A principal weakness of the ARTICLES OF CONFEDERATION was that Congress had no power of taxation. It could request the states to contribute their fair shares to the national treasury but it had no power to collect when, as often happened, the states did not pay. Hence, the first grant of power to Congress in the Constitution was to "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." The Constitution also imposed two other limitations. Congress could not tax exports nor lay a "Capitation, or other direct, Tax" unless "in Proportion to the Census or Enumeration herein before directed to be taken."
The direct limitations on taxing power pose few problems. Congress does not impose capitation or property taxes, which would be direct taxes and require apportionment among the states in accordance with population. Other taxes must be uniform?which means that the same subject or activity must be taxed at the same rate wherever it is found. Congress, like the states, cannot tax exports to foreign countries.
More difficult problems have risen because taxes not only raise revenue but also regulate. A tax on liquor may be designed to raise money but also to discourage consumption. A deduction for interest in computing income tax encourages home ownership. A tax may be high enough to virtually stop the production and sale of a particular product. Before the Civil War the federal government derived most of its revenue from the customs and in many years had no internal revenue beyond that. But beginning with the Civil War, Congress expanded the scope of federal taxation at a time when the Supreme Court had fairly restrictive views as to congressional powers to regulate local activities. The question became how far Congress could use taxation to achieve policies that were forbidden to it through direct regulation.
When Congress imposed a ten percent tax on local banknotes for the purpose of achieving a federal government monopoly in the issuing of currency, the Court in VEAZIE BANK V. FENNO (1869) indicated that the tax was constitutional but said that in any event no regulatory problem was presented; Congress did have an independent MONETARY POWER, and the tax was merely a means of implementing it. Thirty-five years later the Court faced the problem more directly. Congress had imposed a ten cents per pound tax on oleomargarine that was colored and only one-quarter cent per pound if it was white. The Court in MCCRAY V. UNITED STATES (1904) said that even though Congress did not have the power to pass a statute forbidding the sale of colored oleomargarine, it could still tax it and the courts would not interfere merely on the grounds that the tax was too high. And the Court also held that Congress could impose a tax on distributing narcotic drugs and include in the same statute regulations as to how such drugs were to be distributed. The...