WHAT IS THE CLASS OF TAX; DIRECT AND INDIRECT TAXES
“In the matter of taxation, the Constitution recognizes the two great classes of direct and indirect taxes, and lays down two rules by which their imposition must be governed, namely: The rule of apportionment as to direct taxes, and the rule of uniformity as to duties, imposts, and excises….”
“And although there have been from time to time intimations that there might be some tax which was not a direct tax nor included under the words ‘duties, imposts and excises,’ such a tax for more than one hundred years of national existence has as of yet remained undiscovered.”
“Ordinarily, all taxes paid primarily by persons who can shift the burden upon some one else, or who are under no legal compulsion to pay them, are considered indirect taxes; but a tax upon property holders in respect of their estates, whether real or personal, or of the income yielded by such estates, and the payment of which cannot be avoided, are direct taxes.” 1
“Direct taxes bear immediately upon persons, upon the possession and enjoyment of rights; indirect taxes are levied upon the happening of an event or exchange.” 2
“Courts have rarely attempted to define direct or indirect taxes, but have preferred to decide in each case as it arose. The true rule is that the nature of the tax depends upon the nature of the thing taxed. If the tax is a tax upon a person or upon property, it is a direct tax; if on a privilege, it is an excise and is indirect.” 3
There isn’t much more that can be said regarding the description of direct and indirect taxes. If you can pass the tax on to someone else, it is an indirect tax. If you cannot pass the tax on to someone else, it is direct. Examine the administration of the income tax today and ask yourself if you can pass this tax on to someone else. The answer is self-evident.
Although this examination of the class of tax is the most apparent, it is not conclusive. The real test comes from what is the subject of the tax. The work of Otto Skinner goes into a deeper explanation of this test. 4 What is being taxed? There’s the rub, do we really know?
“Without question, a taxing statute must describe with some certainty the transaction, service, or object to be taxed, and in the typical situation it is construed against the Government.” 5
NATURE OF THE TAX
Two landmark tax cases Brushaber and Stanton emphatically declare that the income tax is an excise tax. “Not only, however, has this court held an income tax not to be a direct tax; it has expressly held an income tax to be an excise tax or duty.” 6
“… Excises have been defined as taxes laid upon the manufacture, sale or consumption of commodities within the country, upon licenses to pursue certain occupations, and upon corporate privileges. …, it seems convenient to regard excises as including all internal taxes that are not property taxes, … So regarded, excises include income taxes.” 7
“Senator Cummins: ‘It does not make any difference what it is named. … It does not; it can not. The character of a tax, must be determined by its essential characteristics. It must be determined by the circumstances under which it is laid and the thing or things upon which it is laid. Congress can not make an income tax a special excise tax by so denominating it. It can not make an excise tax a direct tax by so denominating it.” 8
Representative Law of New York in remarkes on the proposed amendment [1909; S.J.R. 40] expressed this view of the proposed tax; “It is my purpose to take advantage of this occasion to briefly define my attitude and views concerning the proposal to levy a special excise tax upon the net earnings of corproations organized for profit.” 9
Given the stated fact that income taxes are excise taxes, are we filing the proper reporting form? According to the IRS the proper form for excise income taxes is form 720 not 1040.
SUBJECT OF THE TAX
We are looking at an excise tax and excise taxes are basically on privileges granted by the sovereign power, taxable activities, corporate charters, etc. We also know that they are not, and cannot be, imposed upon the rights of individuals which are secured by the Constitution. The Income Tax, by its operation, is not imposed upon property. In some courts income is not property. So could it be that the “income tax” imposed upon “income”? Some courts disagree saying that income is property, this would require the tax to be apportioned. The government has gotten around this in two ways. The first, which is more believable; the second uses the defense of the Sixteenth Amendment allows this direct tax. The fallacy of the second defense will be discussed later.
The way the income tax is administered, I would say that the average person would say the it is their income that is being taxes, however, creditable authority, as will be discussed, state that income is only the measure of the tax. So the question still hangs in the air as to what is being taxed.
Given the nature of the income tax and how it is administered, when individuals claim that the income tax is a direct tax; in a sense they are right. The tax law deals with an indirect tax. As mentioned earlier, the law itself is constitutional under the law of contracts (that contract being the 1040 and the “voluntary” particapation by the people), however, in viewing the tax, it is not the form but the substance of the tax that should be examined. 10 In light of the practices of the government in their administration of the income tax on individuals, it is evident that the IRS is administering an direct tax while calling it an indirect tax. In viewing the application of the tax it is important to understand what is being taxed. Is it people, property or events?
If the tax is on people or property (labor), and being administered as a direct tax (cannot be passed on to a third party), I would be ruled as unconstitutional. Notwithstanding the Sixteenth Amendment, as the amendment did not overturn the Supreme Court’s decision in Pollock that direct taxes on property are unconstitutional without apportionment. Remember, that it is not the name of a tax. It is the substance, or how the tax effects the object being taxed.
