[Editor’s note: Phil Hinson has been a FAIRtax activist in Georgia for many years, most recently playing a central role in advocating for a State-Level FAIRtax. Phil was elected to the Board of Directors of Americans For Fair Taxation in July 2017. Phil has also been active in the Convention of States Movement and has taken a particular interest in the proposal of that body to repeal the Sixteenth Amendment to the Constitution. Phil discusses that proposal in this article. The FAIRtax, itself, has a Sunset Clause that calls for the repeal of the Sixteenth Amendment. We would like to thank Phil for submitting this analysis.]
By Philip Hinson
The Founding Fathers were students of history, including the history of governments and taxation. Their view was that direct taxes were the tools of tyrants and despots while indirect taxes were more compatible with their concepts of freedom and liberty. However, they did not want to go so far as to prohibit direct taxes, preferring instead to set up two separate and distinct rules for those two types of taxes. Although Americans do not make much of the distinction between those two categories of taxation today, it is very clear from reading the Constitution that this distinction was certainly fundamental to the Founder’s thinking. However, the Founders did not clearly define what constituted a direct or indirect tax within the Constitution itself.
Congress passed the first income tax statute during the Civil War (1861) to pay for that war. That income tax was repealed in 1872 – I guess it took legislators several years to steel themselves to relinquishing their hold on a revenue stream. A less cynical view might be that it took that long to pay off the debts remaining after the war was over. A few decades later, the 1894 Tariff Act included a provision for another income tax. The very next year (1895), the Supreme Court ruled that a tax on income from property was a direct tax and must therefore be apportioned (collected in a ratio of each state’s population). Congress struggled for some years with how to design an income tax which would pass Constitutional muster, given that pesky apportionment rule. Apportionment of a direct tax would mean that revenues raised by that direct tax would have to be levied in a ratio that approximates the ratio of that state’s population to the population of the entire nation. So if New Jersey had 7 ½% of the nation’s population, a direct apportioned tax would have to raise 7 ½% of its revenues from NJ. Finally, legislators threw up their hands and said, in essence, “this would be a lot easier if we just got rid of that apportionment rule”. In 1908 they passed what became the 16th amendment once it was ratified by the requisite number of states. In 1913, Congress accepted the final state ratification of that amendment and the 16th amendment was added to the Constitution.
I am well aware of the controversy surrounding that state ratification process and the argument that the amendment was never properly ratified by the required number of states as well as the accusations of fraud on the part of state attorneys general. I am also aware that there are those who have used this argument as the legal basis for challenging the income tax in court and those citizens have found themselves serving time in federal prison. I am inclined to believe that these well intentioned patriots have a strong case. However, I also believe that the prospect of winning a court case in which the evidence is more than 100 years old now, and the court would have to issue a judgement that would throw the federal government into financial chaos, is almost zero. Therefore, I believe that it is far more productive to focus on the solution than on the initial genesis of the problem.
The FairTax, coupled with a repeal of the 16th amendment, is such a solution. It is noteworthy in this regard that the FairTax is the only major tax reform proposal which would survive a repeal of the 16th. The FairTax is a form of consumption tax, all of which are indirect, and therefore it is the uniformity rule, rather than the apportionment rule, that is applicable. The FairTax as written would certainly pass the uniformity test and would therefore present no legitimate Constitutional difficulties.
Repeal of the 16th Amendment
[Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be determined by adding to the whole Number of free persons, including those bound to Service for a Term of Years, and excluding Indians not taxed, three fifths of all other persons.] The actual Enumeration shall be made within three Years after the first meeting of the Congress of the United States, and within every subsequent term of ten Years, in such manner as they shall by Law direct.
The Congress shall have power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.
[A] The Congress shall have power to lay and collect taxes on incomes, from whatever source derived,
[B] without apportionment among the several States, and without regard to any census or enumeration.
The 16th amendment has been widely misunderstood by the general public. To understand it fully, it is important to read the brief amendment with the relevant sections of the Constitution fresh in mind. The excerpts above from sections 2 & 8 of Article I contain the rules for apportionment (for direct taxes) and uniformity (for indirect taxes). I have broken down the language of the 16th into two sections for more clarity in this discussion. You won’t find any copies of the Constitution that separate these two conceptual parts of the 16th in this manner.
Section A (in green) is merely a repeat of what is in the body of the Constitution already – nothing new here. That isn’t just my opinion, the Supreme Court held in a case decided only three years after the ratification of the 16th that that amendment conveyed no new powers of taxation upon Congress. It merely removed the requirement to apportion an income tax on property.
However, those readers of the 16th not extremely familiar with the Constitutional rules for apportionment and uniformity read the second part (section [B] in blue) and do not really understand what it is talking about. So they revert back to section [A] and mentally say “Aha! I understand that.” So although the practical effect of the 16th is to enable the levying of an income tax, that is not what it technically does.
In legislative parlance, there is what is known as a simple repeal and an aggressive repeal. A simple repeal merely turns back the clock to where it was when the statute/amendment/whatever was enacted. An aggressive repeal, on the other hand, goes further than that in some regard. In the case of the 16th amendment, that act ended a controversy over whether an income tax was a direct or indirect tax. Therefore, a simple repeal would reopen that controversy. On the other hand, the convention of states (“COS”) simulation that COS Action conducted in Williamsburg, VA, in September of 2016 voted out an aggressive repeal that prohibited the levying of an income tax in the future. In effect, the delegates/commissioners went further in this regard than the Founders were willing to go. It is my considered opinion that this will make it more difficult to get the amendment ratified by the 38 states that are required to get this added to the Constitution.
Given the history of this Constitutional subject, there would seem to be an opportunity to craft a 16th amendment repeal that would be aggressive in the sense that it would affirm that an income tax is a direct tax and therefore the apportionment rule is applicable. This would affirm, rather than overturn, the wisdom of the Framers while at the same time clarify the area of controversy and make it politically impractical (but not technically unconstitutional) to levy an income tax in the future.
1 Pollock v. Farmer’s Loan and Trust Co. , 157 U.S. 429 (1895), affirmed on rehearing, 158 U.S. 601 (1895).
2 Changed by Section 2 of the 14th amendment.
3 Brushaber v. Union Pacific Railroad, 240 U.S. 1 (1916)
4 To understand why apportionment is politically impractical for an income tax, consider the following hypothetical example. Suppose West Virginia had half of the per capita income of New York. An apportioned income tax would have to be designed in which the rates would be twice as high in WV as in NY. How would you like to be a WV legislator voting for THAT tax regime? In fact, apportionment is such a high barrier that there has never been, in the entire history of the nation, an apportioned (direct) federal tax – of any kind.
[Editor’s note: The “Sunset Provision” of the FAIRtax Act, Title IV, Section 401 of HR25, does not address the type of repeal of the Sixteenth Amendment to the Constitution. The proposed new Title IV merely states that, if the Sixteenth Amendment is not repealed within seven years of the date of the FAIRtax act, then the FAIRtax Act become inapplicable to consumption that takes place afterwards. The Sales Tax Bureau under the FAIRtax Act survives for another six months.]
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