Indirect Taxation

Constitution of the United States, Article I, Section 8

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;

Constitution of the United States, Amendment XVI

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.

What is Indirect Taxation?

Ordinarily, all taxes paid primarily by persons who can shift the burden upon someone else, or who are under no legal compulsion to pay them, are considered indirect taxes; Pollock v. Farmers' Loan & Trust Co., 157 U. S. 429 (1895)

Congress is without means to prohibit the shifting of indirect taxes.

As the means by which the burdens of taxes may be shifted are as multiform and as various as is the power to contract itself, it follows that the argument relied on, if adopted, would control almost every conceivable form of contract, and render them void if they had the result stated. Thus, the price of all property, the result of all production, the sum of all wages, would be controlled irrevocably by a law levying taxes if such a law forbade a shifting of the burden of the tax and avoided all acts which brought about that result. It cannot be doubted that to adopt by implication the view pressed upon us would be to virtually destroy all freedom of contract, and in its final analyses would deny the existence of all rights of property. American Express Co. v. Michigan, 177 U.S. 404 (1900)

In Union Electric Company v. United States 363 F.3d 1292 (Fed. Cir. 2004) the Federal Circuit stated:

We conclude that an excise tax (in contradistinction to a direct tax) is a tax imposed on the acquisition, ownership, or use of particular kinds of categories of property that falls short of being a general tax on the whole of an individual's personal property.

Most recently the Supreme Court stated:

... indirect taxes are the familiar federal taxes imposed on activities or transactions. That category of taxes includes duties, imposts, and excise taxes, as well as income taxes. Moore v. US., 602 U.S. 572 (2024)

Corporations and businesses, who employ labor, are able to shift and pass on the cost of labor, including employment taxes, and other forms of taxes to consumers. It is obvious that individuals working for hourly wages absolutely lack this ability to shift indirect taxes.

Congress has a wide range of taxing power, and in deciding the constitutional limits on the power of indirect taxes the Court has opined that:

The power of taxation, which is expressly granted, is plenary, and is limited only by the requirement that it shall be exercised uniformly throughout the United States. South Carolina v. Baker, 485 U.S. 505, 523 (1988)

It is common knowledge, even found in Wikipedia: Income tax in the United States that:

The Supreme Court in Brushaber v. Union Pacific Railroad, 240 U.S. 1 (1916), indicated that the amendment did not expand the federal government's existing power to tax income (meaning profit or gain from any source) but rather removed the possibility of classifying an income tax as a direct tax on the basis of the source of the income.

Brushaber's claim was rooted in the perception that the 16th Amendment should be interpreted to mean that income taxes were merely removed from the definition of direct taxes that needed to be apportioned according to state populations. With the 16 Amendment, Congress had sought to tax the rents and incomes from property and from whatever source derived, that the Supreme Court in the Pollock, supra decision had previously exempted from taxation as being direct taxes.

The Supreme Court in Brushaber stated that the 16th Amendment did not change the nature of income taxes, but rather removed the requirement of apportionment. The Court stated:

The 16th Amendment does not purport to confer a new power of taxation upon Congress. It is simply an authorization to lay and collect taxes on income from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration. [Brushaber v. Union

Direct and Indirect Income Taxes

Indirect taxes were preferred by the framers of the Constitution, Alexander Hamilton wrote in the Federalist Papers No. 21:

It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; ...This forms a complete barrier against any material oppression of the citizens, by taxes of this class, and is itself a natural limitation of the power of imposing them. ...Impositions of this kind usually fall under the denomination of indirect taxes, and must always constitute the chief part of the revenue raised in this country.

The Supreme Court has been clear and consistent in classifing the income tax laws as an indirect tax, giving opinions to corporations and businesses brought before the Supreme Court. The income tax is not a direct tax on property, but it does function as a direct tax on individuals that applies to those who are merely hourly wage earners.

The income tax had its origin and took hold by aiming the taxing policies to the rich and the accumulation of wealth, where less than 3% of the population paid these income taxes. The Pollock decision was only concerned with separating the source of the income from taxing the source itself. The 16th Amendment was introduced to be sure that incomes, "from whatever source derived" was taxable as an excise or indirect tax.

The Internal Revenue Code, Subtitle A-Income Taxes PART I §61 states that "income means all income from whatever source derived, including (but not limited to) ..."

"Income from whatever source" means that the source or property, is separate from the income.

