Chapter 1: Constitutional Taxation
"On every question of the construction of the Constitution, let us carry ourselves back to the time when the Constitution was adopted, recollect the spirit manifested in the debates, and instead of trying what meaning may be squeezed out of the text, or invented against it, conform to the probable one in which it was passed." -- Thomas Jefferson, Letter to William Johnson, Supreme Court Justice, 1823
The issue of income taxes is a complicated one. Those who levy and collect this tax have purposely made it complex in order that the masses will be unable to comprehend just how the tax code works. The purpose of this book is to raise the awareness of the American People on the income tax issue so that the People will be better equipped to keep the government within its constitutional boundaries with respect to its powers of taxation.
The best way to start this task is to state the conclusions of this book in Chapter 1. This way readers will know what to look for as they read the material and will have a clearer understanding of the government's taxation authority.
By the end of this book you will realize that the purpose of the Sixteenth Amendment was to bring tax relief to wage earners.
The title of this book is Constitutional Income: Do You Have Any? Why is it necessary to understand what the term "constitutional income" means? It is necessary because there are various types of "income."
This book is primarily concerned with two: "constitutional income" and "statutory taxable income." These are not always the same. "Statutory taxable income" is whatever the legislature says it is. On the other hand, "constitutional income" means what We the People say it means. Any word or term used in the Constitution has the meaning the People intended that word or term to mean at the time the Constitution was ratified. Or, in the case of an amendment to the Constitution, we use the words therein as the American People understood them to mean at the time the amendment was ratified by the several States. In this book we are concerned with what the word "income" means within the context of the 16th Amendment. So, naturally we will want to know what the People understood that word to mean at the time the 16th Amendment was ratified.
To understand what the meaning of the word "income" is, we must examine the history of income taxes in America prior to the ratification of the 16th Amendment. This history has a legislative/political component and a judicial component in addition to its common meaning in everyday speech We must also remember that our Constitution is unique to this country. The way in which taxes are levied under our Constitution depends upon whether the tax is a "direct tax" or an "indirect tax." How other countries levy an income tax is immaterial to America; they aren't bound by our Constitution.
According to our federal Constitution, direct taxes must be apportioned among the several States, and indirect taxes must be uniform throughout the United States.
As we go through the history of income taxation in America, we will develop a test to determine whether a tax is a direct tax or an indirect tax. In America, such a test is necessary to determine the appropriate way any tax is to be levied. Does a tax have to be uniform throughout the United States? Or, does it have to be apportioned among the several States? In creating this test, we can only function as researchers. This, too, is all the Supreme Court can do on the issue. For it is the People, at the time of the ratification of the Constitution and the 16th Amendment, who have already made the determination on what the terms "income" and "direct tax" mean. Our job is to discover what this is.
The law is based upon words. If words were to have variable meanings, then it would be impossible to have the "rule of law;" instead we would have the "rule of men." Those who ordered what the words meant would rule. Some words have a tendency to change meaning over time and generations, but the meanings of words used in law need to have consistent definitions, otherwise we have evolutionary law. Such law benefits only tyrants at the expense of the citizenry.
Moreover, for the purposes of any given law, the words used therein can be, and often are, defined strictly for the purposes of that particular law. Words written by lawyers can, and often are, subtle and sophisticated in their peculiar meaning. We might call this "wordsmithing."
"Wordsmithing" occurs when, for the purpose of a statute, words, or groups of words known as "terms," are given unique meanings that apply only to that particular statute. Usually these words or terms are commonly used in everyday speech. Their use in a statute can have a meaning different than that normally associated with the word or term when used by non-lawyers. For example, the familiar term "United States" has approximately 450 different and unique definitions within the entire body of state and federal law. Now that you know this, never assume you know what the term "United States" means when you see it used in a statute or on a government form.
Definitions, therefore, are extremely important in determining whether or not you have "constitutional income." As the Congressional Record reflects:
"[W]e have tolerantly permitted the habitual misuse of words to serve as a vehicle to abandon our foundations and goals." House Congressional Record, June 13, 1967, pg. 15641.
To understand this book, you'll need to know at least three definitions. These are the definitions for "direct tax," "indirect tax," and "apportionment." You should also realize from the beginning that there are many species of income taxes. Not all income taxes belong in the same pigeon hole. Failure to place the various types of income taxes in their appropriate pigeon holes will cause confusion.
"The Supreme Court of the United States has thus held that certain kinds of income taxes are indirect, that certain other kinds of income taxes are direct, and that still other kinds of income taxes are invalid, irrespective of whether they are direct or indirect." Edwin R.A. Seligman, The Income Tax Amendment, 25 Political Science Quarterly 193, 197 (1910).
The basic premise of this book is as follows:
- The 16th Amendment created no new classification of taxes under the Constitution, and we are therefore still left only with direct and indirect taxes.
- The 16th Amendment provides taxation authority only for income taxes that are inherently indirect. Such taxes must be levied according to the constitutional rule of uniformity.
- The 16th Amendment does not provide an exception to the constitutional rule of apportionment for direct taxes.
- Any income tax which is inherently a direct tax is outside (without) the scope of the 16th Amendment, and therefore must be apportioned among the several States according to population.
