The income question (second pamphlet) [microform] ..

MASTER NEGATIVE NO. 94-821 89 COPYRIGHT STATEMENT The copyright law of the United States (Title 17, United States Code) governs the making of photocopies or other reproductions of copyrighted materials including foreign works under certain conditions. In addition, the United States extends protection to foreign works by means of various international conventions, bilateral agreements, and proclamations. Under certain conditions specified in the law, libraries and archives are authorized to furnish a photocopy or other reproduction. One of these specified conditions is that the photocopy or reproduction is not to be "used for any purpose other than private study, scholarship, or research." If a user makes a request for, or later uses, a photocopy or reproduction for purposes in excess of "fair use," that user may be liable for copyright infringement. The Columbia University Libraries reserve the right to refuse to accept a copying order if, in its judgement, fulfillment of the order would involve violation of the copyright law. Author: Home Market Club Title: The income tax question (second pampiiiet) Place: [Boston] Date: [1909-1910] COLUMBIA UNIVERSITY LIBRARIES PRESERVATION DIVISION BIBLIOGRAPHIC MICROFORM TARGET MASTER NEGATIVE « ORIGINAL MATERIAL AS FILMED - EXISTING BIBLIOGRAPHIC RECORD 491 H75 Home market club, Boston. Tho income tax question (second pcunphlct) ^Bostonj Published by the Homo market club, 1909-1910. 18 p. • • tf RESTRICTIONS ON USE: TECHNICAL MICROFORM DATA FILM SIZE: ^^VWrr] TRACKING # : REDUCTION RATIO: \d.t IMAGE PLACEMENT : lA^MI^ IB MB DATE FILMED: ^'UA^ INITIALS = ^ tt\^H OSiOiX FILMED BY PRESERVATION RESOURCES, BETHLEHEM. PA. ^. ^ %^> ^^.. U) 3 3 Q) a 3 go 00 oi COM o 3 > o m CO X < N O: 4». % •'V >^ A* ^1 ^^'Vi -V? ^^, ^^. xO? ^i e^ *^^ ^^' ^^^ 3 3 > o 3 3 <^/ > ^7 ..-^ 'V? *'<5^ S en o o^ 00 b 1.0 mm 1.5 mm 2.0 mm ABCDtFGMIJKLMNO«JRSTUVWXYZ •bcdr<Khi|klmnopqrstuvwiv/ 1 ?3456 7890 ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghiiklmnopqrstuvwxyzl234567890 ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyz 1234567890 2.5 mm ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyz 1234567890 <^ <^ ^<^ fo fp f^ If^ *^^ v ^^ fd. fp '^ m H O O ■o m -o > C cd X TJ ^ 0(/) 5 m ^-^'^^. 1— » ro CJl o z 3 3 J^. • fS FGH 3x IJKLMN nopqrst IJKLMN nopqrst <0 OPQR uvwxy !^c IM C/) i^fj a»x cu^ 00IS4 c^x ^-< 001^ s HOME MARKET CLUB, BOSTO?T. 0)4.91 H75 tntl|rCttp«flrttigDrk THE LIBRASJES School of Business 1 t w '^•^^^fcl of ftiflinoflfi Ubtw JUL 4 1844 The Income Tax Question (SECOND PAMPHLET) ObjectionsioV Federal Income Tax by Senator \H ill of New York Arguments of Richard Olney for the Tax and of Joseph H. Choate Against It. Decision of the Supreme Court in 1895, Holding the Income Tax Sections of the Wilson Law Unconstitutional. Opinions of the Justices For and Against. Applicability to the Pending Amendment. c. • « »» --Y • I « 1909-1910 Published by the Home Market Club CONTENTS. PAGE Brown, Justice, Dissenting Opinion 16 Ghoate, Joseph H., Argament Before Supreme Court 7 Conclusion— ^Present Question Stated 18 Decision Against Wilson Law^s Income Tax Sections and How the Justices Stood 11 Field, Justice, Opinion Against Tax 14 Fuller, Chief Justice, Opinion Against Tax 16 Grounds of the Decision, as Stated bj the Chief Justice 12 Harlan, Justice, Dissenting Opinion 18 Hill, David B., Objections to a Federal Income Tax 8 Introduction, Stating Substance of Both Pamphlets 8 Jackson, Justice, Dissenting Opinion 16 Olney, Att'y Gen'l, Argument Before Supreme Court 6 White, Justice, Dissenting Opinion 18 • • . • • c . 1^ t if '^' Arguments and Opinions in the Latest Federal Income Tax Case. In an earlier pamphlet on this sub- ject, the elaborate brief of Mr. Southmayd of New York, in the Pollock case, shows the arrangement between the States and the United States, fixed in the Constitution, by which customs and excises are given to the general government and taxes on property are given to the sev- eral states, and for emergencies the privilege of taxing property or in- comes is given to the federal govern- ment under the condition that the tax shall be apportioned among the states according to their population, so that no new section of the coun- try, where incomes may be small enough to escape taxation, can have the power to throw the burden wholly upon the older and wealthier sections. That pamphlet also contains a very informing article on the British income tax, by Sir Guilford L. Molesworth, in which the opinions of many other British statesmen and economists are cited, all showing how much the tax is disliked and how badly it is misused in that country. The pamphlet now in- hand pre- sents: (i) The concise summary of objec- tions to a federal income tax pre- sented in the United States Senate, June 28, 1894, by Senator David B. Hill (Dem.) of New York. (2) The argument for the tax, in the Pollock case arising under that law, by Attorney General Richard Olney of Boston, and the argument against the tax, by the Honorable Joseph H. Choate of New York. (3) Summaries of the opinions, majority and minority, of the Jus- tices of the Supreme Court. Some portions of these arguments and opinions are devoted to showing why that tax was or was not consti- tutional and so do not directly ap- ply to the pending proposition to change the Constitution; but other portions bear upooi it, because they show the taxation adjustment made between the States and the Federal Government, the reasons for which still subsist. This pamphlet, therefore, makes a fair and non-partisan presentation of the question by the most eminent jurists in the country and is very helpful to those who desire to reach correct conclusions on the pending amendment. DAVID B. HILL'S OBJECTIONS. In the Senate committee of the whole, June 28, 1894, the income tax was agreed to as a part of the tariff bill. Senator Hill of New York (Dem.) filed the following objections to it: First — An income tax has no legiti- mate place' in a tariff reform bill. The effort to retain it in this bill has hin- dered, delayed and sacrificed the cause of tariff reform. Second — An income tax is neither a Democratic nor a