Direct and Indirect Taxes

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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 there was another attempt to enact an income tax law. More conservative members of Congress countered by presenting a proposal to amend the Constitution to provide that income taxes need not be apportioned. Perhaps to their surprise, the sixteenth amendment was proposed by Congress in 1909 and secured ratification by three-fourths of the states in 1913. The result, of course, was to open the door to the major federal revenue producer.

During the twentieth century there have been occasional attempts to litigate various taxes as being direct—but never with success. Congress does not impose capitation taxes nor property taxes—and all other kinds of taxes apparently are indirect.

The requirement that indirect taxes be uniform has given little difficulty. In upholding a federal tax on legacies in Knowlton v. Moore (1900), the Court said that what is required is geographical uniformity. A tax is uniform when it operates with the same force and effect in every place where the subject of it is found. It does not matter that the subject may exist in some states and not in others so long as the tax is the same. Thus, the Court in Fernandez v. Wiener (1945) upheld a federal statute imposing death taxes on community property—even though such property existed in only the few states that had adopted the community property system. In United States v. Ptasynski (1983) the Court cast some doubt on the geographical limitation by upholding a provision exempting Alaskan oil from a crude oil windfall profit tax.

(See taxing and spending power.)

Edward L. Barrett, Jr.


Paul, Randolph E. 1954 Taxation in the United States. Pages 46–58. Boston: Little, Brown.