During the heat of the Civil War, Congress passed and implemented a new excise, the Income Tax of 1862, a tax on:
“all salaries of officers, or payments to persons in the civil, military, naval, or other employment or Service of the United States, including senators and representatives and delegates in Congress, when exceeding the rate of six hundred dollars per annum, a duty of three per centum”,
(The war also stimulated a substantial widening of the subjects and rates of other, more traditional excises).
Enforcement of this tax and several others implemented during the war was relaxed in 1872 and the national government relied thereafter on tariffs for revenue until 1894. In that year, congress attempted to impose an income tax upon receipts which, though the benefits of federal privilege, were also connected with personal property. The tax was promptly declared by the Supreme Court to be unconstitutional in Pollock v. Farmers Loan & Trust (158 U.S. 601). The court reasoned that a tax on income connected with personal property amounted to a tax on the property itself, even while distinguishing between the two things, saying,
”Ordinarily, all taxes paid primarily by persons who can shift the burden upon some one else, or who are under no legal compulsion to pay them, are considered indirect taxes; but a tax upon property holders in respect of their estates, whether real or personal, or of the income yielded by such estates, and the payment of which cannot be avoided, are direct taxes….” and, “The power to tax real and personal property and the income from both, there being an apportionment, is conceded: that such a tax is a direct tax in the meaning of the Constitution has not been, and, in our judgment, cannot be successfully denied: ..."
In response to the Pollock ruling, the 16th amendment was declared ratified in 1913, requiring that a tax on income was not to be construed as an unconstitutional direct tax due to viewing the income as inseparable from its source, as the Pollock court had done. All direct taxes were still required to be apportioned-- any tax on income could only be constructed and enforced as an excise, an indirect tax. This distinction is spelled out by the high court in its 1916 Brushaber v. Union Pacific R. Co., (240 U.S. 1) ruling:
"We are of opinion, however, that the confusion is not inherent, but rather arises from the conclusion that the 16th 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. And the far-reaching effect of this erroneous assumption will be made clear...".
The court notes that the 16th did not repeal or modify Article 1, Section 9, and that an absolute prohibition of unapportioned capitations remains the law of the land. Congress is free to tax ‘incomes’, but what those are held to be, and the manner in which they can legally be taxed, must conform to the prohibition. As the court says, taxation on income is,
“… in its nature an excise entitled to be enforced as such unless and until it was concluded that to enforce it would amount to accomplishing the result which the requirement as to apportionment of direct taxation was adopted to prevent, in which case the duty would arise to disregard form and consider substance alone, and hence subject the tax to the regulation as to apportionment which otherwise as an excise would not apply to it”
Distilling Chief Justice White’s run-on sentence down to manageable form, we read: If a tax on ‘incomes’ amounts to or evolves into a capitation or other direct tax (by, for instance, mis-defining ‘income’ as including personal property, or other things a tax on which would naturally be direct), it’s still unconstitutional unless apportioned. PH
