- Phil Hart
The current attempt by today’s White House Administration to impose more big government on the American People by way of the “single payer option” for healthcare is as unconstitutional as gun confiscation or the elimination of free speech. Obamacare will be funded with a health care surcharge on the today’s income tax, which constitutes an unapportioned direct tax on the wages and salaries of the American People, not allowed by our Constitution.
How so you might ask? Good question. In order to answer that question, we must first review “Constitutional Taxation 101” a course that no lawyer ever took, nor has any judge, member of Congress nor has any PhD candidate in constitutional law. Law schools do not teach courses about the Constitution; they teach courses about litigated cases about the Constitution. The American People are nearly 100 percent illiterate, at all levels, when it comes to constitutional taxation. The higher the level of ignorance among the American people, the greater the amount of fleecing that takes place.
To understand constitutional taxation, we must first understand the terms of the Constitution’s Framers. What is a direct tax? And what is an indirect tax? In 1787, those terms were widely used by the Framers as they debated and drafted our Constitution. These framers knew the meaning of these to terms. Very simply, a direct tax taxes a “noun”, and an indirect tax taxes a “verb”.
What is a tax on a noun? It is a tax on something that exists. A house exists. A tax on a house is a direct tax. The tax is levied on the house, and the tax must be paid. There is no getting out of paying a direct tax. Either the tax gets paid, or the house is eventually seized by the taxing authority. “Labor” is a noun too; and a tax on labor is a direct tax; it is a capitation tax, which must be apportioned.
The next question that begs to be answered is, “What is a tax on a verb?” This is a tax on the happening of an event. It is a tax on a choice a person makes. It is a tax that can be avoided, or the burden of the tax can be shifted to another. If you choose to buy gasoline, you choose to pay the excise tax on each gallon of gas. You could, of course, choose to ride your bicycle and avoid the tax. You pay the indirect tax because of choices you make.
If you are a bus company, you have to pay this excise tax when you put fuel into the fuel tank of your bus. However, you pass on the cost of the tax by charging more for the bus tickets; and the customers of the bus company pay the tax “indirectly”. Again, this tax can be avoided if the bus patron chooses not to travel, or to travel by some other means. An indirect tax is also a tax on a privilege, like operating a business in a corporate form. One chooses to do business as a corporation, and in doing so, chooses to pay the tax levied on the government granted privilege of limited liability and indefinite corporate existence.
We refer to Adam Smith, author of Wealth of Nations (1776), to support our above definitions. Adam Smith began writing his timeless work in 1765. By the time the Constitution was written, in 1787, Wealth of Nations was in its sixth edition. Every one of the Framers of the Constitution was familiar with Smith’s work. Here is what Adam Smith, the eighteenth century guru of economics, had to say about direct and indirect taxes:
“The impossibility of taxing the people, in proportion to their revenue, by any capitation, seems to have given occasion to the invention of taxes upon consumable commodities. The state not knowing how to tax, directly and proportionally, the revenue of its subjects, endeavors to tax it indirectly by taxing their expense, which, it is supposed, will in most cases be nearly in proportion to their revenue. Their expense is taxed by taxing the consumable commodities upon which it is laid out.” Adam Smith, Wealth of Nations, book V, pg. 541 (Prometheus Books, Amherst, New York, 1991) (1776).
We also find the following Adam Smith quote in Wealth of Nations, “Capitation taxes, so far as they are levied upon the lower ranks of people, are direct taxes upon the wages of labor.” Adam Smith, Wealth of Nations, id. at pg. 540.
A Capitation tax is a tax on wages and salaries, so says Adam Smith. Such a tax must meet the constitutional requirement that it be apportioned among the people, such that each person pays the same amount of tax.
Any tax on wages or salaries, when that tax is paid by the paycheck’s recipient (and not by the employer) is a direct tax. In fact, it is a “capitation tax.” As such, the Constitution requires that such a tax be apportioned among the several States (see Art. I, sec. 2, cl. 3; and Art. I, sec. 9, cl. 4).