Congress has the power to tax wages and earnings, if these taxes are collected as indirect taxes. Employers are required to apply and collect the tax, the remainder of paid wages would become property of the wage earner. Congress has even taxed tips, and even lunch reimbursements are considered taxable events, Central Illinois Pub. Svc. Co. v. United States, 435 U.S. 21 (1978)

A withholding or payroll tax can be applied as an indirect tax, collected indirectly, as the same way Social Security Taxes are now collected. A tax on the wages after payment is presented should be considered a direct tax that must be paid directly to the government. Except for that the Constitution states that direct taxes must be apportioned. Just recently the Supreme Court promised to uphold this rule of apportionment for any direct tax in Moore v. US., 602 U.S. 572 (2024)

Wage earners and families do not have the ability to shift the burden of the income tax to someone else, like corporations or businesses can. The individual income tax puts the vast majority citizens are under legal compulsion to pay the tax directly under oath.

This link is to the President of the Senate accepting, for the record, the statement from then President Taft on June 16th, 1909 to the whole Senate: Government Archive.Org-Taft and nothing in the record of the debates changed any section of the Constitution regarding direct taxes, except to include rents and other investment incomes in the category of indirect taxation in contrast and in changing the rule set in Pollock that exempted certain sources of income. President Taft's message merely stated that:

The decision of the Supreme Court in the case of Spreckels Sugar Refining Company against McClain (192 U. S., 397) seems clearly to establish the principle that such a tax as this is an excise tax upon privilege and not a direct tax on property, and is within the federal power without apportionment according to population.

It is noted that during the 16th Amendment debates they recognized that economic writers of the time, including Adam Smith and prominent others, had pronounced income taxes as direct taxes. Ask any Artifical Intelligence (AI) program to define direct and indirect taxes, and it will tell you that direct taxes are taxes on property, and including income taxes. I have asked several AI programs to define direct and indirect taxes, found on THIS PAGE.

1. The "Corporate Income Tax" is an indirect tax as it applies to corporations, and is not subject to the apportionment rule. Businesses follow similar rules as corporations for determining taxable income. The key element of an indirect tax is that the tax is paid by persons or businesses who can shift the burden to someone else. Profit and income is realized after allowed deductions and credits conducted in the course of commerce and industry.

2. The "Individual Income Tax" is an indirect tax with plenary power under the Constitution. the Internal Revenue Code ¹ requires all employers to "deduct" (i.e., excise), and forward wage and employment taxes collected at the source or payment. In this method, the wage and employment taxes are indirect and within the constitutional authority of indirect taxes.

The Internal Revenue Code 26 U.S. Code § 3403: (a) Liability for tax. - The employer shall be liable for the payment of the tax required to be deducted and withheld under this chapter, and shall not be liable to any person for the amount of any such payment. ²

3. The "Individual Income Tax" is a direct tax, as it directly applies the tax onto wage earners and families, in sharp contrast to applying the tax onto taxable events. In practice, custom, and law, after the tax is paid, the money becomes the property of the employee, and any further tax on that money is a direct tax on property, which must be collected by rule of apportionment, This would remove wage earners and families from the tax rolls, without liability, penalty, or risk, due to the fact that the tax has already been paid. Making citizens directly liable for an indirect tax does not conform to the dictates of the Constitution, especially when the tax was excised, or extracted, or taken "...from whatever source derived" at the time of payment. The key element of a direct tax is that the tax is paid by someone who cannot shift the burden to someone else. Wage income is calculated without deductions that were part of that commercial transaction.

Taxes on individual income activity, i.e., wages and salaries, are subject to indirect taxes and must be collected indirectly. The first income tax in 1961 was an indirect tax, as it was collected by the employer and paid by the employer to the government. The Social Security tax is an indirect tax, as it is collected by the employer and paid by the employer to the government. The Current Tax Payment Act of 1943, Pub. L. 68, Ch. 120, 57 Stat. 126 (June 9, 1943), re-introduced the requirement to withhold income tax in the United States. Tax withholding had been introduced in the Tariff Act of 1913 but repealed by the Income Tax Act of 1916.

Congress may tax wages and salaries, subject to Constitutional restraints imposed upon indirect taxes. These taxes must be collected indirectly, without placing direct liability on citizens. The employment taxes collected by the employer is then paid to the government. The current policy of making citizens directly liable for an indirect tax that can be collected indirectly seems to be a violation of the Constitution. The Supreme Court has never been asked or addressed this issue, and only issued opinions to those corporations and business that have sued. Wages, subject to indirect income tax, but once wages and salaries are paid to the employee, the money is the property of the employee and the government has no right to it, unless under the rule of apportionment and representation.

Footnotes

1. 26 U.S. Code § 3402 - Income tax collected at source: (a)Requirement of withholding (1)In general. Except as otherwise provided in this section, every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with tables or computational procedures prescribed by the Secretary.

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2. 26 U.S. Code § 3403 - Liability for tax: The employer shall be liable for the payment of the tax required to be deducted and withheld under this chapter, and shall not be liable to any person for the amount of any such payment.

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