Republican principle, and has never been approved by the peo- ple at the polls, but is one of the doc- trines of the Populist party. Third — It is an unnecessary tax. The ARGUMENTS AND OPINIONS IN THE needs of the treasury will not requir the proceeds of this tax, but sufficient revenues will be realized under the other provisions of the measure. Fourth — It is a direct tax within the meaning of the Constitution, and, not being laid in proportion to population, is unconstitutional and cannot be enforced. Fifth — It is unequal, unjust and sec- tional in its design and operation, and is principally urged by the representatives of those States which will be least af- fected by its provisions. It is an attack upon the thrift, the energy and the en- terprise of the North. Sixth — It is the revival of an odious tax in a time of profound peace. Seventh — The exemption of all in- comes not exceeding $4,000 is an exemp- tion unprecedented in the history of in- come tax legislation and stamps the measure as the most offensive species of ** class legislation. Either substantially all incomes should be taxed or none at all. Eighth — It is unjust in its discrimina- tions. It exempts the income from $635,000,000 of Government bonds, but denies the same exemption to State bonds. It exempts $4,000 from the in- dividual income of a citizen derived from his general business, but denies him the same exemption if his income is derived from a corporate investment. Ninth — It is retroactive in its opera- tion. It compels the payment of a tax upon incomes realized since Jan. i, 1894. Tenth — It usurps those fields of rev- enue which belong to the States. This measure not only provides for income taxation proper, but also includes an in- heritance and gift tax, thereby trespass- ing upon a field already occupied by many States. Incomes, if taxed at all, should be taxed by State rather than Federal authority. Eleventh — Its provisions are inquisi- torial and offensive in their character. The political agents of the Government are vested with vast powers, which are Mable to abuse. It is a system of taxa- tion unsuited for a free government. Twelfth — It violates the Constitution, because it usurps those revenues derived from certain domestic corporations which the States have themselves created, and the revenues of which cor- porations the States have set apart for the uses of their own State Govern- ments. The proposed tax is an attack upon the sovereignty of the States. Thirteenth — The absorption of these legitimate State revenues by the General Government will necessarily lead to in- creased direct taxation by the States and add to the existing burden of the people. Fourteenth — The tax proposed is double that recommended by Secretary Carlisle. Fifteenth — It will duplicate taxation, create friction and promote conflict or contention between the General Govern- ment and the States, is contrary to the established policy of the Government, is a step toward Socialism and is un- wise from every point of political ex- pediency. Senator Manderson (Rep.) of Ne- braska, moved the following addi- tional objection, which Mr. Hill accepted : It creates a class to pay a part of the expenses of the Government, and is the first step toward the creation of a privi- leged few constituting a moneyed aris- tocracy, which, contributing from their abundant revenues or incomes to the support of the Government, will rule it. Mr. Hill's motion to strike out the income tax sections was defeated, yeas 23, nays 40. Three Democrats, Hill of New York, and Smith and McPherson of New Jersey were against the tax. Three Populists and six Republicans, all from the far West, voted with the Democrats, most of whom were from the West and South, for the tax. LATEST FEDERAL INCOME TAX CASE. THE ARGUMENTS. There was a large array of em- inent lawyers on both sides at the hearing before the Supreme Court, in March, 1895 — those against the tax being Joseph H. Choate, Qar- ence A. Seward, Benjamin H. Bris- tow, W. D. Guthrie, David Wilcox, Charles Steele and George F. Ed- munds, and those for the tax being Attorney General Olney, his assist- ant, Mr. E. B. Whitney, and Mr. James C. Carter of New York. In order that the arguments may be better understood, it is well to refer to the provisions of the Con- stitution which bear upon the case. They are: Art. I, Sec. 2, Paragraph 2: — "Repre- sentatives and direct taxes shall be ap- portioned among the several states which may be included within this Union according to their respective numbers"— that is, the numbers of the people. Art. I, Sec. 8:— "The Congress shall have power to lay and collect taxes, duties, imposts and excises, . . . but all duties, imposts and excises shall be uni- form throughout the United States." Fifth Amendment, latter part: "Nor [shall any person] be deprived of life, liberty or property, without due process of law; nor shall private property be taken for public use, without just com- pensation." Most of the counsel closely fol- lowed the line of the law, but Mr. Carter gave a thought to wrhat he considered public opinion and said that "a triumphant majority" will have way, "if need be, over the ruins of Constitutions and of courts." Something of this feeling undoubt- edly exists today. Nevertheless it is safe to assume that the people do not wish to revolutionize the govern- ment unless convinced that methods and agreements which were neces- sary to its formation and which have worked well for one hundred and twenty years can be improved for the future. ARGUMENT OF ATTORNEY-GEN- ERAL OLNEY FOR THE LAW. Mr. Olney devoted his argument on the part of the United States to the constitutional questions which the sev- eral plaintiffs alleged to be involved in the cases presented. Many of the objections raised seemed to him to be simply perfunctory — taken pro forma and by way of precaution. No time, he thought, need be ex- pended in discussing the averments that the income tax law was an invasion of vested rights and took property without due process of law. These propositions were generalities, and, if there was anything in them, it was because they comprehended others, which were the only real subjects of profitable discussion. Suppose it