- Income taxes on wages and salaries are direct taxes and must be apportioned among the several States.
The taxation clauses of the United States Constitution provide:
"Representatives and direct taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers of free Persons, including those bound to Service for a Term of Years, and excluding Indians not taxed, three fifths of all other Persons." Article 1, Section 2, Clause 3.
"The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense and general welfare of the United States; but all Duties, Imposts, and Excises shall be uniform throughout the United States." Article 1, Section 8, Clause 1.
"No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken....No Tax or Duty shall be laid on Articles exported from any State." Article 1, Section 9, Clauses 4 and 5.
"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." 16th Amendment.
The taxation authority of Congress is plenary. This means it is total and complete, able to reach any article or person with its taxing power. It has been this way from the beginning, that is from 1789 when the Constitution was ratified. However, there is one exception: Congress cannot tax exports.
When levying any tax, Congress must follow one of two rules. The first rule is that direct taxes must be apportioned among the several States according to population. This means that Congress will determine the total amount of tax they want to collect. Next, Congress will divide up the amount of the tax due among the states in such a way that each citizen will have to pay the same dollar amount of the tax. In other words, the tax will be apportioned according to population. The states would actually be responsible for collecting the money for Congress. The states then collect the tax from the citizens of the state. It would be up to the states to determine how to collect the tax and/or what to levy. There would be no direct contact between the citizen and the national government. Only if the states failed to perform would the federal government step in and collect the tax. This is how "apportionment" was meant to work.
The term "indirect tax" does not actually appear in the Constitution. You might say it means "any tax that is not direct." For after all, there are only two types of taxes: "direct taxes" and "indirect taxes." It is similar to, "You're either pregnant or you're not."
Indirect taxes are "Duties, Imposts, and Excises." Duties and imposts are tariffs collected on the importation of goods into our country. Sometimes a duty is a "required action," like payment of a stamp duty. Of duties, imposts and excises taxes, the Supreme Court said in the case of Flint v. Stone Tracy Company that:
"Duties and imposts are terms commonly applied to levies made by governments on the importation or exportation of commodities. Excise taxes are those laid upon the manufacture, sale or consumption of commodities within the country, upon licenses to pursue certain occupations, and upon corporate privileges." Flint v. Stone Tracy Co., 220 U.S. 107, 151 {1910).
Indirect taxes can be avoided or passed on. No one has to pay an indirect tax if they don't want to. Indirect taxes are therefore voluntary. Hence the word "indirect."
The tax on a pack of cigarettes is an avoidable excise tax. You can choose not to smoke and avoid the tax. Or you can grow your own tobacco for your own personal use and avoid the tax. The excise tax on tires is avoidable. So is the excise tax on gasoline. You can choose to ride your bicycle. If you are a bus company, you have to pay the excise tax on both tires and gasoline, but you pass this cost onto the patrons who ride your bus in the form of higher ticket prices. You, therefore, are not the ultimate payer of the excise tax, your patrons paid it indirectly.
A direct tax cannot be avoided. It cannot be passed on. If you owe it, you pay it. There is nothing you do that causes you to owe the tax. For example, if you get a license to manufacture alcohol, you pay an excise tax on this privilege. You pay this tax because you made the choice to get into this business. You could choose to do something else for a living and avoid the tax. There are no choices you make which causes you to owe a direct tax. You must pay a direct tax for the simple reason that you exist and the tax is levied on you. A direct tax is direct,
"Any tax when placed on the right of the man... to live is a capitation tax and as direct as any tax can be." Brief for appellant, Flint v. Stone Tracy Co., 220 U.S. 107, 119 (1910).
One example of a direct tax is a tax on land because of ownership. The government levies the tax on the land solely because the land exists. It is immaterial what the land is used for, whether or not the land is economically productive, or who owns it. The tax is on the land and the owner of the land pays the tax.
There are a variety of direct taxes as the framers of the Constitution used the phrase "or other direct," when identifying the apportionment rule. It is worth noting that the requirement to apportion direct taxes is the only provision mentioned twice in the Constitution. The framers obviously understood the inherent appetite government had for revenue.
The framers also well understood the difference between an indirect tax and a direct tax. A reading of the congressional debates over the taxation issue from 1796 to 1798 will reveal much dialog on the issue. The nature of direct or indirect taxes was not debated, but only which of the two was the more desirable.
"History, Mr. Williams said, informed them of the annihilation of nations by means of direct taxation. He referred gentlemen to the situation of the Roman Empire in its innocence, and asked them whether they had any direct taxes? No. Indirect taxes and taxes upon luxuries and spices from the Indies were their sources of revenue; but, as soon as they changed their system to direct taxation, it operated to their ruin; their children were sold as slaves, and the Empire fell from its splendor. Shall we then follow this system? He trusted not." Annuals of Congress, 4th Congress, 2nd Session, pg. 1898 (Jan. 1797).
Professor Seligman of Columbia University, quoted on page 4, was right when he said that some income taxes were direct and some income taxes were indirect. There is a boundary line which separates the two, An indirect income tax is either a tax on a privilege, measured by income, or it is a tax on unearned income or profit which diminishes only the income and leaves the source of the income whole.
