Wednesday, August 24, 2011

Who Ya Gonna Call? Mythbusters!

Yes, there's definitely something strange in the neighborhood. The sheer volume of myth-information (with apologies to Robert Asprin) about the world's monetary and fiscal systems is so great (in the sense of volume, not quality) that we thought we would start an occasional (i.e., whenever we feel like it, and not consecutive) series about the most damaging myths. We have to make it occasional, because just the number of these things floating around is mind-boggling . . . and it infects even (or especially) the hallowed halls of academe and of Congress.

So little time! So much to do! Which myth shall we select for debunking first?

Let's do something easy: the income tax. According to many people, the process for passing the 16th Amendment to the Constitution of the United States was flawed. That being the case, the income tax is unconstitutional, and should be abolished.

Let's take this in easy steps. Flawed in process or not, the 16th is part of the Constitution. It can't be unconstitutional. Whether the 16th Amendment is legitimately a part of the Constitution is a different issue, and one that does not affect the amendment's constitutionality. A flawed process may be grounds for removing it, but as long as it's there, it's constitutional.

The next one is almost as easy. It's asserted that an income tax was unconstitutional before the 16th Amendment, therefore, removing the 16th Amendment would make the income tax illegal, immoral, and fattening.

Not quite. Here's a shocker. Sit down and take a blue pill.  No, not that kind.  A nerve pill.

An income tax has always been constitutional!

Say what?!?!?!?!?

That's right. The Constitution gives the Congress the right to levy taxes. What taxes and in what form is a matter of expedience and political prudence, but to deny that the Congress has the right to levy taxes in any form is to deny that it has the right at all. It's right there in the Constitution:

"The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States."

There it is, in black and white. As the United States Court of Appeals for the Third Circuit explained in Penn Mutual Indemnity Co. v. Commissioner (32 T.C. 653 at 659 (1959)),

"It did not take a constitutional amendment to entitle the United States to impose an income tax. Pollock . . . only held that a tax on the income derived from real or personal property was so close to a tax on that property that it could not be imposed without apportionment. The Sixteenth Amendment removed that barrier. Indeed, the requirement for apportionment is pretty strictly limited to taxes on real and personal property and capitation taxes. . . . Congress has the power to impose taxes generally, and if the particular imposition does not run afoul of any constitutional restrictions then the tax is lawful, call it what you will."

So what's the fuss? That little thing called "apportionment": "No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken."

Huh?

Okay, here goes. Prior to 1895 (when the above-referenced "Pollock" case came before the Supreme Court), the Congress construed the income tax as an indirect tax on property. Most people got their income from working with their capital, whether in the form of land or technology. Thus, so the reasoning went, a tax on income is really an indirect tax on property and persons, not a direct tax.

As America became more industrialized following the Civil War, more and more people were restricted to wages, not profits from capital, for income. Congress started having second thoughts, and repealed the income tax that had been imposed during the Civil War, but didn't really settle the issue as to whether an income tax is direct or indirect.

Meanwhile, back at the ranch, the "Robber Barons" were piling up huge fortunes, realizing gigantic profits that they distributed to themselves and on which they paid no taxes. The Socialist Party first advocated restoring the income tax, and the Populists soon took up the cause. Why, after all, should the poor working stiff have to pay all the taxes instead of the Idle Rich?

Consequently, during the Great Depression of 1893-1898, the Congress passed another income tax. It was pretty low by today's standards, something like 3-4%, and only on incomes in excess of $4,000 (and who made that much money?). It was, however, a Populist and Socialist victory, and clearly directed at the wealthy.

You know — those people with all the money . . . and political pull. Somebody filed a lawsuit, Pollock v. Farmers' Loan & Trust Co. (157 U.S. 429, 158 U.S. 601 (1895)), and got the income tax declared a direct tax — and therefore unconstitutional without apportionment. Not "unconstitutional," mind you. Unconstitutional without apportionment as a result of being tantamount to a direct tax on property. If the Congress had been willing to add apportionment to the law, the income tax would have been constitutional, and could have been levied.

That was one thing the Congress wasn't about to do. They might have to bend to the Supreme Court in the matter of the constitutionality of the income tax without apportionment, thereby permitting the rich to escape taxation, but they were not going to apportion the damned thing among the states on the basis of population. If they did that, a state with a few extremely rich people would pay less in taxes than a state with many poor people. That would be manifestly unjust, and everyone who voted for such a thing would have lost his seat in the next election. Rich people may have more money, but poor people have more votes.

The solution? The 16th Amendment, along with the Federal Reserve Act a Populist — and Progressive — triumph. The 16th Amendment didn't make the income tax constitutional. No, what it did was make the income tax constitutional without apportionment. Read it carefully. Here it is:

"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."

See? Apportionment, not constitutionality, was the issue.

Now you know why you should have stayed awake in Civics.

#30#

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