More Evidence That "Direct Taxes" Include Levies on Wealth and Income

Another guest post from Professor Rob Natelson

[I am happy to post this follow-up essay from Professor Rob Natelson].

My July 12 entry provided links to Founding-era sources showing that the Constitution's category of "direct taxes" included levies on all kinds of wealth and on business profits and income. Direct taxes were not, as often claimed, limited to capitations and real property levies. Nor were they limited to taxes on "persons and property," as stated in the Supreme Court's opinion last month in Moore v. United States.

This post supplements the entry of July 12. Below you will find (1) citations to the four ratification-era comments mentioned in the earlier entry, (2) several additional ratification-era comments, with citations, and (3) links to more pre-Founding-era and Founding-era direct tax statutes.

If you manage to get to the end of this post, I think you will agree: In light of the evidence, it is astounding that confusion over the Constitution's categories of direct and indirect taxes still persists.

Four Ratification-Era Remarks

The July 12 essay listed four comments by participants in the 1787-90 constitutional debates showing that direct taxes included levies on personal property, business profits, and income. I'll provide the citations here, so you can examine them for yourself. They are in the form "14 DH 424." This means "Volume 14 of the Documentary History of the Ratification of the Constitution, page 424." An electronic version of the Documentary History is available at this link.

The comment by John Marshall at the Virginia ratifying convention stating that the contours of direct taxes were "well understood" and listing some covered items of personalty is at 9 DH 1122-23. The comment from the "Address and Reasons of Dissent of the Minority of the Convention of the State of Pennsylvania" (listing land, cattle, trades and occupations) is at 2 DH 636. The pertinent discussion by Oliver Ellsworth (including business tools and family utensils within the scope of direct taxes) is found at 3 DH 549. The description of direct taxes by the "Federal Farmer" (including "labour, &c.") is located at 17 DH 294.

More Ratification-Era Remarks

Patrick Henry at the Virginia ratifying convention identified the subjects of direct taxes as "lands, tenements, and other property" (emphasis added). 10 DH 1464. The Virginia writer known as "A Freeholder" distinguished direct taxes from duties and listed among the subjects of direct taxation "doctors, lawyers, clerks, wheel carriages, and on lots in town." 9 DH 724. As mentioned in the July 12 post, the reference to "doctors, lawyers, clerks" refers to direct "faculty taxes," usually tied to income.

The New York Antifederalist "Brutus" listed as objects of direct taxation polls, land, houses, buildings, windows, fireplaces, cattle and "all kinds of personal property." 14 DH 424.

In Maryland, William Paca proposed an amendment to the Constitution specifying that "Congress shall not impose direct taxes on land or other property." 17 DH 241.

At the first North Carolina ratifying convention on July 26, 1788,  Samuel Spencer asked "How are direct taxes to be laid? By a poll-tax, assessments on land or other property?" 30 DH 296.

It appears that James Madison believed even postal charges were form of direct tax. See The Federalist No. 39, 15 DH 403, 406. I think, however, that most people would have considered them a species of indirect tax ("duty").

There are other examples from the ratification record, but those should be sufficient: Americans understood that direct taxes comprehended far more than capitations and land levies.

18th Century Direct Tax Statutes

The July 12 post provided links to 18th century direct tax statutes from Great Britain (1713), Massachusetts (1780), Connecticut (1777), New Hampshire (1788), and South Carolina (1788). The South Carolina statute taxed realty and some items of personalty. The others included realty and personalty, but added various combinations of business profits and income.

Now let's examine the prototype British direct tax law and four additional American statutes.

The Granddaddy of them All

The prototype for American direct tax statutes was the British Parliament's misnamed "Land Tax," first enacted in 1692. It was misnamed because it covered far more than land. A copy of the 1692 Land Tax Law, found in the British Statute at Large, is at this link.

Notice that the subjects of the tax included all items of personal property other than those excepted. They also encompassed income from many different sources, including but not limited to, public offices, mines, iron works, and parks. I was surprised to see that the text of the statute listed these items even before addressing the taxation of land.

The Land Tax Law was amended from time to time. Here is how Ephraim Chambers' Cyclopaedia described its configuration in 1778:

. . . from the year 1693 to the present, the land-tax has continued an annual charge upon the subject . . . The method of raising it is by charging a particular sum upon each county, according to the valuation of 1692; and this sum is assessed and raised upon the personal as well as the real estates of individuals . . . the assessment on personal estates shall be 4 s. [i.e., four shillings] in the pound, according to the true yearly value of them; i.e., for every 100l. [i.e., £100] of ready money and debts, and for every 100l. worth of goods, 20 s. . . . and excepting stock upon lands and household stuff, and debts and loans owing to his majesty. Every person having a public office or employment, and their substitutes, shall pay 4 s. for every 20 s. of their salaries . . . Every person having an annuity or pension out of the exchequer, or out of any branch of the revenue shall pay 4 s. for every 20 s. except salaries charged upon lands which pay to the full, and annuities exempted by act of parliament . . . .