to be true that the income tax law undertook to ascertain the in- comes of citizens by methods which were not only disagreeable, but were in- fringements of personal rights. The consequence; would be not that the law was void, but that the hotly denounced inquisitorial methods could not be re- sorted to. Similar considerations would apply to the objection that the law was to be pronounced void because taxing the agencies and instrumentalities of the governments of the several states. It had not yet been definitely adjudi- cated, and it was by no means to be ad- mitted, that the income of state and municipal securities was not taxable by the United States when assessed as a part of the total income of the owners under a law assessing income generally, and not discriminating between such se- curities and others of the like character. But, suppose the contrary, the re- sult would be not to find tliat the law was bad in toto, but that it was bad only 6 ARGUMENTS AND OPINIONS IN THE as to the income from state and munici- pal securities. If I am right in these observations the constitutional contention of the plaintiffs simmers down to two points: One is that an income tax is a direct tax, and must be imposed according to the rule of apportionment, and the other is based upon the alleged violation of the constitution with regard to uni- formity. I do not stop to discuss the question what the constitutional rule of apportionment is. I do not think I ought to delay the court for any considerable time with the question whether an income tax is direct or indirect. Whether an income tax is what the constitution describes as a "direct tax" is a question as com- pletely concluded by repeated adjudica- tions as any question can be. It is a direct tax within the meaning of the constitution, unless five concurring judgments of this court have all been erroneous. The attorney-general denied that any land tax was aimed at or attempted by the statute — there was no lien on land for payment. The whole scope and tenor of the statute showed the con- templated subject of taxation to be per- sonal property and nothing else. Discussing the meaning of the word "uniform" as applied to the collection of imposts, excises, etc., he declared that the word had a territorial application and no other. "A federal tax," he said, "which is not a poll tax nor a tax on land, must be the same in all parts of the country. It cannot be one thing in Maine and another thing in Florida. The law providing for such a tax must be like a bankruptcy law or a naturali- zation law. It must have the same operation everywhere, wholly irrespec- tive of state lines." The power to tax was for practical use, and was necessary to be adapted to the practical conditions of human life. These were never the same for any two persons, and as applied to any com- munity, however small, were infinitely diversified. Nothing was more evident or had been oftener declared by courts and jurists than that absolute equality of taxation was impossible. No system had been or could be devised that would produce any such result. No country or state of this Union had ever adopted a plan of taxation that did not exempt some portions of the community from a burden that was imposed upon others. The power to do so was unquestioned, and was universally exercised. It was quite beside the issue to argue in this or any other case that Congress had mistaken what public policy re- quired. On that point Congress was the sole and final authority, and its decision, once made, controlled every other de- partment of the Government. No exemption was made by the statute in favor of a class that was not based on some obvious line of public policy— and, that class being established, one uniform rule was applicable to its members. It is manifest that in this distinction between people with incomes over $4,- 000 and those with incomes under that amount Congress was proceeding upon definite views of public policy, and was aiming at accomplishing a great public object. It was seeking to adjust the load of taxation to the shoulders of the community in the manner that would make it most easily borne and most lightly felt. So with business corporations. Their net incomes were taxed at the standard rate of two per cent., but undiminished by the standard deduction of $4,000. The result might be that a man in business as a member of a corporation was tax- able at a little higher rate than a man in the same business by himself or as co- partner. It was common knowledge that cor- porations are so successful an agency for the conduct of business and the ac- cumulation of wealth that a large sec- tion of the community viewed them with intense disfavor. When, therefore, this income tax law made a special class of business corporations, and taxed their incomes at a higher rate than that which applied to the incomes of persons not incorporated, it but recognized existing social facts and conditions which it would be folly to ignore. In conclusion, Mr. Olney said: "It would certainly be a mistake to infer that this great array of counsel, this elaborate argumentation and these nu- LATEST FEDERAL INCOME TAX CASE. merous and voluminous treatises, mis- called by the name of briefs, have any tendency to indicate anything extraordi- nary or unique either in the facts before the court or in the rules of law which arc applicable to them. I venture to suggest that all this laborious and eru- dite and formidable demonstration is bound to be without effect on one dis- tinct ground. In its essence and in its last analysis it is nothing but a call upon the judicial department of the govern- ment to supplant the political in the exercise of the taxing power; to substi- tute its discretion for that of Congress in respect of the subjects of taxation, the plan of taxation, and all the dis- tinctions and discriminations by which taxation is sought to be equitably ad- justed to the resources and capacities of those who have it to bear. Such an ef- fect, however weightily supported, can, I believe, have but one result. It is in- evitably predestined to failure, unless this court, for the first time in its his- tory, overlook and overstep the limits which separate the judicial