The Const.i.tution nowhere specified just what taxes were to be deemed "direct" (Madison in his notes of the Const.i.tutional Convention records: "Mr. King asked what was the precise meaning of direct taxation? No one answd.")[1] or what kind of uniformity was intended by the provision that indirect taxes should be uniform, and more than a century was to elapse before either of these fundamental questions was finally settled. The answer to the latter question (that the term "uniform" refers purely to a geographical uniformity and is synonymous with the expression "to operate generally throughout the United States") was given by the Supreme Court in the year 1900 in the celebrated case of Knowlton v. Moore,[2] and met with general approval. The answer to the question of what const.i.tutes a direct tax within the meaning of the Const.i.tution, given by the Supreme Court in 1895 in the Income Tax cases,[3] met with a different reception. The decision upset long-settled ideas, disarranged the federal taxing system, aroused popular resentment, and ultimately led to the enactment of the Sixteenth Amendment.
[Footnote 1: Farrand, "Records of the Federal Convention," Vol. II, p. 350.]
[Footnote 2: 178 U.S., 41.]
[Footnote 3: Pollock v. Farmers Loan & Trust Co., 157 U.S., 429.]
The question had arisen early in the life of the Republic in the case of Hylton v. United States, decided in 1796.[1] This litigation involved the validity of a tax on carriages which had been imposed by Congress without apportionment among the states. Alexander Hamilton argued the case before the Supreme Court in support of the tax. The Court adopted his view and sustained the tax, holding that it was a tax on consumption and therefore a species of excise or duty. The Justices who wrote opinions expressed doubt whether anything but poll taxes and taxes on land were "direct" within the meaning of the Const.i.tution. That point, however, was not necessarily involved and was not decided, though later generations came to a.s.sume that it had been decided.
[Footnote 1: 3 Dallas, 171.]
The tax on carriages was soon repealed and many years elapsed before the question came up again. After the Civil War broke out, however, the need of revenue became acute and various statutes taxing income without apportionment among the states were enacted by Congress. These met with general acquiescence. It was felt that they were emergency measures necessitated by the war, and they were in fact abandoned as soon as practicable after the war. A well-known lawyer, however (William M. Springer of Illinois), did not acquiesce and refused to pay his income tax, on the ground that it was a direct tax not levied in accordance with the Const.i.tution. In the action brought to test the question[1] it appeared that the income on which Mr. Springer had been taxed was derived in part from the practice of his profession as an attorney. To this extent it was clearly an excise or duty, i.e., an indirect tax. As it was inc.u.mbent upon Mr. Springer, by reason of the form of the action, to demonstrate that the tax was void in toto the Court could not do otherwise than decide against him. In rendering its decision, however, the Court took occasion to discuss the question as to what were direct taxes within the meaning of the Const.i.tution, and expressed the view that the term included only capitation or poll taxes, and taxes on real estate. There the matter rested until the year 1894 when Congress enacted another income tax law. This time the argument from necessity was lacking. The country was in a state of profound peace. Opposition to the tax among the moneyed interests was widespread. Test suits were brought and after most elaborate and exhaustive argument and reargument the Hylton and Springer cases were distinguished and the act was held unconst.i.tutional.[2] The decision was by a closely divided Court (five to four), the majority finally holding that "direct taxes" within the meaning of the Const.i.tution included taxes on personal property and the income of personal property, as well as taxes on real estate and the rents or income of real estate. This conclusion was fatal to the act. It was conceded that the tax, in so far as it affected income derived from a business or profession, was an indirect tax and therefore valid without apportionment among the states, but the provisions for taxing the income of real and personal property were held to be an essential part of the taxing scheme invalidating the whole statute.
[Footnote 1: Springer v. United States, 102 U.S., 586.]
[Footnote 2: Pollock v. Farmers Loan & Trust Co., 157 U.S., 429; same case on rehearing, 158 U.S., 601.]
This momentous decision was almost as unpopular with Congress and the general public as the decision in Chisholm v. Georgia had been a hundred years earlier. Many legislators were in favor of enacting another income tax law forthwith and endeavoring to coerce the Court, through the force of legislative and popular opinion, to overrule its decision. Calmer counsels prevailed, however, and plans were initiated to get over the difficulty by a const.i.tutional amendment. Meanwhile, steps were taken to eke out the national revenue by various excise taxes, notably the so-called Federal Corporation Tax. This novel tax, which was thought by many to involve a very serious encroachment by the Federal Government on the powers of the states, will be discussed more at length in later chapters.[1]
[Footnote 1: See Chapters X and XI, infra.]
The const.i.tutional amendment as proposed by Congress and ratified by the states provided:
"The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration."