Thus, not merely real estate, but cash, accounts receivable,  other personal property, and income were subjects of direct taxation. The provision taxing rental income added a withholding requirement: "The land-tax shall be paid by the tenant, who shall deduct it out of his rent."

Additional American Direct Tax Statutes

The statement of the Pennsylvania dissenters (mentioned above) as to the scope of direct taxes ("land, cattle, trades, occupations, etc.") is supported by a 1781 direct tax statute from that state, linked here. Besides assessing a wide range of real and personal property, it included "all offices and posts of profit" and "all professions, trades and occupations." These categories effectively rendered it an income tax.

When Justice Samuel Chase opined in Hylton v. United States (1796) that direct taxes included only levies on heads and land, he should have known better. Although his home state of Maryland had relied mostly on capitations during the colonial era, after Independence it moved to direct taxes on property of all descriptions, with specified exceptions. Here is a link to a 1782 Maryland direct tax statute.

It is not clear why Chase was so mistaken. His guarded language ("I am inclined to think, but of this I do not give a judicial opinion") suggests he was merely guessing. Or his dictum may have been a product of his notorious pro-Federalist partisanship—partisanship that ultimately led to his impeachment, although not removal.

Here is a link to a New York statute passed in 1788 and effective in 1789, which requires Assessors to examine the "Value of the real and personal Estate" of every inhabitant of their district for taxation purposes. Like most other direct tax statutes—and like the Constitution itself—it provides for apportionment of revenue among political subdivisions.

Parting Comments

First: A point of vocabulary. As observed in my 2015 article on the subject, Americans used the term "duty" to mean any exaction other than a direct tax. The British usage of the word was broader, and could include direct taxes.

Second: In Hylton, Justice Chase suggested that capitations were imposed equally on all persons. In NFIB v. Sebelius (the 2012 case upholding the Affordable Care Act's health insurance mandate), the court was misled by Chase's comment. In writing for the Court, Chief Justice John Roberts stated:

"Capitations are taxes paid by every person, 'without regard to property, profession, or any other circumstance.' Hylton, supra, at 175 (opinion of Chase, J.) (emphasis altered)."

My July 12 post corrected the misconception. In fact, capitations frequently were adjusted for wealth, status, sex, and other factors. Linked here is a 1733 Delaware capitation law providing for such adjustment.

Like Maryland, after Independence Delaware moved away from capitations toward direct taxes on property. Delaware's 1796 tax overhaul measure is linked here.

####

Rob Natelson is senior fellow in constitutional jurisprudence at the Independence Institute in Denver and a former constitutional law professor at the University of Montana. He is the author of "The Original Constitution: What It Actually Said and Meant" (3rd ed., 2015) and a contributor to the Heritage Foundation's "Heritage Guide to the Constitution." A more thorough examination of this subject is at Robert G. Natelson, What the Constitution Means by "Duties, Imposts, and Excises"—and Taxes (Direct or Otherwise), 66 Case Western Res. L. Rev. 297 (2015).

Comments

[ReaderY]

When someone takes an issue that people have debated over a lot and says everything is obvious and crystal clear, I get suspicious. I start getting concerned not about the evidence the person is presenting, but the evidence the person is omitting.

Is it just possible that the evidence is being cherry-picked so only contemporaneous statements etc. that favor the “clear” position being advocated are shown, and all the statements and other evidence that don’t favor it are omitted?

If one is sufficiently selective, anything can be made to look clear.

If a scholar has a track record of taking a careful and neutral overall look at things, being careful not to take an initial position without conducting significant research and thought, is careful to present and discuss evidence favoring a different position, and sometimes acknowledges that more evidence requires reversing an earlier position, my suspicions can be overcome and trust can be achieved.

But do we have that here?

[Krayt]

In a land of wealth and plenty, as technology marches on, life gets better and better, and hence government should need to do less and less. But it does more and more because it can get away with taxing and borrowing more and more because the economy generates more.

But that isn’t enough currently. And the borrowing is out of control. A magically balanced budget is immediately and deliberately unbalanced because more can be borrowed, and hence spent, purchasing votes, for later wielding of power for corruption, or whatever. Skip that last bit if it bothers you. You are insane, given human history and the surface of the Earth.