from the legislative power, and the scrupulous observance of which is absolutely es- sential to the integrity of our constitu- tional system." ARGUMENT OF MR. CHOATE AGAINST THE TAX. Hon. Joseph H. Choate of New York said: "It never would have occurred to me to present either an opening or a closing argument to this great and learned court that if, in their wisdom, they found it necessary to protect a suitor who sought here to invoke the protection of the constitution which was created for us all, possibly the popular wrath might sweep the court away. It is the first time I ever heard that argu- ment presented to this court or any other, and I trust it will be the last. "1 thought until today that there was a constitution of the United States, and that the business of the executive arm was to uphold the constitution. I thought that this court was created for the purpose of maintaining the consti- tution as against unlawful conduct on the part of Congress. It is news to me that Congress is the sole judge of the measure of the powers confided to it by the constitution, and it is also news to me that that great fundamental prin- ciple that underlies the constitution, namely, the equality of all men before the law, has ceased to exist." Mr. Choate said that on the day of Gen. Sherman's funeral ex-President Hayes said to him that he (Choate) would probably live to see the day when in the case of the death of any man of large wealth the state would take for it- self all above a prescribed limit of his fortune, and divide it or apply it to the equal use of all the people. He (Choate) had looked upon that remark as the wanderings of a dreamer, and yet in less than five years he found himself in the supreme court of the United States con- testing the validity of an alleged act of Congress, which was defended by the authorized legal representative of the government, upon the plea that it was only a tax levied upon extremely rich men. It was defended upon principles as communistic, socialistic, populistic, as has ever been addressed to any po- litical assembly in the world. Mr. Carter, continued Mr. Choate, had said that in the convention which framed the constitution there was one ever present fear. This was that by a combination of states an unjust tax might be put upon a single state or a little group of states. Mr. Choate di- rected the attention of the court as to how the present law would strike. In 1873, Massachusetts, New York, New Jersey and Pennsylvania paid four-fifths of the tax on incomes above $2,000. What was their political representation in the House of Representatives, which only can initiate the passage of revenue bills? Eighty-three out of 356, or a little less than one-fourth. The increase of exemption from $2,000 to $4,000 would bear upon those states with vastly greater force, so that they would pay nineteen-twentieths of the tax under a law "imposed upon them by other states who, as the chief justice has quickly seen in the course of the argu- ment, will not bear a dollar of it. This iniquitous result, Mr. Choate said, had been brought about by an ex- press violation of two of the leading prohibitive restraints of the constitution. 8 ARGUMENTS AND OPINIONS IN THE. LATEST FEDERAL INCOME TAX CASE. and, despite the contention of the at- torney-general and his associates that the state of things could not be helped, Mr. Choate thought it could. The main argument presented by Mr. Carter in support of the law was that the men upon whom it was imposed were too rich. He claimed that $20,000 might have been made the minimum of exemp- tion in the law and that there would have been no help for it. He said in his brief, that, although we could not tax John Jones by name, however rich he might be, we could make a class to des- ignate him and so tax him. Now, continued Mr. Choate, if you ap- prove this law, with this iniquitous ex- emption of $4,000, and this communistic march goes on, and five years hence they come to you with an exemption of $20,000 and a tax of 20 per cent., how can you meet it, in view of the decision they ask you to render? There is pro- tection now or never under this law. My learned friend says you cannot ap- ply any limit. He says that no matter what Congress does in the matter of a limit, if in their views of so-called — what did he call it? — sciology? political economy? — they fix a limit of a mini- mum of $20,000 or a minimum of $100,- 000, this court will have nothing to say about it. I agree that it will have noth- ing to say if it lets go its hold upon this law — upon a law passed for such a purpose, accomplishing such a result by such means. I thought that the fundamental object of all civilized government was the preservation of the right of private property. That is what Mr. Web- ster said at Plymouth Rock in 1820, and I supposed that all educated, civilized men believed it. According to the doctrines that have been propounded here this morning, even that great fun- damental principle has been scattered to the wind. Washington and Franklin were alive to that sacred principle, and if they could have foreseen that in a short time — for what were 115 years in the life of the republic? — it would be claimed in the supreme court of the United States that, not despite that constitution, but by means of it, they had helped create a combination of states that could pass a law for breaking into the strong boxes of the citizens of other states, and giving out the wealth of everybody worth more than $100,000 for general distribution throughout the country, they would both have been keen to erase their signatures from an instru- ment that would result in such conse- quences. The spirit that invaded the halls of Congress was seeking to throw up its entrenchments in the supreme court of the United States. If this law were upheld, the first parallel would be carried, and then it would be easy to overcome the whole fortress on which the rights of the people depended. Mr. Choate conceded that Congress had plenary power to tax, and that it was necessary, in order to maintain his position, for him to show either that Congress had not the power to pass the sections of the act complained of, or that, in passing them, it had