The Framers of the Constitution were so serious about this apportionment requirement for direct taxes; it is likely the United States would have never survived the Articles of Confederation without it. The great compromise that kept the 1787 Constitutional Convention from blowing apart was when the Framers traded the apportionment provision requirement on direct taxes for the provision that each state (including the small states) were to get two senators in the Senate. Consequently, we should honor what those men did in Philadelphia in 1787 by respecting this very constitutional requirement today.
Now you might think, “Doesn’t the Income Tax Amendment of 1913 (The Sixteenth Amendment) provide for an exception to the constitution’s apportionment requirement for direct taxes so that Obamacare can be funded by an income tax surcharge on our wages and salaries?” Well, that is what the parties on both sides of the case thought in Brushaber v. Union Pacific Railroad Co., 240 U.S. 1 (1916) and in Stanton v. Baltic Mining, 240 U.S. 103 (1916). These were the first two cases that litigated the newly imposed income tax after the “Income Tax Amendment” was added to the Constitution in 1913.
All the parties to these cases argued that the Sixteenth Amendment provided for a new tax, that being a direct tax that did not have to be apportioned, nor did it have to be subjected to any regulating constitutional rule. Thirty-five times in the Stanton Case, the argument was made that the Sixteenth Amendment provided an exception to the apportionment requirement for a direct income tax. A sampling of the Stanton arguments before the United States Supreme Court include:
“The Sixteenth Amendment authorizes direct taxes upon ‘incomes,’ but not upon capital or property. Income taxes may now be imposed without regard to apportionment among the States, according to their population.
All forms of direct taxation other than taxes on ‘incomes,’ clearly remain subject to the same constitutional limits as formerly.” Brief for Appellant at pg. 24, Stanton v. Baltic Mining Co., 240 U.S. 103 (1916).
“This is a direct tax on ‘net income,’ and nothing else can constitutionally be taxed directly, without apportionment.” id. at 36.
“The Sixteenth Amendment only authorizes direct taxes on ‘incomes.’” id. at 60.“All forms of direct taxation of real and personal property, other than income taxes, still require apportionment; otherwise they are unconstitutional.” id. at 139.
All this was rejected by the Supreme Court. In the Court's Opinion on the Stanton Case, they said:
“But aside from the obvious error of the proposition intrinsically considered, it manifestly disregards the fact that by the previous ruling [Brushaber] it was settled that the provisions of the Sixteenth Amendment conferred no new power of taxation but simply prohibited the previously complete and plenary power of income taxation possessed by Congress from the beginning from being taken out of the category of indirect taxation to which it inherently belonged and being placed in the category of direct taxation subject to apportionment by a consideration of the sources from which the income derived.” Stanton v. Baltic Mining Co., supra.
Unfortunately for tens of millions of Americans, the Supreme Court was very wordy in its Brushaber Opinion when covering this point. But the law commentaries were more clear. And here is what they said:
“In Brushaber v. Union Pac. R.R. Co., Mr. Chief Justice White, upholding the income tax imposed by the Tariff Act of 1913, construed the Amendment as a declaration that an income tax is ‘indirect,’ rather than as making an exception to the rule that direct taxes must be apportioned.” The Income Tax and the Sixteenth Amendment, 29 Harvard Law Review 536 (1915-6).
Cornell Law Quarterly simplifies what the Supreme Court said in Brushber:
“The contention of the appellant was as follows:
(1) The Sixteenth Amendment provided for a new kind of a direct tax, a tax on incomes from whatever source derived.
The court, through Chief Justice White, held that the tax [in Brushaber] was constitutional. The major proposition of the appellant’s argument is not true. Hence, the conclusion does not follow. The sixteenth amendment [sic] does not permit a direct tax, (in fact as it will later be shown, the court does not think that the amendment treated the tax as a direct tax at all), carrying with it the distinguishing characteristic of a hitherto unrecognized uniformity.
