A Short History of Property, Labor, Wealth, Profit & Taxation in America
In its early history, not wanting to deprive the people of basic subsistence, the United States taxed non-essential luxury goods. From 1791 to 1802, the federal government was supported by internal taxes on distilled spirits, carriages, refined sugar, tobacco and snuff, property sold at auction, corporate bonds, and slaves. The high cost of the War of 1812 brought the nation’s first sales taxes on gold, silverware, jewelry, and watches. In 1817, however, Congress did away with all internal taxes, relying on tariffs on imported goods.
In 1862, in order to support the Civil War effort, Congress enacted the nation’s first income tax law. It was a forerunner of our modern income tax in that it was based on the principles of graduated, or progressive, taxation and of withholding income at the source. During the Civil War, a person earning from $600 to $10,000 per year paid tax at the rate of 3% (the average skilled tradesman made less than $600 per year in 1860, while a common laborer made less than $300, so workers were tax-exempt). Those with incomes of more than $10,000 paid taxes at a higher rate. Additional sales and excise taxes were added, and an “inheritance” tax also made its debut. In 1866, internal revenue collections reached their highest point in the nation’s 90-year history – more than $310 million, an amount not reached again until 1911.
In 1868, Congress again focused its taxation efforts on tobacco and distilled spirits, and in1895, the US Supreme Court decided that the income tax was unconstitutional because it was not apportioned among the states in conformity with the Constitution.
It was understood, in early agrarian America, that one’s labor was one’s primary and essential property, and that a free man had the inalienable right to the fruits of his labor and to freely exchange such fruits with others. Thus, any non-tangible compensation for one’s free labor, such as money (merely a token of exchange for later redemption), was no different from a direct barter, and no less than 100% one’s own natural property.
It was only when one created surplus (profit or unearned income), or more value than one produced by one’s own labor, that one had economic “income” which accumulates into economic wealth (capital). Economic surplus (profit) can be generated only by the exploitation of the labor of others, by charging interest on a monetary loan, or reaping dividends from an economic investment. Or it can be generated by appropriating part of the natural commons for one’s exclusive use – land and its bounty – and charging rent to others who are thereby deprived of the rights of secure tenure. It is this latter form of “real property” that is purely a social invention and hence not inalienable.
True income (wealth accretion), being a form of theft from others, demands a return to society in the form of taxation, tariff or excise. It was broadly understood that a man’s wages belonged to him alone; but profit, interest, dividend and rental income belonged in part to everyone and could be legitimately re-appropriated to redress the economic imbalance.
This was, in fact, the view of Thomas Paine, expressed in his final revolutionary pamphlet, Agrarian Justice (1797), and shared by a number of great American thinkers, such as Henry George (the author of the most read book in America after the bible, Progress and Poverty, 1879). And it was for this reason that Paine proposed an inheritance tax to redress the imbalance once every generation and to fund a universal social security program, and that George proposed a single tax on land (the expropriated commons).
But, since our national constitution was written by wealthy land-owners, and Congressional acts were often made at the expense of the agrarian and working classes, the wages of labor were considered constitutionally taxable by the federal government while income from artificial property was not. This came to a head when Congress, in 1894, attempted to impose a federal tax of just 2% on incomes over $4,000 (worth $107,446 today). Derided as “un-Democratic, inquisitorial, and wrong in principle”, it was challenged in federal court and ruled unconstitutional by those who controlled the nation’s wealth.
So in 1909, President William Howard Taft proposed a 2% federal income tax on corporations – “upon the privilege of doing business as an artificial entity and of freedom from a general partnership liability enjoyed by those who own the stock” – and a constitutional amendment to allow an income tax. That 16th Amendment, opposed by northeastern industrialists, was nevertheless ratified in 1913 and the Revenue Act of the same year, signed by Woodrow Wilson, enabled a tax on income “from any source whatever” [see endnote for discussion].