Thus far we have dealt only with such limitations upon the federal taxing power as are expressly imposed by the Const.i.tution. As has been seen, the only express limitations are that direct taxes shall be apportioned among the states, that indirect taxes shall be uniform, and that exports shall not be taxed at all. There are, however, certain other limitations which we proceed to notice briefly.
The Const.i.tution provides[1] that the compensation of federal judges "shall not be diminished during their continuance in office." There is a similar provision as to the compensation of the President.[2] No attempt seems to have been made to tax the compensation of federal judges prior to 1862. A statute of that year subjected the salaries of all civil officers of the United States to an income tax and was construed by the revenue officers as including the compensation of the President and the judges. Chief Justice Taney, the head of the judiciary, wrote the Secretary of the Treasury a letter[3] protesting against the tax as a virtual diminution of judicial compensation in violation of the const.i.tutional provision. No heed was paid to the protest at the time but some years later, upon the strength of an opinion by Attorney General h.o.a.r, the tax on the compensation of the President and the judges was discontinued and the amounts theretofore collected were refunded. There the matter rested until after the Income Tax Amendment, when Congress again sought to impose a tax upon the income of the President and the judges. A federal judge of a Kentucky district contested the tax and the question came up before the Supreme Court for final decision. On behalf of the revenue department it was urged that a general income tax, operating alike on all cla.s.ses, did not involve any violation of the const.i.tutional provision. It was also contended that such a tax was expressly authorized by the Sixteenth Amendment giving Congress power to tax incomes "from whatever source derived." The Court in an exhaustive opinion[4] overruled both these contentions and held the tax to be a violation of the Const.i.tution.
[Footnote 1: Art. 3, Sec. 1.]
[Footnote 2: Art. 2, Sec. 1, Clause 6.]
[Footnote 3: See 157 U.S., 701.]
[Footnote 4: Evans v. Gore, 253 U.S., 245.]
It has often been a.s.serted that a limitation of the federal taxing power is found in the "due process" clause of the Fifth Amendment of the Const.i.tution, providing that no person shall "be deprived of life, liberty, or property without due process of law." This amendment relates to the powers of the General Government. A similar limitation on the powers of the states is found in the Fourteenth Amendment. Taxing laws have frequently been attacked in the courts on the ground that, by reason of some inequality or injustice in their provisions, the taxpayer was deprived of his property without due process of law. In cases involving state laws such objections have sometimes been sustained.[1] There seems, however, to have been no case in which a federal taxing law was declared invalid on this ground, and the Supreme Court has recently remarked that it is "well settled that such clause (viz., the due process clause of the Fifth Amendment) is not a limitation upon the taxing power conferred upon Congress by the Const.i.tution."[2] Nevertheless, it is believed that if a federal tax were clearly imposed for other than a public use, or were imposed on tangible property lying outside the national jurisdiction, or were so arbitrary and without basis for cla.s.sification as to amount to confiscation, relief might be obtained under the due process clause of the Fifth Amendment.
[Footnote 1: See, e.g., Union Tank Line Co. v. Wright, 249 U.S., 275.]
[Footnote 2: Brushaber v. Union Pacific R.R., 240 U.S., 24.]
By far the most important and interesting of the implied limitations of the federal taxing power remains to be noticed. That is the limitation which prohibits the National Government from burdening by taxation the property or revenues or obligations of a state, or the emoluments of a state official, or anything connected with the exercise by a state of one of its governmental functions. In other words, while the National Government may tax income from bonds issued by England or France or their cities, it is powerless to tax the income from bonds of Rhode Island or the smallest of its towns.
This implied limitation, nowhere categorically expressed but enunciated in a series of decisions of the Supreme Court, has not always met with acquiescence from the executive and legislative branches of the Government. In fact, Congress is now engaged in an effort to do away with it, at least in so far as concerns the right to tax the income from state and munic.i.p.al bonds. To-day, however, it still stands as one of the most striking and unique characteristics of our governmental system. It will be discussed more at length in the next chapter.
IX
CAN CONGRESS TAX THE INCOME FROM STATE AND MUNIc.i.p.aL BONDS?
That is a question which is agitating a good many people just now. Congress from time to time has seemed disposed to try it, in spite of misgivings as to the const.i.tutionality of such legislation.[1] A recent Revenue Bill contained provisions taxing the income of future issues of such obligations, and a motion for the elimination of those provisions was defeated in the House 132 to 61. Meanwhile, protests were pouring in from state and munic.i.p.al officers a.s.sailing the justice and expediency of such a tax.