Now they want to just start seizing property of The People, and their investments. This flies in the face of why an income tax amendment was needed (it would be curious if one was needed for income, i.e. profits from sales, among other things) but not pre-sale value increase. And seizure of property without market compensation suddenly appearing makes a joke of the 5th amendment.

Say no to weasels.

[jb]

Taxing property and seizing property are not the same thing (obviously one can lead to the other if you don't actually pay your taxes, but equating the two is like saying that a mortgage lien is theft). As evidence: localities don't need to provide compensation for property taxes, which everyone agrees are constitutional since they don't need to worry about whether they're direct or indirect taxes.

[Magister]

In a land of wealth and plenty, as technology marches on, life gets better and better, and hence government should need to do less and less.

The conclusion after "hence" does not follow from the premises, even ignoring the portion of life getting better that only results from government doing more.

[Dan Schiavetta]

+1

[Rev. Arthur L. Kirkland]

That is a magnificent observation.

(It is conceivable that an against-the-grain proposition from a wild-eyed, lone fringer with sketchy associations can be vindicated. I can even think of a well-known example.

That 1,21 gigawatts can justify a "crank" theory doesn't mean you should ignore the sketchy associations, though.)

[Krayt]

Everything all politicians do is sketchy. They are specialists in conjuring up surface reasons to do something, as cover story for the real reason, which comes first.

This doesn’t bother them because the best ones are psychopaths lite, in that they can lie convincingly, because, contrary to feeling your pain, they do not actually care what you think about them.

[Rev. Arthur L. Kirkland]

"Everything all politicians do is sketchy."

That's anti-government crank territory. Why do you hate modern America?

[Krayt]

Worldwide and throughout history, people go into government to get in the way, to get paid to get back out of the way. This is the purpose of government since day 1.

Crank territory is in being a credophile, buying the BS they spew. Authorize them the power to conk your enemies over the head, as they define it, curious they are mostly the rich and business owners, and they’ll make your life better!

Conking commences.

Things…happen.

Their familial wealth skyrockets.

“Shut the hell up, Rev, and do what you are ordered, believe and tout this has nothing to do with corruption but rather the Goodnes of Promises we make!"

True believers are the cranks.

[Krayt]

I sympathize with George Will, who gets upset at rampant cynicism at government, getting in the way of useful functionality. But if government does anything useful, it's almost accidental, as pols scurry about and do something like a stopped clock twice a day, amidst the corruption, which is why they went into politics.

[Rev. Arthur L. Kirkland]

I will celebrate your replacement -- and that of the other bitter, antisocial, disaffected, worthless right-wingers against whose wishes and efforts better Americans have shaping our national progress for more than a half-century.

The bigotry, old-timey religion, conspiracy theories, and belligerent ignorance do nothing to redeem these worthless clingers.

Until then, though, these clingers can enjoy the admiration of their fellow misfits, the Volokh Conspirators. Bitter right-wing cranks are their people.

[jb]

LOL. Those darn roads. And police. And firefighters. TIL that the things that make modern civilization possible are just accidents of an otherwise incompetent government.

[JesusHadBlondeHairBlueEyes]

We know what your heart says about the Noble and Good Bureaucrat or Politician, but what do your eyes say?

[Á àß äẞç ãþÇđ âÞ¢Đæ ǎB€Ðëf ảhf]

That's exactly my feeling, as soon as someone opens an argument with the words "inarguably", "indubitably", "it is clear that", "there is no doubt that", and so on.

Two of his own quotes in the first article show a lack of conformity at the time:

It appears that James Madison believed even postal charges were form of direct tax. See The Federalist No. 39, 15 DH 403, 406. I think, however, that most people would have considered them a species of indirect tax ("duty").

and of course the Chase quote itself:

It is not clear why Chase was so mistaken. His guarded language ("I am inclined to think, but of this I do not give a judicial opinion") suggests he was merely guessing. Or his dictum may have been a product of his notorious pro-Federalist partisanship — partisanship that ultimately led to his impeachment, although not removal.

If Prof Natelson is this unsure of what Madison or others thought, or why Chase wrote the "confusing" language, why should the rest of his "clear" distinctions be taken at face value?

[Rev. Arthur L. Kirkland]

Ask any mainstream law professor at a legitimate law school about Rob Natelson. That should save you some time you otherwise might devote to reading Natelson's work.

[Longtobefree]

What we have here is failure to communicate.