An income tax levied on the privilege of doing business in a corporate form is an indirect tax. Such a tax may be measured by either gross income or net income. The tax is on the privilege and the amount of the income is used to measure the amount of tax due. An income tax that diminishes only the income and leaves the source whole takes its bite out of only the severable income and does not touch the underlying capital. For example, a tax on the interest income from a savings account diminishes only the interest and does not touch the original principle.
A direct income tax is a tax on gross income that can not be placed on any privilege. If a man works and only makes enough money to barely meet his needs and the needs of his family, any tax on his wage or salary is a direct tax. Since the tax makes it more difficult for the man to feed, clothe and shelter his family, the tax is therefore a direct tax. The man is diminished by the tax. The tax is on the man's right to exist as it makes his existence more difficult. It is not a tax he can avoid or pass on to someone else. Adam Smith wrote that taxes on the revenue of the people are capitation taxes.
Congress is still bound by these constitutional provisions when levying taxes. Not until the Constitution is further amended, or the Nation is conquered by a foreign foe, can these rules be ignored. We will see how, through slight of hand and clever "wordsmithing" of statutes, Congress has done something they are otherwise not permitted to do. Even though the courts have repeatedly determined that substance rules over form, the bureaucracy excels at collecting a tax it is not permitted by the Constitution to collect.
Although the effect of the income taxation statutes are far removed from what the American People intended when they ratified the 16th Amendment, the statutes themselves are constitutional. They just don't mean what you and I think they mean in a simple reading of them. Years ago the Wall Street Journal claimed it took someone with the intelligence of a triple PhD. to understand the Internal Revenue Code in a first reading of it. Let's not kid ourselves; we're not free if our liberty and property are at risk because of such a complex and convoluted law.
This book presents the income tax issue without going into the statutes and regulations. These being so complex, it is nearly an endless task to unravel them in order to actually determine who and what is being taxed. Instead, this book looks at the question from a constitutional standpoint. We will determine what is permitted by the Constitution and what is not in so far as the taxation of "incomes" is concerned.
The conclusions drawn by this book are supportive of what other researchers are discovering as they unravel the statutes and regulations. That being that the income tax is an excise tax on activities and privileges. It is an indirect tax. Please realize that having "passive income" is a privilege one enjoys due to the existence of civil government. Having "earned income" is not a benefit of civil government. You would have it even if civil government didn't exist. The statutes, regulations and internal IRS documentation support this conclusion.
If you are still not clear on what the meanings of "direct tax," "indirect tax" and "apportionment" are, reread this chapter or consult the glossary. However, be careful as to what you read elsewhere about the definition of "direct tax." There is some misinformation out there. You won't fully benefit from the rest of the book unless you understand these terms.
We will also see that there is no foundation for the government's position that the word "income," as used in the 16th Amendment, includes the wages and salaries of an American working in the private sector and living in the several States of the Union. The government's position is based on the Supreme Court's statement in the Eisner v. Macomber Case where the court said:
"Income may be defined as the gain derived from capital, from labor, or from both combined." Eisner v. Macomber, 252 U.S. 189,206 (1919).
The Eisner Case was a stock dividend case; that is a stock from a corporation. It relied on two other cases for this statement, that of Stratton's Independence v. Howbert, 231 U.S. 399 and Doyle v. Mitchell Bros. Co., 247 U. S, 179. These latter two cases were cases relating to corporations. An examination of the court's Transcript of Record for these three cases will show that there is no foundation to the government's position that the Supreme Court determined that wages and salaries equal income. That a corporation may derive income from labor as it utilizes labor in pursuit of profits is entirely correct. But, to say that income may be derived from labor is entirely different than saying that labor equals income. The question has never been directly before the Supreme Court.
In examining the history of the debate and ratification of the 16th Amendment, we will also see that there is no evidence upon which the government can rely for their claim that the American People desired to have their wages and salaries taxed. No evidence can be found in the law journals of the time, not in the journals on political economy or economics, not in the Congressional Record, nor in any of the newspapers of record of the time. In other words, the government's position that wages and salaries equals income within the meaning of the 16th Amendment is "wholly without foundation."
Wages and salaries will be "income" within the constitutional meaning of the term only when We the People determine this to be so.
Today our politicians justify America's involvement with the "peacekeeping" efforts of the New World Order when they tell us we must make the world safe for democracy. But when was there ever a democratic process whereby the American People determined that they wanted their wages and salaries taxed? Where is the evidence that proves that the American People lobbied Congress and their state legislatures demanding there be levied a constitutionally direct tax on their wages in lieu of an indirect tax on their consumption? The historical record is void of any evidence that such a democratic process ever took place. It was never the intention of the American People that the 16th Amendment would confer the power upon Congress that the bureaucracy says it has. There is no evidence to support this contention. We are therefore the world's biggest hypocrite as our government takes one-third of the earned income of the American People without our consent while promoting democracy throughout the rest of the world.
Although this argument has been around for some time, it has never been substantiated by the information and evidence presented in this book. The remaining chapters will prove the assertions made in this first chapter.