trans- gressed the measure of the exercise of that power entrusted to it. He called attention to the distribution of the power of taxation and the limita- tions of the exercise of that power, from the operation of which it could not, by any device, escape. Mr. Choate said he did not impute to the constitutional convention such heed- lessness or ignorance as was suggested in one of the briefs on the other side; that he did not believe or understand that it covered the whole subject of taxation, by its declarations with respect of direct taxes, imposts, excises and duties. How about the corpus of personal property? If a tax upon it was neither a direct tax, nor an impost or excise or a duty, what would follow? Just that which Chief Justice Chase said many years ago would apply — that it was a tax to be enforced by Congress, and laid neither according to apportionment nor of equality and uniformity. And yet in all that 100 years nobody had even sug- gested that such a tax could be so en- forced and collected. The true rule of construction was to impute to the work of the constitutional convention the same interpretation that everybody else gave to it at the time, and had ever since given it. Mr. Wad- leigh of New Hampshire had the true idea when he said, discussing the opera- tion of the taxing clause, that it would bear hardly upon his state, but that New Hampshire would consent to it in order to have the constitution adopted. Why should it bear hardly upon New Hamp- shire, with its mountains and rocky hill- sides, were it not that all taxes, except duties, imposts and excises, should be apportioned according to the popula- tion? Mr. Choate asserted that the tax upon real estate, the rents and incomes there- from, was a direct tax, and that the members of the constitutional conven- tion had them in mind as a subject of direct tax when they used that term. He took that, he said, not from anything that had been said by Justice Patterson or anybody else in an effort to limit or prescribe the meaning of the constitu- tion, but from the generally and univer- sally acknowledged consent of mankind, then and now. There had been three periods of direct taxation — in 1792, when trouble with France was apprehended; during the war of 1812, and in the war of the rebellion. The first was emble- matic of them all^t was a direct tax upon real estate, not naked land, as Mr. Carter had contended, but upon houses and lands, productive and unproductive alike. The second proposition which Mr. Choate advanced was that a tax upon rents from real estate was indistinguish- able from a tax on the real property it- self. He had understood the learned attorney-general to say no; that, the rent, after it got into a man's pocket, was money, and that it was that which was taxed. The law proposed to tax rents as personal property and not as real estate. But how could anyone pay the tax upon land? He put the question, he said, as applied to the practical, or- dinary business affairs of life, of which the court was bound to take knowledge — except as he paid it from the rentals? The owner could not take a piece of the land and give it to the government as an equivalent for the tax. Is there any difference, then, between a tax on land and a tax on the rents therefrom? An unapportioned tax upon real estate the constitution forbade; could such a tax be laid upon the rents or income there- of? No one would say that such a law could be maintained. A tax upon land being forbidden, Congress could not wipe out the value of the land by a tax upon the income therefrom for a period of years. We have been lawyers all our lives and have followed scores of generations in considering the difference between land and the rent or profit thereon. We have found it to be an intangible and insen- sible thing. Illustrating this, he quoted Coke upon Littleton, which, he said, had been the law in all English Christendom ever since, that when a land owner grants the profits of his lands to another, the fee to the land itself passes, for what is land but the profit thereon? The attorney-general had said that the law taxed rents as personal property and not as rents. If that were so, it would still need to be apportioned among the states according to popula- tion, to be effective; but the law as- sessed a tax on rents as such, and not as personal property. He quoted nu- merous decisions by the Supreme Court of the United States itself that a tax upon the profits arising from a certain business or thing was a tax upon the business or thing itself. Therefore, he submitted the proposition, although with diffidence, because it had been so stoutly contested by his learned adver- saries, that a tax upon rents is a tax upon land, and required, by the same law and the same constitution, to be ap- portioned among the states, according to population, to be effective. And so as to personal property, a tax upon it was included within the term of direct taxes and valid only when apportioned among the states. Suppose a man, assessed on his per- sonal property, under a tax apportioned among the states, should refuse to pay on the ground that it was an excise tax, a duty, and appealed to the courts for relief. Would any court grant it? Not at all. The tax on interest of United States bonds was a tax on the bond it- self, as in the case of rents, and, there- fore, could not be legally collected. The interest on the bond issued by the United States or any other body politic, was a part of the bond itself, and insep- 10 ARGUMENTS AND OPINIONS IN THE LATEST FEDERAL INCOME TAX CASE. 11 arable from it. What value to me is a bond of the United States, payable 30 years hence, but for the fact that, in the meantime, it promises to pay me inter- est semi-annually at the rate of three per cent.? Concluding this part of the argument, Mr. Choate insisted that he had estab- lished beyond controversy the proposi- tion that a tax on rents is a tax on land, and, therefore, a direct tax. The other side had our briefs two weeks, and the only answer or suggestion they have been able to make is that of the attor- ney-general, that the law taxes rents as money in a man's pocket and not as rents. Mr. Choate sketched in a most inter- esting and