Direct Taxes

Constitution of the United States, Article I, Section 2, Clause 3

Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers,...

Constitution of the United States, Article I, Section 9, Clause 4

No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken.

Rule of Apportionment

Under the rule of apportionment, Congress sets the total amount to be raised by a direct tax, then divides that amount among the states according to each state’s population. An 1861 federal tax on real property illustrates how the rule of apportionment operates. Act of Aug. 5, 1861, ch. 45, 12 Stat. 292, 294

By proscribing direct taxes in Proportion to the Census or enumeration under Article I, Section 9, Clause 4, the Framers apportioned direct taxes consistent with how they apportioned representation in the House. As James Madison noted in the Federalist Papers, linking tax liability to representation ensured that any advantage a state may have in enhancing its reported population size to increase its representation would be offset by its increased tax liability. ArtI.S9.C4.2 Historical Background on Direct Taxes

What is a Direct Tax?

The US Supreme Court has identified capitation taxes as tax paid by every person, ‘without regard to property, profession, or any other circumstance’ National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012)

Generally speaking, direct taxes are those taxes imposed on persons or property. See National Federation of Independent Business v. Sebelius, 567 U.S. 519, 570–571 (2012) As a practical matter, however, Congress has rarely enacted direct taxes because the Constitution requires that direct taxes be apportioned among the States. To be apportioned, direct taxes must be imposed “in Proportion to the Census of Enumeration. U. S. ? Const., Art. I, §9, cl. 4; see also §2, cl. 3. In other words, direct taxes must be apportioned among the States according to each State’s population. Moore v. United States, 602 U.S. 572 (2024)

To be clear, a direct tax is a tax on persons or property. This is simple to understand. This is in sharp contrast to an indirect tax, which is a tax on transactions or commercial activity.

It was not the purpose or effect of that amendment to bring any new subject within the taxing power. Congress already had power to tax all incomes. But taxes on incomes from some sources had been held to be "direct taxes" within the meaning of the constitutional requirement as to apportionment. Art. 1, § 2, cl. 3, § 9, cl. 4; Pollock v. Farmers' Loan & Trust Co., 158 U. S. 601. The Amendment relieved from that requirement, and obliterated the distinction in that respect between taxes on income that are direct taxes and those that are not, and so put on the same basis all incomes "from whatever source derived." Brushaber v. Union P. R. Co., 240 U. S. 1, 240 U. S. 17. "Income" has been taken to mean the same thing as used in the Corporation Excise Tax Act of 1909, in the Sixteenth Amendment, and in the various revenue acts subsequently passed. Southern Pacific Co. v. Lowe, 247 U. S. 330, 247 U. S. 335; Merchants' L. & T. Co. v. Smietanka, 255 U. S. 509, 255 U. S. 219. Bowers v. Kerbaugh-Empire Co., 271 U.S. 170 (1926)

As noted in Bowers, supra p. 174, the Pollock decision reasoned that income from some sources, like rents, were inseperable from the source itself and therefore was unconstitutional. The court did not hold that 16th Amendment took a class of income taxes out of the direct tax clause; on the contrary, the court held that the 16th Amendment seperated the income from the source. The effect of the Amendment was to seperate from income from whatever source it was derived. i.e, inclusive of rents, interest or dividends from investments of all kinds; the distinctions between that which gives value to property and the property itself.

Separation from the Source (Excise).

By separating the source from the income, the tax is no longer a direct tax on the source, but an indirect tax on the income from that source. Taxes on the incomes, from the source, or whatever source derived, must be seperated from the source itself to avoid placing a direct tax on the source. As with other types of excise taxes, the principle scheme or action of excises is to remove, or seperate, a portion thereof.

An excise, or excise tax, is any duty on manufactured goods that is normally levied at the moment of manufacture for internal consumption rather than at sale. It is therefore a fee that must be paid in order to consume certain products. Excises are often associated with customs duties, which are levied on pre-existing goods when they cross a designated border in a specific direction; customs are levied on goods that become taxable items at the border, while excise is levied on goods that came into existence inland.

Direct Taxes and Indirect Federal Tax on Wages

Once the wages are paid and any indirect taxes are collected by the employer, the wages become the property of the employee. Any further tax on the wages after payment would be a direct tax on the property of the employee. The collection and liability of indirect employment and wage taxes falls onto the employer, not the employee. Collecting these taxes indirectly is needed to avoid placing a direct tax on the paid wages or the wage earner. The Income Tax Act of 1861 and the Social Security Act of 1935 are examples of applying wage taxes indirectly. For example, once wages are paid, the wages become and are the "property" of the employee. Collection and liability of wage taxes falls onto the employer, not the employee. Collecting these taxes indirectly is needed to avoid placing a direct tax on the paid wages or the wage earner; the Income tax act of 1861 and ss act of 1935 withholding tax act of 1943 are examples applying wage taxes indirectly. unfinished ... cite these laws.

Terminology in Reverse:

While the Supreme Court constantly rules that income taxes are indirect, the business world has opposing terminology.

Direct tax is paid directly by the taxpayer to the government and cannot be shifted, like federal income tax. In contrast, indirect tax, such as business property taxes, can be passed on or shifted to others.[Thomson Reuters]https://tax.thomsonreuters.com/blog/direct-vs-indirect-tax-the-differences/()

Direct Taxes and Representation

The rule of apportionment is tied to the principle of representation. The Framers of the Constitution linked direct tax liability to representation. Art. I, § 9, cl. 7, of the Constitution, which provides:

No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.

Art. I, § 7, cl. 1, of the Constitution, which provides:

All Bills for raising Revenue shall originate in the House of Representatives;

The "Direct Tax" clause in the original Constitution ensures that the power to tax is tied to representation and the power of the purse. It may be the only clause in the Consitution that was inserted twice, once in Article I, Section 2, Clause 3, and again in Article I, Section 9, Clause 4.