The amendment, the court said, judged by the purpose for which it was passed, does not treat income taxes as direct taxes but simply removed the ground which led to their being considered as such in the Pollock case, namely, the source of the income. Therefore, they are again to be classified in the class of indirect taxes to which they by nature belong.” Ramon Siaca, The Federal Income Tax Law of 1913: Construction of the Sixteenth Amendment, 1 Cornell Law Quarterly 298, 299 and 301 (1916).
In 1916, the New York Times wrote of the Brushaber Case:
“The basic error of those who attacked the constitutionality of the tax, Chief Justice White holds... was in regarding the Sixteenth Amendment as empowering the United States to levy a direct tax without apportionment among the States according to population. In substance, the court holds that the Sixteenth Amendment did not empower the Federal Government to levy a new tax....
‘We are of the opinion, however, that the confusion is not inherent, but rather arises from the conclusion that the Sixteenth Amendment provides for a hitherto unknown power of taxation: that is, a power to levy an income tax which, although direct should not be subject to the regulation of apportionment applicable to all other direct taxes.’” Income Tax Upheld In Broad Decision, New York Times, pg. 5, January 25, 1916.
Can we determine if the Supreme Court ruled correctly in the Brushaber and Stanton Cases? Yes we can; and yes the Court did rule correctly. The Court had no choice, as the legislative history is clear.
When the Income Tax Amendment was being debated in Congress, the debate started in the Senate and there were several versions of it proposed. One of the later versions was Senate Joint Resolution #39, which read:
“The Congress shall have power to lay and collect direct [author’s emphasis] taxes on incomes without apportionment among the several States according to population.” 44 Cong. Rec. 3377 (1909).
When this language was proposed on the Senate floor, the debate fizzled for the reason that Congress did not want to allow for any unapportioned direct tax. Immediately after S.J.R. #39 was first proposed, the next comment by Senator McLaurin was:
“I think if the Senator from Nebraska will change his amendment to the Constitution so as to strike out the words ‘and direct taxes’ in clause 3, section 2, of the Constitution, and also to strike out the words ‘or other direct’ in clause 4 of section 9 of the Constitution, he will accomplish all that his amendment proposes to accomplish and not make a constitutional amendment for the enacting of a single act of legislation.” id. at 3377.
When S.J.R. #39 was replaced by S.J.R. #40, which ultimately became the Sixteenth Amendment, the language of the two proposals was nearly identical. However, there was on very significant change in that the word “direct” was dropped when #39 morphed into #40. Clearly, the Congress did not want to allow for an unapportioned direct tax.
Not only did S.J.R. #39 fizzle during debate, but it was actually voted on July 5, 1909, just prior to the vote on S.J. R. #40, which later became the Sixteenth Amendment. And with that vote Senate Joint Resolution #39 was rejected by the Senate for a second time. In other words, the Senate had the opportunity to create an unapportioned direct tax directly before it, and choose to reject this option. When the legislative branch of government rejects a provision, the executive branch cannot later implement it.
“It is plain, then, that Congress had this question presented to its attention in a most precise form. It had the issue clearly drawn. The first alternative was rejected. All difficulties of construction vanish if we are willing to give to the words, deliberately adopted, their natural meaning.” U.S. v. Pfitsch, 256 U.S. 547, 552 (1921).
Income taxes on wages and salaries are direct taxes that must be apportioned when levied in the several States. Income taxes on investment income, corporate dividends, bond interest and any other privileged income are indirect taxes and must be levied uniformly throughout the United States. All direct taxes must be apportioned. All indirect taxes must be uniformly levied. There are no exceptions. Please realize that the “several States” are only a subset of the “United States.”
