The Failure of Constitutional Challenges to the Federal Income Tax
The federal government’s imposition of taxes on income is an issue that affects every citizen in the United States. It requires businesses to file quarterly returns and employees to file W-2s and 1099s each year in April. These filings ultimately lead to citizens paying the federal government a portion of all income under the laws in place during the taxable year.
For over a century, citizens and politicians have fought over the fairness of the tax system. In 2020, that argument centers around our progressive tax rates and whether the wealthy are paying their fair share. The Democrats and Republicans are split on this issue. Taxation is one of the many hot button issues in the United States that could decide various federal elections.
While a majority of the country argues over fairness, there is a minority of citizens and organizations who attempt to attack the system at its source. Their argument involves challenging the constitutionality of a Congressionally mandated income tax. This is a fringe argument, but one that is passed around on social media and occasionally finds its way into a federal court. The argument is appealing to some listeners as it would alleviate their burden each April. This disinformation is dangerous as “tax protesters” follow this logic and refuse to file taxes. This refusal can lead to criminal charges including failure to file and tax evasion. Every one of the arguments attacking the Constitutionality of a federal income tax has been heard, and shot down, by a federal court. The arguments are so disfavored that federal courts will often order frivolous argument penalties against litigants who assert a Constitutionality argument in their defense.
This blog post will provide information rebutting the main constitutionality arguments against the federal income tax. The hope is that accurate information will help taxpayers understand the system and forego some of the dangers associated with such a stance in Court. The blog will be broken down into two parts: 1) the source of federal taxation power and the history of the federal income tax and 2) a review of common constitutionality arguments and the accompanying analysis by federal courts of appeals.
Source of the Federal Taxation Power and the History of the Federal Income Tax
Article I, Section 8 of the Constitution gives Congress the power to “lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States.” This Section is straight forward. The Constitution grants Congress the power to enact laws which tax citizens to provide for the general welfare and defense of the country. The early tax bills passed by Congress involved tariffs and excise taxes. Income was not taxed for the first 100 years of the country’s existence. However, that changed during the civil war.
In 1861, Congress passed the first income tax on United States’ citizens. The bill was passed to fund the Union’s civil war efforts. The bill placed a 3% tax on all incomes over $600. There was minimal litigation over the federal government’s authority under this bill. The law was repealed in 1871 following the end of the civil war.
For the next 20 years, the federal government paid for defense and other projects with monies raised from tariffs and excise taxes. These taxes provided adequate cash flow. A tax on citizen income was unnecessary. That changed in the 1890’s. In this decade, the government was underfunded and needed a new source of income. In 1894, Congress enacted a second piece of federal income tax legislation and its first when the country was not at war (The Income Tax Act of 1894). The bill provided for a 2% tax on all income over $4,000.
The Income Tax Act was highly contested in the following years. Various citizens and groups filed challenges to the Constitutionality of the federal income tax as legislated. Various courts of appeals answered these challenges in a group of cases now known as The Income Tax Cases. These cases started the public debate which exists to this day. The populists backed the income tax because, unlike consumption taxes, an income tax would ensure the wealthy were paying their fair share. The populists viewed the consumption tax as being inherently unfair – a person making $100,000 per year with acres of land could theoretically pay the same amount of tax as the poor. The income tax in the late 1890’s was spearheaded by the populist movement. Their movement received little assistance from the major political parties during this period.
Following various challenges to the Income Tax Act, the Supreme Court reviewed the legislation in Pollock v. Farmer’s Loan & Trust Co. (1895). In Pollock, the Supreme Court ruled The Income Tax Act of 1894 was unconstitutional because it levied an income tax that was not apportioned by population. It is important to note the Court’s decision was based on the lack of apportionment among the state population. They did not address the Constitutionality of income taxation on its face.
For the next decade, the political debate went forward, but legislation was non-existent. No bill was put forward during this period due to concern it would conflict with the decision in Pollock. In the early 1900’s, the concept of income taxation began to garner support from Republicans and Democrats. In 1906, Teddy Roosevelt offered his approval of using an income tax to fund government operations. President Taft echoed this support two years later in 1908. With the main political parties behind taxing citizen income, politicians began an open discussion about how to get around the Pollock decision.
The political debate during this time centered around two separate strategies to institute the federal income tax: 1) passing a bill and forcing the Supreme Court to confront their decision in Pollock or 2) drafting and proposing a Constitutional amendment which would allow Congress to tax citizen income directly (not apportioned among the states). Most politicians were hesitant to challenge the Supreme Court by passing legislation which clearly confronted a Court decision from 10 years prior.
In 1909, Congress agreed on the language for the proposed 16th Amendment to the United States Constitution: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” The amendment required approval by ¾ of the states. In 1913, there were 48 states in the union. Thus, the amendment required approval from 36 states before it would become valid constitutional law.
In 1913, 38 states had ratified the proposed constitutional amendment. The 16th amendment became law that year, and Congress has utilized this constitutional authority to pass various income tax legislation. This amendment provides the foundation from which our current income tax structure is built. It provides the basis for the vast majority of criminal tax fraud and tax evasion cases throughout the United States.
The legislative history is clear on Congress’ ability to tax citizen income. However, various tax protesting groups and individual citizens have challenged the validity of income taxation. These challenges include: 1) the 16th amendment was not properly ratified, 2) income taxation is an illegal taking without due process in violation of the 5th amendment to the United States Constitution, 3) money is not appropriately classified as income without a gold backing standard, and 4) filing taxes is a voluntary act and Congress cannot require a citizen to file returns and pay taxes.
Each of these arguments has been shot down over the years by a federal court. None of them form a valid legal defense for tax fraud, tax evasion or failure to file charges. In the second part of this post, we will dig a little deeper into the arguments above and review the federal courts of appeals cases that dispose of these issues.