[Footnote 1: See, e.g., H. Report No. 767, 65th Cong., 2d Sess., accompanying House Revenue Bill of 1918 as reported by Mr. Kitchin from the Committee on Ways and Means, page 89.]
It is not the purpose of this chapter to discuss the questions of justice and expediency (as to which there is much to be said on both sides) but rather to deal with the strictly legal aspects of the matter and indicate briefly why such a tax cannot be laid without a change in our fundamental law.
Let it be said at the outset that no express provision of the United States Const.i.tution forbids. On the contrary, that instrument confers on Congress the power to lay taxes without any restriction or limitation save that exports shall not be taxed, that duties, imposts, and excises shall be uniform throughout the United States, and that direct taxes must be apportioned among the states in proportion to population. The obstacle lies rather in an implied limitation inherent in our dual system of government and formulated in decisions of the Supreme Court.
The founders of this republic established a form of government wherein the states, though subordinate to the Federal Government in all matters within its jurisdiction, nevertheless remained distinct bodies politic, each one supreme in its own sphere. In the famous phrase of Salmon P. Chase, p.r.o.nouncing judgment as Chief Justice of the Supreme Court[1]:
The Const.i.tution in all its provisions looks to an indestructible Union, composed of indestructible states.
[Footnote 1: Texas v. White, 7 Wall., 700, 725.]
In a later case[1] another eminent justice (Samuel Nelson of New York) put the matter thus:
The General Government, and the states, although both exist within the same territorial limits, are separate and distinct sovereignties, acting separately and independently of each other, within their respective spheres. The former, in its appropriate sphere, is supreme; but the states within the limits of their powers not granted, or, in the language of the 10th Amendment, "reserved", are as independent of the General Government as that government within its sphere is independent of the states.
[Footnote 1: The Collector v. Day, 11 Wall., 113, 124.]
It follows that the two governments, national and state, must each exercise its powers so as not to interfere with the free and full exercise by the other of its powers. To do otherwise would be contrary to the fundamental compact embodied in the Const.i.tution-in other words, it would be unconst.i.tutional.
This proposition was affirmed at an early day by Chief Justice John Marshall in the great case of McCulloch vs. The State of Maryland,[1] which involved the attempt of a state to tax the operations of a national bank. That case is one of the landmarks of American const.i.tutional law. While it did not expressly decide that the Federal Government could not tax a state instrumentality but only the converse, i.e., that a state could not tax an instrumentality of the nation, the Court has held in many subsequent decisions that the proposition enunciated by the great Chief Justice works both ways. For example, it has declared that a state cannot tax the obligations of the United States because such a tax operates upon the power of the Federal Government to borrow money[2] and conversely, that Congress cannot tax the obligations of a state for the same reason;[3] that a state cannot tax the emoluments of an official of the United States[4] and conversely, that the United States cannot tax the salary of a state official;[5] that a state cannot impose a tax on the property or revenues of the United States[6] and conversely, that Congress cannot tax the property or revenues of a state or a munic.i.p.ality thereof.[7]
[Footnote 1: 4 Wheaton, 316.]
[Footnote 2: Weston v. City of Charleston, 2 Pet., 449.]
[Footnote 3: Mercantile Bank v. New York, 121 U.S., 138, 162.]
[Footnote 4: Dobbins v. Commissioner of Erie County, 16 Pet., 435.]
[Footnote 5: Collector v. Day, 11 Wall., 113.]
[Footnote 6: Van Brocklin v. Tennessee, 117 U.S., 151.]
[Footnote 7: United States v. Railroad Co., 17 Wall., 322.]
The Supreme Court has said (and many times reiterated in substance) that the National Government "cannot exercise its power of taxation so as to destroy the state governments, or embarra.s.s their lawful action."[1] One of the most distinguished writers on American Const.i.tutional law (Thomas M. Cooley, Chief Justice of the Supreme Court of Michigan and afterward Chairman of the federal Interstate Commerce Commission) has said:
There is nothing in the Const.i.tution which can be made to admit of any interference by Congress with the secure existence of any state authority within its lawful bounds. And any such interference by the indirect means of taxation is quite as much beyond the power of the national legislature as if the interference were direct and extreme.[2]
[Footnote 1: Railroad Co. v. p.e.n.i.ston, 18 Wall., 5, 30.]
[Footnote 2: Cooley"s Const.i.tutional Limitations, 7th Ed., 684.]
The question as to the right of Congress to levy an income tax on munic.i.p.al securities came up squarely in the famous Income Tax Cases[1] involving the const.i.tutionality of the Income Tax Law of 1804. While the Supreme Court was sharply divided as to the const.i.tutionality of other features of the law, it was unanimous as to the lack of authority in the United States to tax the interest on munic.i.p.al bonds.