instructive way the com- promise made in the constitutional con- vention relating to the matter of taxa- tion, by which the states surrendered to the United States the sole right to levy excises, duties and imposts and to con- trol and regulate commerce between the states, and the right to levy a direct tax upon the real and personal property in the states as an ultimate source of reve- nue for the maintenance of the govern- ment itself. It was by that bargain that the adoption of the constitution was brought about, and the question now was, said Mr. Choate, whether the bar- gain should be repudiated and the sea- board states should take back the price paid for it. Representation and direct taxation went hand in hand. It was the only thing that the framers of the constitu- tion said twice in that instrument. What was the reason? It was that those men were fresh from the conflict over the injustice of taxation without repre- sentation, and they proposed to prevent, as far as they could, the possibility of such an event as is proposed in the present law, that the representatives of a large proportion of the population should vote to compel the smaller pro- portion of population to pay more than their just part of the taxes. Mr. Choate asserted that the question that rents are inseparable from real es- tate, had never been decided by the court; it had never been considered nor even presented for consideration. In the Springer case, said Mr. Choate, Mr. Springer sued for the recovery of a year's income tax, when he was a rep- resentative of the outside world, not a representative in Congress as he has been since, and he averred that he had earned $50,000 that year. He was a lawyer, and advocated his own cause. Probably he was an exception to the rule which usually obtains in those cases. There was nothing in the pleadings in that case nor in the decision, said Mr. Choate, which precluded an affirmance of the proposition for which he con- tended. Mr. Choate then proceeded to give the court, at considerable length, his defini- tion of the "uniform" clause in the con- stitution. Mr. Carter, he said, had ex- plained that it meant that the tax should extend throughout the United States, and related to the plan and method of collecting the tax. Counsel felt constrained to concede something to the phrase, but the attor- ney-general, in himself representing the august power of the legal branch of the government, used the sponge, and sweeping his arm across the face of the instrument, calmly expunged the words as "mere surplusage." The meaning of the word, Mr. Choate said, was that in the levying of imposts, duties and excises, whenever done, there should be equal and exact relations be- tween the government and each and every citizen throughout the United States. The rule was introduced to put an end to the previously existing rule of inequality. This construction of the phrase, said Mr. Choate, had been uni- formly acted upon by the government ever since its beginning. "I call your honor's attention," he said, "to the fact that there was never a tariff act passed by the United States which made the rate of duty depend upon the person or corporation which paid it." Justice White — Mr. Choate, would not that construction destroy all specific duties provided in every tariff act? Mr. Choate — We do not claim such a right. We do not say that every like article shall pay the same rate of duty, or that every special class shall pay the same rate of duty, or that every article I 1^ of a special class shall pay the same rate. Justice White — Do not all the decis- ions of state courts upon the term "equal and uniform" establish the fact that you cannot tax a man with one dol- lar's worth of property at the same rate you do with $10? Mr. Choate — I think not. Not a single decision had been found in either the federal or state books, Mr. Choate said, that varied from the mean- ing of the word contended for by him- self and associate counsel — that the taxes shall be equal as between man and man. This brought him, said Mr. Choate, to the startling and monstrous doctrine propounded by the representatives of the government, that the inequalities or supposed inequalities of a tariff bill could not be compensated for by irregu- larities in another form of taxation. "Is this court ready to go to that length?" he asked. Before leaving this branch of the case, Mr. Choate said there was an unvarying line of decisions by state courts confirming the proposi- tion contended for by him. And it was illustrated and strengthened by the ex- ception quoted from Louisiana. Mr. Choate then proceeded to discuss the illegal exceptions made by the bill, the first the chief of which was the ex- emption of incomes of $4,000 and less. The meaning and import of the law, he asserted, was to punish the rich for being in that condition. Counsel who had preceded him advocated the law for the reason that it affected the rich men only, the extremely rich. I thought there was one law for the rich and for the poor. Oh, we are at the parting of the ways, your honors. The bill, he declared, was a deliberate strike by those who voted for it at those parts of the United States where money has accumulated. The exemption of $4,000 was the same as other blows at the constitution within the four corners of the document. No wonder that the President refused to sign the bill; no wonder that neither the President nor the Secretary of the Treasury recommended the adoption of the income tax. Justice Harlan — Do you concede that any exception may be made? Mr. Choate — We do not. While discussing the inequalities of exemption accorded to individuals and to corporations. Justice Brown sug- gested: "May it not have been that the exemp- tion of $4,000 to the individual was al- lowed as a reasonable amount for do- mestic and household expenditures, while the corporation is not compelled to spend anything for those purposes?" Mr. Choate — My impression is, your honor, that the law is made alike for the corporation and individual. The discrimination against corporations is but a punishment for their having en- gaged in that form of business which their states had held out to them as a proper and desirable method. Mr. Choate