Direct Taxes

Ever wonder why imposing a federal income tax required passage of the 16th amendment?

Because America’s Founding Fathers explicitly prohibited any such tax in the U.S. Constitution.

Article I, Section 9, stipulates, “No capitation, or other direct, Tax shall be laid unless in Proportion to the Census or Enumeration herein before directed to be taken.” That meant that a direct tax, like today’s income tax, would have to be levied through the states, and in proportion to their populations, as determined by the census. The idea of individuals being compelled to complete 1040 forms in order to calculate their income tax bills personally would be inimical to the Founders’ view of tax justice.

The words “or other direct” were inserted upon passage of a motion by Delaware nationalist George Read, who “was afraid that some liberty might otherwise be taken to saddle the States, with a readjustment by this rule, of past requisitions of Cong[ress] and that his amendment by giving another cast to the meaning would take away the pretext”, reports James Madison in his notes from the Constitutional Convention.

Though all but forgotten 200 years later, the implied distinction between direct and indirect taxes was important. Though the difference is informal rather than legal, tax historians and philosophers throughout the centuries have designated direct taxes as those that are levied directly on an individual or his assets, while indirect taxes are applied to commercial activity. Income and property taxes, for example, are considered direct; customs duties and sales taxes are considered indirect.

Though imprecise, the distinction was more than one of semantics. As early as ancient Greece, direct taxation was viewed as incompatible with liberty, while indirect taxation was considered more conducive to its survival.

Centuries later, Baron de Montesquieu, the French philosopher on whose theory of the separation of powers America’s founders based our structure of government, argued: “Capitation is more natural to slavery; a duty on merchandise is more natural to liberty, because it has not so direct a relation to the person.”

The founders shared the view that direct taxes were dangerous and sought to protect the people by requiring that they be apportioned. The federal government would not be empowered to levy direct taxes on the people itself; rather each state would raise and remit to the national treasury an amount in proportion to its number of inhabitants.

This protection lasted until 1913, during a time when many were deluded by socialism, and the 16th Amendment scarred America’s fiscal landscape with the graduated income tax, an idea propounded by Karl Marx.