Nov 20
Sixteenth Amendment on Property Taxes
In 1894 Charles Pollock was a Massachusetts citizen who owned only ten shares of stock in the Farmers' Loan & Trust Company. He sued the company to enjoin it from paying the tax. Pollock lost in the lower courts, but finally appealed to the United States Supreme Court, which agreed to hear the case. Arguing for the plaintiff Pollock was Joseph Choate, one of the most eminent Wall Street lawyers of his day.
The Supreme Court handed down its decision on April 8, 1895, with Chief Justice Melville Fuller delivering the opinion of the Court. He ruled in Pollock's favor, stating that certain taxes levied by the Wilson-Gorman Act, to the extent imposed on income from property, were unconstitutional. The Court treated the tax on income from property as a direct tax. Under the provisions of the Constitution of the United States at that time, such direct taxes were required to be imposed in proportion to states' population. The tax in question had not been apportioned and, therefore, was invalid. As Chief Justice Fuller stated:
First. We adhere to the opinion already announced—that, taxes on real estate being indisputably direct taxes, taxes on the rents or income of real estate are equally direct taxes.
Second. We are of opinion that taxes on personal property, or on the income of personal property, are likewise direct taxes.
Third. The tax imposed by sections 27 to 37, inclusive, of the act of 1894, so far as it falls on the income of real estate, and of personal property, being a direct tax, within the meaning of the constitution, and therefore unconstitutional and void, because not apportioned according to representation, all those sections, constituting one entire scheme of taxation, are necessarily invalid.
The decrees herein before entered in this court will be vacated. The decrees below will be reversed, and the cases remanded, with instructions to grant the relief prayed. [158 U.S. 601, 638]
Justices John Marshall Harlan, Jackson, White and Brown dissented from the majority opinion. Justice White argued:
It is, I submit, greatly to be deplored that after more than 100 years of our national existence, after the government has withstood the strain of foreign wars and the dread ordeal of civil strife, and its people have become united and powerful, this court should consider itself compelled to go back to a long repudiated and rejected theory of the constitution, by which the government is deprived of an inherent attribute of its being—a necessary power of taxation. [158 U.S. 638]
In his dissent, Justice Brown wrote:
The decision involves nothing less than the surrender of the taxing power to the moneyed class...Even the spectre of socialism is conjured up to frighten Congress from laying taxes upon the people in proportion to their ability to pay them.
The Supreme Court did not rule that all income taxes were direct taxes. Instead, the Court held that although generally income taxes are indirect taxes (excises) authorized by the United States Constitution in Article 1, Section 8, Clause 1, the taxes on interest, dividends and rents under the 1894 Act had a profound effect on the underlying assets. The Court ruled that the tax on dividends, interest and rent should be viewed as a direct tax falling on the property itself rather than as an indirect tax. As direct taxes, these taxes were required to follow the rule of apportionment found in Article 1, Section 2, Clause 3.
The rule of apportionment requires the amount of a direct tax collected to be divided by the number of Representatives in the United States House of Representatives, the quotient is then multiplied by the number of representatives each State has to determine each State's share of the tax which it then needs to lay and collect through its own taxing authority.
Congress has had the power to lay and collect an indirect tax on incomes from the beginning of the American Government under the United States Constitution in 1787. The purpose of the Sixteenth Amendment was to prevent the income tax from being taken out of the category of indirect taxation, to which it inherently belonged, and misapplied as a direct tax (as was done with Pollock). The Sixteenth Amendment made the apportionment rule inapplicable to income taxes, including taxes on income derived from property, by providing that Congress has the power to tax incomes from any source without having to apportion the tax by population.
In his dissent to the Pollock decision, Justice Harlan stated:
When, therefore, this court adjudges, as it does now adjudge, that Congress cannot impose a duty or tax upon personal property, or upon income arising either from rents of real estate or from personal property, including invested personal property, bonds, stocks, and investments of all kinds, except by apportioning the sum to be so raised among the States according to population, it practically decides that, without an amendment of the Constitution—two-thirds of both Houses of Congress and three-fourths of the States concurring—such property and incomes can never be made to contribute to the support of the national government.
In a nation where the Federal government was beginning its battle against monopolies and trusts, where the great bulk of wealth was concentrated in the hands of a few, the decision in Pollock was unpopular, much like the decision in United States v. E. C. Knight Co., 156 U.S. 1 (1895) of the same year. The following year, the Democratic Party, which had grabbed hold of the Populist movement, included an income tax plank in its election platform.
Nebraska Senator Norris Brown publicly decried the Court's decision, and instead proposed specific language to remove the Pollock requirement that certain income taxes be apportioned among the states by population. The proposal was later incorporated into the Sixteenth Amendment. Fourteen years would pass, however, before the Amendment was finally passed by Congress in 1909. Upon ratification in 1913, the Amendment effectively made the Pollock decision moot, removing any requirement that taxes on incomes derived from property be apportioned by population.
Clarified Commentary
In the case of Pollock v. Farmers' Loan & Trust Co. the Supreme Court declared certain income taxes — taxes on income from property under the 1894 Act — to be unconstitutionally unapportioned direct taxes. The Court reasoned that a tax on income from property should be treated as a tax on "property by reason of its ownership," and should therefore be required to be apportioned. The reasoning was that taxes on the rents from land, the dividends from stocks and so on burdened the property generating the income in the same way that a tax on "property by reason of its ownership" burdened that property.
This meant that, after Pollock, while income taxes on wages (as indirect taxes) were still not required to be apportioned by population, taxes on interest, dividends and rent income were required to be apportioned by population. The Pollock ruling made the source of the income (e.g., property versus labor, etc.) relevant in determining whether the tax imposed on that income was deemed to be "direct" (and thus required to be apportioned among the states according to population) or, alternatively, "indirect" (and thus required only to be imposed with geographical uniformity).
From 1895 up to when the Sixteenth Amendment was ratified, while Congress could have re-imposed taxes on income from labor and other non-property sources without apportionment by population, imposing taxes on interest, dividends and rent income would not have been practical (as the dollar amount of income from interest, dividends and rent would virtually never be exactly the same amount for each and every taxpayer in the United States for any year). The Congress was unwilling to impose an income tax on labor and other non-property sources without also imposing a tax on income from property — and taxes on income from property were no longer realistic. The Pollock ruling made imposition of an income tax politically unfeasible from 1895 until the ratification of the Sixteenth Amendment. At the same time, the Congress was reflecting the growing concern among many elements of society that the wealthiest Americans had consolidated too much economic power.
In his dissent to the Pollock decision, Justice Harlan stated:
When, therefore, this court adjudges, as it does now adjudge, that Congress cannot impose a duty or tax upon personal property, or upon income arising either from rents of real estate or from personal property, including invested personal property, bonds, stocks, and investments of all kinds, except by apportioning the sum to be so raised among the States according to population, it practically decides that, without an amendment of the Constitution — two-thirds of both Houses of Congress and three-fourths of the States concurring — such property and incomes can never be made to contribute to the support of the national government.
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10:57 AM Nov 26