Yet that first constitutional income tax was a very progressive tax, because of the nation’s first populist uprising. The Socialist Labor Party advocated a graduated income tax in 1887,and the short-lived Populist Party demanded a graduated income tax in its 1892 platform. So the tax was 1% on the incomes of couples exceeding $4,000 (about $94,000 today), as well as those of single persons earning more than $3,000 (about $74,500 today), and up to a 7% top marginal rate for income beyond $500,000 (nearly $12 million today). This 7:1 ratio was the highest and most progressive America ever had (Reagan dropped it from 6.36:1 to 1.87:1 in 1986, and today it’s a theoretical 2.64:1). It would require only a few years following ratification for the federal income tax to become the chief source of revenue for the federal government, but less than 1% of the population paid federal income tax at the time. The 99% were free.
Taxation and war have always been tied at the hip in America. The nation’s first income tax (later ruled unconstitutional) was initiated to pay for the Civil War. The 16th Amendment was passed in time for WWI and, by the depth of our involvement in WWII, the top marginal rate was 94% for incomes over $200,000 (more than $2.5 million today) with no taxation below an income of $2,000 (almost $26,000 today). But Congressional slight of hand maneuvers brought millions of additional Americans onto the tax rolls. This included taxation of both state and federal public employees (who serve the public but are taxed to pay for their own wages), basing taxes on gross – rather than net after living expenses – income with a “standard deduction”, serial reduction of the statutory exemption and dependent deduction, the initiation of wage withholding, and a temporary Victory Tax of 5% on gross earnings beyond $624 ($8,000 today). Withholdings were required even on those with non-taxable earnings, forcing the filing of a return in order to receive a refund, thus circulating a great deal of money through the treasury and avoiding federal borrowing – in effect, an interest-free loan from workers to the government. To further the subterfuge, Congress created the “adjusted gross income” which, for businesses was after-expense net income but for wage earners was gross personal income.
The income tax was magically transformed from a “class tax” to a “mass tax” under the guise of a war emergency. The number of returns filed in 1939 was approximately 4 million, or 3% of the population. By 1945 the number of people required to file a tax return increased to almost 50 million – 36% of the American people. The income exemption and standard deduction were not raised until 1969.
The definition of “income” in the 16th Amendment was economic gain beyond basic expenses, and the income threshold for taxation reflected this concept. Because of the massive currency inflation caused by World War II, somewhere around 1943–1944 the cost of living exceeded the statutory exemptions. Since then, the cost of living has far exceeded the statutory exemptions and standard deduction. In 1913 the minimum taxable income was three to six times the average salary. Today the statutory exemption and standard deduction is approximately one-tenth the average cost of living. As a result, today’s workers are enslaved both to their employers and to the government.
As America has seen both income and wealth concentrate into the upper echelons of society greater than at any time since the 1920’s, one of the two major political parties hopes to further reduce taxation on the richest Americans and on such unearned income as capital gains, and decries any attempt at distributive justice as “socialism”.
Addendum on Profit
What profits a man if he gains the world but loses his soul?
– Mathew 16:26
Entrepreneurial profit is, technically, the excess income accrued to a person from the labor of others solely due to an ownership position. In other words, profit in the purest sense is unearned income. And anything unearned, or accrued merely from a position of economic privilege, is a form of theft from the commons or from the labor of others less fortunate (but often more skilled).
Business overhead is something entirely different, and each business is organized differently, has different fixed and variable costs, and re-invests income in different proportions. So there is no standard, and a mathematical average would be meaningless, since averages are skewed by the extremes (and there are far too many extremes in this business – at both ends).
A business owner, who is also a laborer in the business, deserves a reasonable wage as well as enough income to cover all overhead with perhaps some additional to invest back into the venture (though his workers must use their wages alone to re-invest in tools). That additional is often referred to as “profit”. But, if it’s re-invested, then it’s actually a capital expense which reduces net income.
There are three types of true profit:
- unearned income accrued from the privilege of business ownership
- interest and dividends from financial investment (another privilege of wealth, which contributes nothing of value to society but creates constant inflation and cyclical recessions)
- the unearned economic appreciation of “real” property, typically due either to social investments or to speculative pressures (neither of which are created by the “owner”)
In all cases, profit is unearned by one’s own efforts and hence illegitimate and immoral – particularly profit on land and other natural resources which were granted by the Creator of the Universe for our collective use and stewardship, but which can never be rightfully owned, exploited or sold.