Excise taxes are also not imposed upon the natural rights of Americans. Excise taxes can be imposed upon privileges. The Tennessee Supreme Court addressed this point; “‘Privileges are special rights, belonging to the individual or class, and not to the mass; properly, an exemption from some general burden, obligation or duty; a right peculiar to some individual or body.’ 11
Since the right to receive income or earnings is a right belonging to every person, this right cannot be taxed as privilege.” 12
The Supreme Court of Oregon agrees; “Individuals, unlike the corporation, cannot be taxes for mere privileges of existing. …; the individuals’ right to live and own property are natural rights for the enjoyment of which an excise cannot be imposed.” 13
The United States Supreme Court; “Where rights secured by the Constitution are involved, there can be no rule-making or legislation which would abrogate them.” 14
“There is no such thing in the theory of our national government as unlimited power of taxation in Congress. There are limitations of its powers arising out of the essential nature of all free government; there are reservations of individual rights, without which society could not exist, and which are respected by every government. The right of taxation is subject to these limitations.” 15
“As in our intercourse with our fellow men certain principles of morality are assumed to exist, without which society would be impossible, so certain inherent rights lie at the foundation of all action, and upon a recognition of them alone can free institutions be maintained. These inherent rights have never been more happily expressed than in the Declaration of Independence, that new evangel of liberty to the people; “We hold these truths to be self evident,” that is so plain that their truth is recognized upon their mere statement, “that all men are endowed,” not by edicts of Emperors, or decrees of Parliament, or acts of Congress, but, “by their Creator with certain inalienable rights,” that is, rights which cannot be bartered away, or given away, or taken away except in punishment of crime, “and that among these are life, liberty, and the pursuit of happiness, and to secure these,” not grant them but secure them, “governments are instituted among men, deriving their just powers from the consent of the governed. (Emphasis added) 16
“Among these inalienable rights, as proclaimed in that document, is the right of men to pursue their happiness, by which is meant the right to pursue any lawful business or vocation, in any manner not inconsistent with the equal rights of others, which may increase their prosperity or develop their faculties, so as to give their highest enjoyment.” (emphasis added) 17
Justice O’Connor expressed a like opinion when deciding the extent of Congressional authority under the commerce clause saying: “Congress exercises its conferred powers subject to the limitations contained in the Constitution. Thus, for example, under the Commerce Clause Congress may regulate publishers engaged in interstate commerce, but Congress is constrained in the exercise of that power by the First Amendment.” 18
Often times the courts will determine the validity of a law based upon the doctrine of “public policy”. The cases just cited declare that rights are not the subject to majority rule, nor do they depend upon any election. 19
Further the Supreme Court in Butcher’s Union v. Cresent City stated; “
“When such regulations do not conflict with any constitutional inhibition or natural right, their validity cannot be successfully controverted. The general government was not formed to interfere with or control them.” 20 And in the famous Miranda decision the Supreme Court made it again clear that; “Where rights secured by the Constitution are involved, there can be no rule making or legislation which would abrogate them.” 21
In communication with the Utah State Legislature concerning the subject of the State Income Tax, the Office of Legislative Research and General Counsel stated “that the tax is imposed on state taxable income of every resident individual”. This is still a vague answer, for instance; if the particular individual is a resident and their income is derived from sources out side of the State there would be a foreign jursidiction problem. What is clear is that the State of Utah is taxing the people (resident) and the income is used as the measure of the tax. In the case of non-resident individuals, the tax is imposed upon their employment and the income generated from within the State is used as a measure.
In either case, the bottom line is that the State income tax is a direct tax on people, therefore, people are the subject of the Utah State Income Tax. The one instance because you live in Utah, and the other because you are employed in the State of Utah.
1. Pollock vs. Farmers’ Loan and Trust, 157 U.S. 429, 557, 558; U.S. vs. Butler, 297 U.S. 1 [1935]
2. Knowlton vs. Moore, 178 U.S. 41, 47
3. argument for petitioner; Bromley v. McCaughn, 280 U.S. 124, 127 [1929]
4. The Biggest Tax Loophole of All
5. Hassett v. Welch, 303 U.S. 303, 58 S. Ct. 559, 82 L. Ed. 858; Higley vs. C.I.R., 69 F. 2d 163 (1934)
6. Pollock v. Farmers’ Loan, 157 U.S. 429, 473
7. Herman vs. Baltimore, 189 Md. 191; 173 A.L.R. 1310, 1314 (emphasis added) (See also 26 R.C.L., Taxation(1920), 25. Excises Classified.
8. Congressional Record, Senate, June 30,19__; p. 3976
9. Appendix to the Congressional Record, Friday July 9, 1909
10. Helvering v. Edison Bro. Stores, 133 F. 2d 575; Herman v. Baltimore,__ Md __, 173, ALR 1310, 55 A2d 491
11. Quoting, Lonas v. State, 50 Tenn. 287, 307.
12. Jack Cole Co. v. MacFarland, 337 S.W. 2d 453 at 456 [1960]
13. 26 R.C.L. Taxation § 209, p. 236; Cooley Taxation (4th ed.) §1676, Redfield v. Fisher, 292 P. Reporter 813, 819 [1930]; See also the Supreme Court of Arkansas, Sims v. Ahrens, 271 S.W. 720, 722 [1925]; Thompson v. Wiseman, 75 S.W. 2D 393, 394 [1934]
14. Miranda v. Arizona, 384 U.S. 436, 471; Lucas v. Forty-forth Gen. Assembly, 377 U.S. 713, 736-737 [1964]; Adair v. U.S., 208 U.S. 161,173 [1907]; Adkins v. Children’s Hospital, 261 U.S. 525, 545 [1922]; Allgeyer v. Louisiana, 165 U.S. 578, 589 [1896]
15. Loan Associates v. Topeka, 20 Wallace 655; Parkersburg v. Brown, 106 U.S. 487; United States v. Lopez, S. Ct., No. 93-1260;UNITED STATES v. LOPEZ , 514 U.S. 549
16. Butcher’s Union Co. v. Crescent City Co., 111 U.S. 746, at 756-757 (1883)
17. Butcher’s, supra, at 757
18. New York v. United States, supra (emphasis added)
19. Lucas v. Forty-forth Gen. Ass’m., supra 736, 737
20. Butcher’s Union vs. Crescent City Co., 111 U.S. 746, 754
21. Miranda vs. Arizona, 384 U.S. 436 at 491.