The conclusion is obvious. Any income tax surcharge on our wages and salaries constitutes an unapportioned direct tax not allowed by our Constitution. But wait a minute, is the surcharge any different than the underlying income tax on wages and salaries that Americans have been paying since World War II? No it isn’t. The Obamacare income tax surcharge and the underlying income tax on wages and salaries are both unapportioned direct taxes and are both unconstitutional.
Ah, but there are some narrow exceptions to my above blanket statement. The apportionment rule reads: “No capitation, or other direct, tax shall be laid, unless in proportion to the census or enumeration hereinbefore directed to be taken.” Art. I, sec. 9, cl. 4. And notice that it only applies to the “several States”. It does not apply to the territories, possessions and districts under the exclusive jurisdiction of the United States. In fact, our Constitution allows Congress to act as a dictator in these areas. (See Article 5 “Needful rules.”) Therefore, any unapportioned direct tax levied in the territories, possessions and districts is quite constitutional.
There is one other exception to my conclusion, and that is for a person employed by the federal government who works and or lives in the several States. The federal government can, if it wants to, declare that working for the federal government is a privilege. Then, the federal government can tax that privilege with an indirect tax. This tax is avoidable because one can choose to not work for the federal government and avoid the tax. It is a tax on a verb.
But outside of these two narrow exceptions, there is no authorization for an unapportioned direct tax on Americans living and working for private sector companies within the several States.
How did we get to where we are today? Today’s tax system is a result of the almost complete ignorance among the American People as to what taxes the Constitution allows, and what taxes are constitutionally unauthorized. In today’s national debate on the Fair Tax, on the Flat Tax, on a national sales tax, there is zero debate on what type of taxes we are talking about, “direct taxes” or “indirect taxes”? I personally find it eerie that there is no debate as to what taxes are allowed by the Constitution. Have we lost our way? Upon what point do we use to zero our compass?
“The purpose of the income tax was to bring tax relief to wage earners.” The Peoples’ Income Tax Guide, “Brown’s Agenda: Tax Relief for Wage Earners.”
The first income tax statute was passed as part of the Underwood/Simmons Tariff Act on October 3, 1913. As it was the purpose of the income tax to bring tax relief to wage earners, the Underwood/Simmons Tariff Act imposed the lowest tariffs since the civil war while creating the first modern income tax authorized by the Sixteenth Amendment. However with the Sixteenth Amendment’s vague language the fix was in to grow the income tax into something much more massive that would be coupled to the Federal Reserve System, which was also passed by Congress on December 23, 1913. Today the income tax is used to harvest money out of the economy so that the debt creation/money creation machinery of the Federal Reserve System can run faster without creating massive inflation.
Up until recently there was no interest in the Federal Reserve banking system. And all legislation and arguments to address that issue fell on deft ears. Today we have House Bill 1207 by Congressman Ron Paul of Texas to audit the Federal Reserve Bank that has 311 co-sponsors. What has made the difference on this issue? How have we gone from silence about the Federal Reserve to having it be an issue that is at the forefront of political debate? What happened was the American people have become educated on the nature of the FED. Next the American people got activistic over the private Federal Reserve scam. We even have End the Fed rallies. And now the American people are demanding Federal Reserve accountability and transparency, and Congress is listening.
The same thing can happen with Obamacare and the income tax. As long as most lawyers in America, most judges, most members of Congress and nearly every Citizen is 100 percent ignorant as to what taxes are allowed by the Constitution, the federal bureaucracy will get away with their unconstitutional fleecing of the flock. However, if enough Americans do their homework and take on the individual responsibility of self-government and understand what is going on all around them, we just might have a shot of returning to a constitutional taxation system.
If you want Obamacare, stay ignorant. On the other hand, if you want to have free market choices in healthcare, study the citations provided in this article, read my book Constitutional Income, constitutionalincome.com Educate yourself and your neighbors, and most importantly, educate your Congressman. You might even consider running for office. Then you can be the one who votes constitutionally 100 percent of the time. Obamacare will fizzle only if enough Americans resist it.