CORBIN on June 7, 1788
concluded that no danger was to be apprehended from the power of direct taxation, since there was every reason to believe it would be very seldom used. ...and if this conclusion of mine be well founded, let me ask if public liberty is not secured by bars and adamantine bolts — secured by the strongest guards and checks which human ingenuity can invent. Will this dread power of taxation render liberty insecure? Sir, without this power, other powers will answer no purpose. Government cannot exist without the means of procuring money. My honorable friend told us he considered this clause as the vitals of the Constitution. I will change the phrase, and say that I consider this part as the lungs of the Constitution. If it be sick, the whole system is consumptive, and must soon decay; and this power can never be dangerous if the principles of equal and free representation be fully attended to. While the right of suffrage is secured, we have little to fear. This government, sir, fully secures us this noble privilege, on the purest and simplest principles of equality. That number which, in any one part of the country, has a right to send a representative, has the same right in another part. What does the Constitution say? That thirty thousand shall have one representative, no matter where. If this be not equal representation, what, in the name of God, is equal representation? But, says the honorable gentleman, the Constitution may be satisfied by one from each state. I conceive there is no fear of this. There is not a power to diminish the number. Does it not say that representatives shall be apportioned according to the number of the people, and that direct taxes shall be regulated by the same rules?
Gov. RANDOLPH on June 7, 1788 The Dbates in the Several State Conventions vol. 3, 1827
But, I trust, this power of imposing direct taxes has been proved to be essential to the very existence of the Union. The advocates for the national government, circumstanced as they are, with the accession of so many states, never will give their assent to leave it in the power of the states to sacrifice the Union. It has been observed, by an honorable gentleman over the way, (Mr. George Mason,) that there could not be a fellow-feeling between the national representatives and their constituents, and that oppression must be inseparable from their exercise of the power of imposing taxes.
Mr. JOHN MARSHALL on June 7, 1788 The Dbates in the Several State Conventions vol. 3, 1827
The objects of direct taxes are well understood: they are but few: what are they? Lands, slaves, stock of all kinds, and a few other articles of domestic property. ...No tax can be laid without the consent of the House of Representatives. If there be no impropriety in the mode of electing the representatives, can any danger be apprehended? ... I think that the power of direct taxation is essential to the existence of the general government, and that it is safe to grant it. If this power be not necessary, and as safe from abuse as any delegated power can possibly be, then I say that the plan before you is unnecessary; for it imports not what system we have, unless it have the power of protecting us in time of peace and war.
On January 17, 1788 The Debates in the Several State Conventions vol. 2 There is a prejudice, said Mr. Dawes, against direct taxation, which arises from the manner in which it has been abused by the errors of the old Confederation.
Mr. SINGLETARY thought no more power could be given to a despot, than to give up the purse-strings of the people.
Wednesday, January 23. — Mr. PIERCE rose, he said, to make a few observations on the powers of Congress, in this section.
The restriction that all direct taxes must
be apportioned was inserted twice into the Constitution.
During the ratification process (1787-90) many people objected to granting Congress any power to lay direct taxes. They feared that Congress might raise the overall burden and undo whatever progress toward equity states had achieved during the war. At least nine state conventions considered motions for constitutional amendments restricting the federal direct-tax power. Case Western Reserve Law Review·Volume 66·Issue 2·2015 What the Constitution Means by “Duties, Imposts, and Excises”—and “Taxes” (Direct or Otherwise)