condemned the exceptions made in behalf of religious, charitable and educational institutions, mutual in- surance companies and savings banks. The last point presented was that state and municipal bonds were entitled to exemption from the operations of the law, upon the same theory that national bonds were exempt from state taxation. THE DECISION AND HOW THE JUSTICES STOOD. On the 8th of April, 1895, all the justices who sat in the case decided that so much of the Wilson law as applied to incomes from state and municipal securities and government bonds was unconstitutional, on the ground that it would be destructive to our complex system of govern- ment if either the federal or state governments could tax the securities issued by the other. By one majority the court decided that so much of the law as taxed in- comes derived from real estate and personal property was unconstitu- tional, on the ground that such levy is a direct tax and should have been apportioned among the several states according to their population. 12 ARGUMENTS AND OPINIONS IN THE On the other questions, the chief of which was whether a law exempt- ing $4,000 or any other sum from paying an income tax was uniform taxation within the meaning of the constitution, the justices were evenly divided, therefore a full decision had to await the return of Justice Jack- son, who was detained by illness. On Monday, May 20, Justice Jack- son having resumed his duties, the court by one majority decided all parts of the income tax feature of the law unconstitutional. In the first decision Justice Shiras of Pennsylvania had voted to sus- tain the tax on incomes from real and personal property. Just before the second decision was rendered he notified his associates that on more mature reflecticm he had changed his mind and now held that feature unconstitutional. Justice Jackson, however, decided the other way, leaving the court as a whole stand- ing as before with one majority against the law. Party lines were crossed by both sides, but sectional lines obviously affected the minds of some of the justices in making their interpreta- tions. Those who voted to sustain the law were Justice Harlan (Rep.) of Kentucky, Justice Brown (Rep.) of Michigan, Justice White (Dem.) of Louisiana, and Justice Jackson (Dem.) of Tennessee — 4. Those voting against the law were Chief Justice Fuller (Dem.) of Il- linois, Justice Field (Dem.) of Cali- fornia, Justice Brewer (Rep.) of Kansas, Justice Gray (Rep.) of Mas- sachusetts and Justice Shiras (Rep.) of Pennsylvania — 5. Sectionally the majority was well distributed — one justice being from New England, one from the Middle States, two from the West and one from the Pacific coast — all from the North. The minority was composed of one from the West and three from the South. Only three of the questions then in dispute have a bearing on the question of ratifying the pending amendment, and they are (i) whether a direct tax on property and income should be apportioned among the states according to their population; (2) whether a tax is uni- form if incomes to a certain amount are exempted, and (3) whether in- comes from federal or state bonds can be taxed without danger of breaking up the government. The court having been unanimous on this last point, it may be thought that no congress will lay such a tax, but as the pending amendment does not prohibit it, and will be thought by some to supersede not only the decision but the ground upon which it was founded, it may be claimed by others that the ratification of the amendment cannot be otherwise in- terpreted than as the granting of perfect liberty to congress and to state legislatures to tax each other's securities and therefore to destroy them in some crisis. GROUNDS OF THE DECISION, AS STATED BY THE CHIEF JUSTICE. 1. That by the Constitution Federal taxation is divided into two great classes — direct taxes, and (2) duties, im- posts and excises. 2. That the imposition of direct taxes is governed by the rule of apportion- ment among the several States, accord- ing to numbers, and the imposition of duties, imposts and excises by the rule of uniformity throughout the United States. LATEST FEDERAL INCOME TAX CASE. 13 3. That the principle that taxation and representation go together was in- tended to be and was preserved in the ■• Constitution by the establishment of the rule of apportionment among the sev- eral States. 4. That the States surrendered their power to levy imposts and to regulate ^ commerce to the General Government, and gave it the concurrent power to levy direct taxes in reliance on the pro- tection afforded by the rules prescribed, and that the compromises of the Consti- tution cannot be disturbed by legisla- ^ tive action. 5. That these conclusions result from the text of Uic Constitution and are sup- ported by the historical evidence fur- nished by the circumstances surrounding ^j the framing and adoption of that instru- ' ment, and the views of those who framed and adopted it. 6. That the understanding and expec- tation at the time of the adoption of the Constitution was that direct taxes would '0 not be levied by the General Govern- ment, except under the pressure of ex- traordinary exigency, and such has been the practice down to August 15, 1894. 7. That the taxes on real estate be- 1( long to the class of direct taxes, and that the taxes on the rent or income of real estate, which is the incident of its ownership, belong to the same class, and that taxe^ on personal property or on »> the income of personal property are likewise direct taxes. 