LAND, n. : A part of the earth’s surface, considered as property. The theory that land is property subject to private ownership and control is the foundation of modern society. Carried to its logical conclusion, it means that some have the right to prevent others from living. – The Devil’s Dictionary, 1911
The Distinction between Direct and Indirect Taxation
Indirect taxes are duties, imposts, and excises. “Duties and imposts are terms commonly applied to levies made by governments on the importation or exportation of commodities. Excise taxes are those laid upon the manufacture, sale or consumption of commodities within the country, upon licenses to pursue certain occupations, and upon corporate privileges.”– Flint v. Stone Tracy Co. (1910)
Indirect taxes can be avoided by refraining from certain transactions or passed on in the form of higher prices, and are therefore voluntary.
A direct tax cannot be avoided or passed on. There is nothing you do that causes you to owe the tax. You must pay a direct tax for the simple reason that you exist and the tax is levied on you. A direct tax is:
“Any tax when placed on the right of the man… to live is a capitation tax and as direct as any tax can be.” Brief for appellant, Flint v. Stone Tracy Co. (1910).
An example of a direct tax is a tax on land because of ownership. It is immaterial what the land is used for, whether or not the land is economically productive, or who owns it. The tax is on the land and the owner of the land pays the tax.
An indirect income tax is either a tax on a privilege, measured by income, or it is a tax on unearned income or profit which diminishes only the income and leaves the source of the income – the underlying capital or the original principle – whole.
A direct income tax is a tax on gross income that does not derive from any privilege. If a man works and makes only enough money to meet his needs and the needs of his family, any tax on his wage or salary is a direct tax because the man is diminished by the tax, and it is thus on the man’s right to exist. It is not a tax he can avoid or pass on to someone else.
The Constitution was written in 1787 and ratified in 1789. At that time the undisputed authority for the English-speaking world on the issues of economics, finance and taxation was Adam Smith, author of Wealth of Nations (1776). This book was authoritatively quoted by the Supreme Court in the Hylton Case (1796), the first tax case to come before the nation’s highest court challenging the taxation clauses of the Constitution.
Smith’s authority is noted again almost 100 years later in the opening argument in the landmark Pollock Case (1895): “Every member of that [Constitutional] Convention was familiar with the handbook of statesmen of that age – Adam Smith’s Wealth of Nations…”
In Wealth of Nations, Smith explained, “Capitation taxes, so far as they are levied upon the lower ranks of people, are direct taxes upon the wages of labor….”
The Pennsylvania Minority, a group of delegates to the 1787 Constitutional Convention who dissented from the document sent to the states for ratification, objected over this kind of taxation, and explained:
“The power of direct taxation applies to every individual … it cannot be evaded like the objects of imposts or excise, and will be paid, because all that a man hath will he give for his head. This tax is so congenial to the nature of despotism, that it has ever been a favorite under such governments… The power of direct taxation will further apply to every individual … however oppressive, the people will have but this alternative, either to pay the tax, or let their property be taken for all resistance will be vain.”
President Thomas Jefferson abolished the Federal income tax during his first term in office. He stated, in his Second Inaugural Address on March 4, 1805:
“The remaining revenue on the consumption of foreign articles is paid chiefly by those who can afford to add foreign luxuries to domestic comforts, being collected on our seaboard and frontiers only, and incorporated with the transactions of our mercantile citizens, it may be the pleasure and the pride of an American to ask, What farmer, what mechanic, what laborer ever sees a taxgatherer of the United States?”
Pollock v. Farmers’ Loan & Trust Company (1895), was a split 5–4 Supreme Court ruling that inverted the previous understanding of constitutional taxation. The Court ruled that the unapportioned income taxes on interest, dividends and rents imposed by the Income Tax Act of 1894 were, in effect, direct taxes, and were unconstitutional because they violated the provision that direct taxes be apportioned.
Senator Norris Brown (R-Nebraska), was the author of the 16th Amendment to the Constitution, also known as the Income Tax Amendment.
