The current administration has placed a heavy emphasis on both cutting the overall tax burden and on redistributing the burden so that percentage that those with large incomes pay is not as much higher than the percentage that those with small incomes pay. I thought it might be helpful, since these issues come up on the forums quite often, to have a basic primer on the issues involved in redistributing the tax burden, as well as on some of the mechanics of taxation, since it can be a bit complicated and the media doesn’t always do a great job of explaining things.
This first installment is mainly background: how we got our income tax and what restrictions are placed on it by the constitution. It is not meant to be a comprehensive guide, but merely an overview. Future installments will discuss how taxes actually work, and the issues involved in progressive taxation and redistribution of income.
What gave the government the power to take our money in the first place?
Our founding fathers, recognizing that our government would need some way to pay for itself, gave Congress extremely broad powers to levy taxes. Article I, section 8 of the Constitution provides that “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.”
Thus the power of Congress to collect tax was limited in its scope only to the requirement that they be used to provide for the common defense and general welfare (a phrase whose interpretation is often disputed). The manner in which Congress could levy taxes, however, had substantial limits. First, all taxes were required to be uniform throughout the United States. In other words, Congress couldn’t create different rates for citizens of different states. Second, Article I, Section 9 provides that “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census of Enumeration herein before directed to be taken.” That is, “direct taxes” such as taxes on real or personal property (or, at the time, slaves) could only be levied on the basis of state population, and not on the basis of income. Other forms of taxation had no such limitation.
In the late 19th century, the Supreme Court ruled income taxation unconstitutional for the reason that part of income is derived from property, making it a “direct tax.” This came despite an earlier ruling upholding an income tax during the Civil War. For a short period after this, the Court issued a series of rather conflicted rulings regarding whether or not certain types of taxes were “direct” or not. This resulted in the corporate income tax being considered constitutional, even though an individual income tax was not. There was speculation that the Court was on its way to reversing its ruling that income tax was unconstitutional. The distinction between “direct” and other taxes was eliminated, rendering the issue moot, however, when the 16th amendment was passed, giving Congress the 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.” The 16th amendment strengthened Congress’s already substantial taxation powers, eliminating restrictions on the manner of taxation (although retaining the requirements that taxes be uniform throughout the United States).
What can the government use our money for?
As noted above, Congress has the power “[t]o 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.” There has been some dispute as to the scope of the term “general welfare.” Some (most notably James Madison) have argued that “general Welfare” was limited to those powers explicitly granted to Congress by other sections of the Constitution, so that the tax power is simply the manner by which Congress can fund the activities that it is expressly authorized to engage in by the Constitution. Others (including Alexander Hamilton) have argued that “general welfare” can be interpreted literally, and that Congress has the power to tax and spend as long as it does so to promote the general welfare. This latter view has won out in the courts, and debate on the subject has completely ended, at least as a legal matter. The debate over how taxes should be used remains very much alive as a policy matter, however, with some advocating the use of tax funds on social programs that ostensibly promote the general welfare, and others advocating limiting taxation primarily to providing for the common defense, with very provision for non-defense-related general welfare.
Comments
m0zart
The "income tax" amendment passed in the early part of the 20th century was passed partially to justify an income tax to fund the newly encroaching efforts in World War I, most admittedly agreeing to approve the amendment with the idea that it would be a temporary undertaking, and cap at 1% of income. We all know where that led. It was understood that most SC justices at the time had recognized the improper ruling of the court in the time of the civil war, and were at best, very unlikely to rule in favor of it for yet another war without an explicit amendment.
Of course all this is moot. The "Income Tax" amendment was passed, and though there is some controversy regarding the manner in which it was passed, SCOTUS has since ruled that the improprieties are not enough to invalidate the amendment. So ... punishment for productivity is here to stay, like it or not.
Of course, I'd like at least a satisfying answer (and the ethics behind that answer) to the first question: "What gave the government the power to take our money in the first place?" Its not enough to suggest that a group of people got together, and for better or worse, decided that what would normally be theft really wasn't theft anymore, and that punishments that could be levied against a particular class of property owner wasn't in fact a class disctinction of its own. There's more to this (and very well SHOULD BE more to this) than reading a few empty lines from a document that of all things justified the enslavement of men by men. That in itself implies an almost hidden motive to the nature of the Government it pretended to establish for the "common good".