8. That by no previous decision of this court has this question been adju- dicated to the contrary of the conclu- f» sions now announced. y. '\K JUSTICE HARLAN'S DISSENTING OPINION. In my judgment — to say nothing of the disregard of the former adjudica- tions of this court, and of the practice of the government for a century — this decision may well excite the gravest apprehensions. It strikes at the very foundations of national authority, in that it denies to the general government a power which is, or may become at some time, in a great emergency, such as that of war, vital to the existence and preser- vation of the union. It tends to re-es- tablish that condition of helplessness in which Congress found itself during the period of the articles of confederation, when it was without power, by laws operating directly upon individuals, to lay and collect, through its own agents, taxes sufficient to pay the debts and de- fray the expenses of government, and was dependent in all sudh matters upon the good will of the states, and their promptness in meeting the requisitions made upon them by Congress. Any attempt upon the part of Con- gress to apportion taxation of incomes among the states upon the basis of their population would, and properly ought to, arouse such indignation among the freemen of America that it would never be repeated. Under that system the people of a state containing 1,000,000 inhabitants, who receive annually $20,000,000 of in- come from real and invested personal property, would pay no more than would be exacted from the people of another state having the same number of inhabitants, but who receive an in- come from the same kind of property of only $5,0000,000. If this new theory of the constitution, as I believe it to be; if this new departure from the way marked out by the fathers is justified by the fundamental law, the American peo- ple cannot too soon amend their con- stitution. DISSENTING OPINION OF JUS- TICE WHITE. 1. The Government of the United States possesses plenary powers of tax- ation— all powers which belong to any Government as such — subject only to the limitation imposed by the Constitu- tion in forbidding the levying of an ex- port tax. 2. This power, unlimited in itself, is limited as to form by the requirement that direct taxes shall be apportioned according to population, and duties, ex- cises and imposts shall be uniform throughout the United States. 3. The limit as to apportionment is not a limitation on the power of taxa- tion, but a limitation of the manner in which the power shall be exercised. 14 ARGUMENTS AND OPINIONS IN THE I LATEST FEDERAL INCOME TAX CASE. 15 4. Whether a Federal income tax is direct or indirect does not depend alone upon the theories of economists, but upon the sense in which these words are used in the Constitution, as heretofore interpreted. 5. Shortly after the Constitution was framed (1794) Congress put a construc- tion upon these words by imposing a tax on carriages. The act was passed by a large majority, and was approved by Washington. After reviewing the cases, begin- ning with the Hylton case in 1796 and ending with the Springer case in 1880, Justice White claimed that all the decisions of the supreme court relating to the question had held that an income tax is an in- direct tax and does not need to be apportio<ned among the states ac- cording to their population. JUSTICE FIELD IN OPPOSITION TO THE TAX. Some decisions of this Court have qualified or thrown doubts upon the exact meaning of the words "direct taxes." Thus in Springer agt. United States (102 U. S. 586), it was held that a tax upon gains, profits and income was an excise or duty, and not a direct tax within the meaning of the Constitution, and that its imposition was not there- fore unconstitutional. And in Pacific Insurance Company agt. Soule (7 Wall. 433) it was held that an income tax or duty upon the amounts insured, renewed or continued by insurance companies, upon the gross amounts of premiums re- ceived by them and upon assessments made by them, and upon dividends and undistributed sums, was not a direct tax, but a duty or excise. In the discussions on the subject of direct taxes in the British Parliament an income tax has been generally designated as a direct tax, differing in that respect from the decision of this court in Springer against the United States; but, whether the latter can be accepted as correct or otherwise, it does not affect the tax upon real prop- erty and its rents and income as a di- rect tax. Such a tax is by universal consent recognized to be a direct tax. As stated, the rents and income of real property are included in the designation of direct taxes as part of the real prop- erty. Such has been the law in England for centuries, and in this country from the early settlement of the colonies; and it is strange that any member of the legal profession should at this day ques- tion a doctrine which has always been thus accepted by common-law lawyers. But the law is not invalid merely in its disregard of the rule of apportion- ment of the direct tax levied. There is another and equally cogent objection to it. In taxing incomes other than rents and profits of real estate it disregards the rule of uniformity which is pre- scribed in such cases by the Constitu- tion. . . . The taxes created by the law under consideration as applied to sav- ings banks or insurance companies, whether of fire, life or marine, or to buildings or other associations, or to conduct any other kind of business, are excise taxes, and fall within the require- ment, so far as they are laid by Con- gress, that they must be uniform throughout the United States. The Income Tax law under consider- ation is marked by discriminating fea- tures which affect the whole law. It discriminates between those who receive an income of $4,000 and those who do not. It thus vitiates, in my judgment, by this arbitrary discrimination, the whole legislation. The present assault upon capital is but the beginning. It will be but the stepping stone to others, larger and more sweeping, till our political con- tests will become a war of the poor against the rich; a war constantly grow- ing in intensity and bitterness. "If the Court sanctions the power of discrimi- nating taxation, and nullifies the uni- formity mandate of the Constitution," as said by one who has been all his life a student of our institutions, "it will mark the hour when the sure decadence of our present Government will com- mence." If the purely arbitrary limita- tion of $4,000 in the present law can be sustained, none having less than that amount of property being assessed or taxed for the support of the Govern- ment, the limitation of future Con- \t a gresses may be fixed at a much larger sum, at $5,000 or $10,000 or $20,000, parties possessing that amount alone I being bound to bear the burdens of Government; or