The goal of the Income Tax Amendment was to strike down the Supreme Court’s Pollock Rule, which converted an income tax on the net income of businesses and investments from an indirect tax into a direct tax required to be apportioned by the Constitution.
Senator Brown’s intent in drafting the 16th Amendment can be determined from congressional debates and from an article he wrote entitled: “Shall the Income Tax Amendment be Ratified” (Senate Document No. 705, 61 Congress, 1910, and also in Editorial Review, April, 1910). Brown maintained that the Pollock Rule was unjust, inequitable, and politically impossible.
In his article, Senator Brown specifically stated what the Amendment intended to tax:
“If the income arises from an investment in lands, it should be taxed; if it arises from investments in manufacturing enterprises, in railroads, in banks, in newspapers, in the mercantile business, or in steamship lines, it should be taxed. Why should an income arising from an investment in State or municipal bonds not be taxed? Why should the holder of these securities enjoy his income free from any contribution to assist this Government, which protects him and his property no less than it protects other people owning another class of property? Why should he escape and other people be compelled to pay?”
Alabama became the first state to ratify the 16th Amendment. The only question asked during the debate in the House was by Rep. Glover who wanted to know if the Income Tax Amendment would affect salaries. “Col. Sam Will John responded that it would not,” reported The New York Times. The Alabama Legislature, along with everyone else in America at that time, understood that the “income” to be taxed was passive income from investment and business profit.
The Supreme Court reiterated this understanding in Eisner v. Macomber (1919) that “Income may be defined as the gain derived from capital, from labor, or from both combined.”
The Sixteenth Amendment
Senate Joint Resolution 25, April 28, 1909:
“Resolved by the Senate and House of Representatives of the United States of America in Congress Assembled (two-thirds of each House concurring therein). That the following section be submitted to the legislatures of the several States, which, when ratified by the legislatures of three-fourths of the States, shall be valid and binding as a part of the Constitution of the United States:
The Congress shall have power to lay and collect taxes on incomes and inheritances.
The proposed amendment was rejected. As explained by Senator Rayner of Maryland “Congress has the power now to lay and collect taxes on incomes and on inheritances… I will just call the Senators’ attention to the fact that unless you change the clause of the Constitution which provides for apportionment the joint resolution would not repeal that clause.”
Senate Joint Resolution 39, June 17, 1909:
“The Congress shall have power to lay and collect direct taxes on incomes without apportionment among the several States according to population”
This proposal was also rejected but only after serious debate which revolved around the distinction between “direct” and “capitation” taxes, which left the issue confused.
Senate Joint Resolution 40, June 28, 1909, which was passed and ratified as the 16th Amendment:
“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.”
It makes no provision for the repeal of the clauses requiring apportionment of direct taxes, because it was not the intent of Congress to levy a direct tax, but to clarify that a tax laid upon income, derived from real and personal property, was an excise tax. In other words, Congress specifically intended that the gains and profits derived from the income of real and personal property be treated in the same manner as the gains and profits derived from business and professional pursuits. In other words, the Sixteenth Amendment is a net-income tax, not a gross income tax.
In the debate over the Corporation Excise Tax of 1909, President Taft, in a letter to both the Senate and the House of Representatives, made this statement:
“The decision in the Pollock case left power in the National Government to levy an excise tax, which accomplishes the same purpose as a corporation income tax and is free from certain objections urged to the proposed income-tax measure… The decision of the Supreme Court in the case of Spreckles Sugar Refining Company against McCain (192 US 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. The tax on net income is preferable to one proportionate to a percentage of the gross receipts, because it is a tax upon success and not failure.”
However, over time and through congressional wordsmithing and court misrepresentations, the meanings of direct and indirect tax have been distorted and confused, with the revenue laws now based on the understanding that taxes on income from wages are indirect taxes. The United States Court of Appeals for the District of Columbia Circuit, for instance, has stated: “Only three taxes are definitely known to be direct: (1) a capitation [a head tax or poll tax], (2) a tax upon real property, and (3) a tax upon personal property.” – Murphy v. Internal Revenue Service and United States (2007)
by Robert Riversong: may be reproduced with attribution for non-commercial purposes and a link to this page
See also: Economic Secession – War Tax Resistance