Interpreting the Sixteenth Amendment.

Author:Jensen, Erik M.
 
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Readers of Constitutional Commentary may have missed the brouhahas, but Professor Calvin Johnson and I have been arguing for several years about the meaning of the Direct-Tax Clauses of the Constitution (1) and the Sixteenth Amendment to that Constitution. (2) I'm happy to say we disagree on almost everything, and less happy to note that neither constitutional lawyers nor tax lawyers seem to care very much about any of these issues. (3)

Our disagreements aren't only about academic trivia. For those who insist on practical consequences in legal arguments, there really may be something at stake here. The Direct-Tax Clauses, parts of the original Constitution, impose a cumbersome apportionment requirement on taxes that are "direct"--a rule tied to the apportionment rule for representation in the House of Representatives. In its original form, Article I, section 2 provided that

[r]epresentatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be determined by adding to the whole Number of free Persons, including those bound to Service for a Term of Years, and excluding Indians not taxed, three fifths of all other Persons. The special counting conventions for slaves and "Indians not taxed" disappeared long ago, (4) but the apportionment rule remains. And Article I, section 9, clause 4 similarly provides that "[n]o Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken."

Everyone agrees that apportionment makes direct taxes very difficult to implement. The Sixteenth Amendment, ratified in 1913, provided some relief, eliminating apportionment as a requirement for "taxes on incomes": "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." But the Amendment seemed to leave apportionment intact for other direct taxes, whatever they are. Avoiding apportionment thus requires that a levy be either indirect, in which case the Direct-Tax Clauses won't kick in at all (and the Sixteenth Amendment will be irrelevant), or a tax on incomes, which the Sixteenth Amendment immunizes.

A broad definition of "direct taxes" coupled with a narrow conception of "taxes on incomes" could leave the Direct-Tax Clauses with application broad enough to prevent significant change in the way the United States raises revenue. In the last decade, several new forms of national taxation have been proposed, including taxes on wealth (5) and various types of consumption taxes. (6) If these taxes would be direct but wouldn't be taxes on incomes, they would have to be apportioned to be constitutionally valid. And if apportionment would be required for a proposed tax, the tax probably wouldn't be enacted: it's been 142 years since Congress went to the trouble of apportioning a tax. (7)

All of this is a long-winded way of explaining why I'm discussing the Direct-Tax Clauses in an exchange on interpreting the Sixteenth Amendment. The process of interpreting the Amendment is inevitably also the process of interpreting the Clauses. You can't hope to understand the Amendment without understanding what it was a reaction to.

The scope of the Amendment and the scope of the Clauses depend on the interpretation of two terms, "direct taxes" and "taxes on incomes." The Sixteenth Amendment doesn't matter, under any theory of interpretation, unless the Direct-Tax Clauses have some substance--unless, that is, the term "direct taxes" encompasses a significant body of levies. (8) And the Direct-Tax Clauses have no remaining substance today if every levy that might otherwise have been subject to the Clauses can be characterized as a "tax on incomes."

My conclusions about the proper way to interpret the Direct-Tax Clauses and the Sixteenth Amendment are simple: constitutional provisions ought to be taken seriously, and we ought to resist interpretive principles that would have the effect of gutting those provisions. Yes, the Direct-Tax Clauses took a peculiar form, but they were intended to be serious limitations on the national taxing power. And, although the Amendment was intended to cut back on the scope of the Clauses--to make an unapportioned income tax possible--it too should be interpreted in a way that takes the Clauses seriously. If, as I argue, the term "taxes on incomes" was intended to exempt only a particular (albeit important) category of taxes from apportionment, the apportionment rule has continuing effect for direct taxes that aren't taxes on incomes.

Because issues of constitutionality often merge with issues of desirability, especially in popular discussions, it's worth making a couple of points to prevent misunderstanding of my arguments. First, when I defend the significance of the Direct-Tax Clauses, I don't mean to suggest that I would have drafted limitations on the taxing power in the way the founders did. My drafting preferences don't matter, nor do Professor Johnson's. Calvin Johnson and I are trying to understand the Constitution as it is, not as we wish it to be.