[ReaderY]

Also, I don’t think anybody disputes that income taxes are direct taxes. That’s why the 16th Amendment was considered necessary. Moore certainly didn’t disturb this. It said that the corporate pass-through tax involved is a kind of income tax covered by the 16th amendment. That makes it, like all taxes covered by the 16th Amendment, a direct tax not subject to census-based apportionment.

[Ridgeway]

The way I see it, indirect taxes are transactional taxes (like excise taxes, stock transfer taxes, inheritance taxes etc.). Direct taxes are "status" taxes like property taxes.

You could make an argument that the income tax is really a tax on labor transactions, and that the SCT got it wrong back in 1913, but the 16th amendment mooted that question. Income taxers are now constitutional regardless of how they are classed.

That has little bearing on whether a wealth tax is a direct tax. Everybody seems to agree that a real property tax is a direct tax, and I cannot see any principled way to distinguish a personal property tax from a real property tax.

The recent Moore case is a red herring. That had to do with whether the govt is required to allow taxpayers to shield income via corporate form. The retroactive application of the law seemed problematic to me, but that is neither here nor there. It had nothing to do with a tax on wealth per se -- the value of the stock was irrelevant -- just the amount of income earned by the entity attributable to the stockholder.

[MatthewSlyfield]

"You could make an argument that the income tax is really a tax on labor transactions,"
The problem with this is that taxable income is not limited to labor wages.

[Krayt]

Money is condensed work!

Wait...it's almost like money is itself just another tradeable thing, no more privileged than wheat or steel. We may be on to something, boys!

[Noscitur a sociis]

Well, certainly no one disputes that the Supreme Court said that income taxes were direct taxes, and that that decision is what prompted the amendment. But I think you’ll find a lot of people believe that the Supreme Court was wrong.

[F.D. Wolf]

I don’t think anybody disputes that income taxes are direct taxes.

Of course, this is disputed. That was the central dispute in Pollock v. Farmers' Loan & Trust Co. (1895). Five justices thought the income tax was a direct tax, and therefore subject to the requirement of apportionment, and four justices thought it was not a direct tax. Congress passed the Sixteenth Amendment in response to this case.

[Sabedi1]

Ultimately it doesn't matter what the Constitution says, as our increasingly third world population doesn't care about it. It's a document written by racist dead white guys anyway.

Make no mistake, a 100% full blooded Mayan from Guatemala is a third worlder, even if he gets U.S. citizenship somehow.

[Rev. Arthur L. Kirkland]

"our increasingly third world population doesn’t care about it"

Good news! Better Americans haven't been able to diminish our system's structural amplification of hayseed votes yet, but what the can't-keep-up residents of West Virginia, Mississippi, Alabama, Idaho, South Carolina, Tennessee, Kentucky, Wyoming, etc. care about is nonetheless a diminishing concern in modern, improving America.

[Sabedi1]

So you acknowledge the Democrats' importing of low IQ third worlders is purely about votes?

[Rev. Arthur L. Kirkland]

No. I am stating that the drawling Republican hillbillies of America's left-behind red states are better Americans' third-worlder problem.

America's first world: Our successful, modern, diverse, educated cities. Our strongest research and teaching campuses.

America's second world: The ring of lower-quality communities that surround and benefit from proximity to that first world.

America's third world: The shambling rural and southern stretches and the depleted human residue that inhabits those backwaters after generations on the wrong end of bright flight. The areas whose signature elements include addiction, bigotry, guns, superstition, street pills, ignorance, tobacco, sketchy disability claims, more bigotry, economic inadequacy, Trump signs, nonsense-based education, vaping, and Republican registration.

[GKHoff]

In other words, the Eloi and the Morlocks. Maybe H.G. Wells really did have a time machine.

[JoeFromtheBronx]

“I don’t think anybody disputes that income taxes are direct taxes”

The Pollock ruling was 5-4. I don’t think the matter is that clear, especially about specific types of income taxes.

As many note, there was much debate about what “direct taxes” cover. The easier cases were poll taxes and taxes on real estate.

The Constitution, see Art. V and the nature of the provisions that could not be amended before 1808, show there was a clear concern here concerning slaves. Real estate also. Other than that, there was a variety of opinions. So, e.g., there was an early case involving carriages, which divided the Founding Generation.

It seems the appropriate path is to give Congress a wide berth except for crystal clear exceptions.

[blackoasis]

Congress passed a direct tax within a decade after ratification. It was essentially a property tax, and it was apportioned among the states. In addition to the general unpopularity of taxes, apportionment meant that there was a different tax rate in each state.

[blackoasis]

https://www.govinfo.gov/content/pkg/STATUTE-1/pdf/STATUTE-1-Pg597.pdf#page=1