Direct and Indirect Taxes

• Author: Edward L. Barrett
• Pages: 784-785

Page 784

The Constitution imposes two major limitations on the federal power to tax. Direct taxes can be levied only if allocated among the states according to population. All other taxes (indirect taxes) must be uniform among the United States.

The requirement of apportioning direct taxes apparently was included because the southern states feared that they would bear excessive burdens on land and slaves?a fear demonstrated by the fact that (until the FOURTEENTH AMENDMENT) only three-fifths of slaves were counted in the population. Nobody in the Convention appeared to be very clear, however, on just what was a direct tax that had to be allocated.

The issue first came to the Supreme Court in HYLTON V. UNITED STATES (1796). A duty laid on carriages was challenged as being a direct tax. The Court pointed out the difficulties with direct taxes, particularly the fact that while the total amount allocated to each state related to the population of that state, the individual taxpayers (in this case the owners of carriages) would pay quite different amounts depending not only on population but also on the relative numbers of the taxable subjects within the state. The Court expressed doubt that any taxes other than a capitation tax or a tax on the value of land could be called direct taxes. Over the next century the issue seldom arose, for Congress levied very few taxes beyond customs duties until the CIVIL WAR. However, the Court did hold that a tax of ten percent on state-issued currency (VEAZIE BANK V. FENNO, 1869), a tax on the succession to a decedent's property (Scholey v. Rew, 1875), and income taxes (Springer v. United States, (1881) were all indirect, not direct taxes.

The income tax involved in Springer had remained in effect only until 1872. By the 1890s, however, many groups called for a reduction in federal dependence on tariffs for revenue and for an income tax on wealthier persons. In 1894 a statute was passed imposing a tax on all incomes over $4,000. Facing a challenge to this tax, the Supreme Court reversed its earlier stand and in POLLOCK V. FARMERS ' LOANTRUST CO. (1895) held the tax a direct tax and so invalid because not apportioned. The Court's new position was that taxes on the rents or income of real estate and taxes on personal property or the income from personal property were direct taxes and must be apportioned, though taxes on income from other sources would not be direct taxes.

A few years later...