In addition, my exchange with Professor Johnson isn't about the most desirable forms of taxation. The universes of desirable taxes and constitutional taxes overlap, but they aren't necessarily identical. It may be that my understanding of the relevant constitutional provisions would prevent Congress from enacting forms of taxation that I would prefer, and it's certainly the case that the Constitution permits forms of taxation that Professor Johnson and I find odious. None of that is relevant to the present discussion.

To set the stage, in Part I, I outline the relevant constitutional structure. In Part II, I describe what I see as the fundamental differences (other than height and weight) between Professor Johnson and me. In Part III, I discuss the interpretive principles that ought to control in understanding the Direct-Tax Clauses. In Part IV I do the same for the Sixteenth Amendment.

I. THE CONSTITUTIONAL STRUCTURE AFFECTING "DIRECT" TAXATION: THE BASICS

The Constitution's overall taxing power is broad: "The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises." (9) But two clauses in the Constitution limit congressional power to enact "direct taxes" by requiring that such taxes be apportioned among the states on the basis of population. That's a tough requirement to meet: if your state has one-tenth of the total population, it should bear one-tenth of the aggregate direct-tax liability, regardless of the state's proportion of the national tax base. (10)

If your state also has one-tenth of the relevant national tax base, apportionment presents no particular problem: your one-tenth of the population will have to pay one-tenth of the total direct-tax liability. You might dislike the particular tax, and you might dislike the way the tax burden is distributed among your state's citizens and residents, but you shouldn't feel that your state is being gouged.

But suppose your state's share of the direct-tax base is only one-twentieth of the national total. Each taxed item in your state will be subject to tax at a rate double the otherwise applicable average, or Congress will have to come up with some other, equally klutzy mechanism to make the apportionment numbers come out right. Whatever the mechanism adopted, you and your fellow citizens of state X (particularly the citizens who might feel the pinch of a higher tax rate) are unlikely to see the tax as fair. (11)

Or if your state's share of the direct tax due is one-fifth of the national total? Each item will be subject to tax at a rate one-half the otherwise applicable average--good for your state, but bad for others. If Congress went ahead with direct taxation in those circumstances, when there's significant geographical variation, the statute would look very different from what we're used to.

This description is making apportionment sound more off-putting than it really is because not all levies are apportioned. The Constitution effectively divides the tax universe into direct taxes, which must be apportioned (unless exempted by the Sixteenth Amendment), and all other levies, which I'll call "indirect taxes." "Indirect taxes" isn't a constitutional term, but it's a shorthand way to refer to the "Duties, Imposts and Excises"--a subset of the "Taxes, Duties, Imposts and Excises" that Congress has the "Power To lay and collect"--that, under Article I, section 8, must "be uniform throughout the United States." (12) The uniformity rule has been interpreted to require only geographical uniformity for indirect taxes, (13) meaning that, "if a particular item is subject to tax, it must be taxed at the same rate throughout the United States, wherever it may be found." (14) (For the moment, I'm ignoring another limitation on both direct and indirect taxes, the Export Clause's prohibition against taxes or duties on "Articles exported.") (15)

I've argued elsewhere that indirect taxes were generally understood to be those levies that are imposed on transfers of articles of consumption. (16) The founders assumed that the burden of such taxes was shifted to the ultimate consumer. As a result, there's no incentive for the national government to raise an indirect tax rate too high because, if it does so, revenue will actually decrease: would-be purchasers will buy something else instead, or will take other actions to avoid or evade tax liability. With this understanding, the founders thought that no limitation other than the uniformity rule was necessary to constrain indirect taxation.

In contrast, direct taxes were understood not to be shiftable or avoidable--the burden was assumed to be borne by the party on whom the tax was imposed--and the potential for governmental abuse was therefore greater. At some...

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