Limits to U.S. Taxation
Even though the U.S. Congress has unlimited power to spend as they desire, their power to tax does have some limitations. This is of interest to Organic Wealth readers because there’s a political movement underway that desires to begin confiscating existing wealth. They claim it would be just on the ultra-wealthy, but we all know their thievery will expand over time.
In chapter six, Power Restrained, I examine the limits the U.S. Constitution has on taxation.
The first limit is called Uniformity and it applies to indirect taxation. These kinds of taxes (duties, imposts and excises) are part of the indirect category because the tax isn’t paid directly to the federal government by the taxpayer. The tax becomes part of the cost of an item and pass-through to the government. It’s the merchants who pay the taxes to the government, though the money was/will be received from the consumer. Gasoline excise taxes today are pass-through indirect taxes.
Indirect taxation is required to be uniform throughout the United States. This means that every entity that is the object of the tax must pay the exact same amount. The goal with uniformity is equal tax treatment to prevent corruption and favoritism.
The Congress shall have 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; but all Duties, Imposts and Excises shall be uniform throughout the United States; (US Const. art. 1, sec. 8, cl. 1).
Apportionment
The second category of taxation is called direct taxes and they must adhere to the rule of Apportionment.
Direct taxes shall be apportioned among the several States (art. 1, sec. 2, cl. 3).
Direct taxes should be defined as any tax that’s paid directly to the government. These taxes are not consumption taxes like those in the indirect category. They are compulsory and apply to existing wealth. Examples are income, property and wealth taxes.
Apportionment means the tax revenue generated from each state must be proportional to that state’s population percentage compared to the entire country. For example, if California has 12% of the U.S. population, then any direct tax on citizens of California cannot exceed 12% of the total raised from all the states. So if the federal government wanted to raise $100 billion from wealth taxes, they could only take $12 billion from citizens of California.
If equal tax treatment is the goal, having to adhere to apportionment is impossible. It’s why there isn’t a federal property tax and why a wealth tax is controversial.
The Founders didn’t care about equal tax treatment for direct taxes because their only purpose was in cases of emergencies, such as war. The normal tax revenues would come from indirect taxation methods. The government needed another source in case funds were needed quickly. As it turns out, borrowing is how the U.S. raises funds for emergencies and everything else. Government debt has made apportionment moot, but not necessarily so for direct taxation.
You may have noticed that I defined direct taxation as any payment made directly to the government. This should have been the definition, but Courts misconstrued its meaning. They decided between easily apportionable or not to determine whether a tax was direct or indirect.
They also expanded the definition of indirect taxation. So instead of just pass-through taxes, they ruled other taxes could be indirect if they’re on incidents of ownership or privileged actions. Initially, this is how the income tax was allowed because they weren’t taxing the individual, but their privilege in earning an income. The Court ridiculously called the income tax, excise taxes.
If you read Organic Wealth, you will learn all the details in how we arrived where we are at. In a follow up post, I will show just how wrong these Courts were in misjudging the Founders’ intent and why we can’t trust any Court to protect organic wealth.