Opinion · Supreme Court of the United States
Pollock v. Farmers' Loan & Trust Co.
15 S. Ct. 673
- Type
- Opinion
- Court
- Supreme Court of the United States
- Jurisdiction
- Federal
- Date
- 1895-04-08
- Topic
- general
declining to resolve a constitutional challenge to a tax statute under decisions considering a different law | declining to resolve a constitutional challenge to a tax statute under decisions considering a different law | imposing, sua sponte, sanctions on attorney for raising unapportioned direct tax argument on appeal | “Congress cannot tax exports, and it must impose direct taxes by the rule of apportionment, and indirect taxes by the rule of uniformity. Thus limited, and thus only, it reaches every subject, and may be exercised at discretion.”
Citator
- Authority status
- negative
- Cited by
- 557 opinions
- Negative treatment
- 1 citing opinion
POLLOCK v. FARMERS' LOAN TRUST CO.,157 U.S. 429(1895)
15 S.Ct. 673
POLLOCKv. FARMERS' LOAN AND TRUST COMPANY.
APPEAL FROM THE CIRCUIT COURT OF THE UNITED STATES FOR THE SOUTHERN
DISTRICT OF NEW YORK.
No. 893.
Argued March 7, 8, 11, 12, 13, 1895.
Decided April 8, 1895.
It was further alleged that under and by virtue of the powersPage 431conferred upon the company, it had from time to time taken and executed, and was holding and executing, numerous trusts committed to the company by many persons, copartnerships, unincorporated associations, and corporations, by grant, assignment, devise, and bequest, and by orders of various courts, and that the company now held as trustee for many minors, individuals, copartnerships, associations, and corporations, resident in the United States and elsewhere, many parcels of real estate situated in the various States of the United States, and amounting, in the aggregate, to a value exceeding five millions of dollars, the rents and income of which real estate collected and received by said defendant in its fiduciary capacity annually exceeded the sum of two hundred thousand dollars.
The bill also averred that complainant was and had been since May 20, 1892, the owner and registered holder of ten shares of the capital stock of the company, of a value exceeding the sum of $5000; that the capital stock was divided among a large number of different persons who as such stockholders constituted a large body; that the bill was filed for an object common to them all; and that he, therefore, brought suit, not only in his own behalf as a stockholder of the company, but also as a representative of and on behalf of such of the other stockholders similarly situated and interested as might choose to intervene and become parties.
It was then alleged that the management of the stock, property, affairs, and concerns of the company was committed under its acts of incorporation to its directors, and charged that the company and a majority of its directors claimed and asserted that under and by virtue of the alleged authority of the provisions of an act of Congress of the United States entitled, "An act to reduce taxation, to provide revenue for the government, and for other purposes," passed August 15, 1894, the company was liable and that they intended to pay to the United States before July 1, 1895, a tax of two per centum on the net profits of said company for the year ending December 31, 1894, above actual operating and business expenses, including the income derived from its real estate andPage 432its bonds of the city of New York; and that the directors claimed and asserted that a similar tax must be paid upon the amount of the incomes, gains, and profits, in excess of $4000, of all minors and others for whom the company was acting in a fiduciary capacity. And further, that the company and its directors had avowed their intention to make and file with the collector of internal revenue for the second district of the city of New York a list, return, or statement showing the amount of the net income of the company received during the year 1894 as aforesaid, and likewise to make and render a list or return to said collector of internal revenue, prior to that date, of the amount of the income, gains, and profits of all minors and other persons having incomes in excess of $3500, for whom the company was acting in a fiduciary capacity.
The bill charged that the provisions in respect of said alleged income tax incorporated in the act of Congress were unconstitutional, null, and void, in that the tax was a direct tax in respect of the real estate held and owned by the company in its own right and in its fiduciary capacity as aforesaid, by being imposed upon the rents, issues, and profits of said real estate, and was likewise a direct tax in respect of its personal property and the personal property held by it for others for whom it acted in its fiduciary capacity as aforesaid, which direct taxes were not in and by said act apportioned among the several States as required by section 2 of article I of the Constitution; and that if the income tax so incorporated in the act of Congress aforesaid were held not to be a direct tax, nevertheless its provisions were unconstitutional, null, and void in that they were not uniform throughout the United States as required in and by section 8 of article I of the Constitution of the United States, upon many grounds and in many particulars specifically set forth.
The bill further charged that the income tax provisions of the act were likewise unconstitutional in that they imposed a tax on incomes not taxable under the Constitution and likewise income derived from the stocks and bonds of the States of the United States and counties and municipalities therein,Page 433which stocks and bonds are among the means and instrumentalities employed for carrying on their respective governments, and are not proper subjects of the taxing power of Congress, and which States and their counties and municipalities are independent of the general government of the United States, and the respective stocks and bonds of which are, together with the power of the States to borrow in any form, exempt from Federal taxation.
Other grounds of unconstitutionality were assigned, and the violation of articles IV and V of the Constitution asserted.
The bill further averred that the suit was not a collusive one to confer on a court of the United States jurisdiction of the case, of which it would not otherwise have cognizance, and that complainant had requested the company and its directors to omit and refuse to pay said income tax, and to contest the constitutionality of said act, and to refrain from voluntarily making lists, returns, and statements on its own behalf and on behalf of the minors and other persons for whom it was acting in a fiduciary capacity, and to apply to a court of competent jurisdiction to determine its liability under said act, but that the company and a majority of its directors, after a meeting of the directors, at which the matter and the request of complainant were formally laid before them for action, had refused and still refuse, and intend omitting to comply with complainant's demand and had resolved and determined, and intended to comply with all and singular the provisions of the said act of Congress, and to pay the tax upon all its net profits or income as aforesaid, including its rents from real estate and its income from municipal bonds, and a copy of the refusal of the company was annexed to the complaint.
It was also alleged that if the company and its directors, as they proposed and had declared their intention to do, should pay the tax out of its gains, income, and profits, or out of the gains, income, and profits of the property held by it in its fiduciary capacity, they will diminish the assets of the company and lessen the dividends thereon and the value of the shares; that voluntary compliance with the income tax provisions would expose the company to a multiplicity of suits, not only by andPage 434on behalf of its numerous shareholders, but by and on behalf of numerous minors and others for whom it acts in a fiduciary capacity, and that such numerous suits would work irreparable injury to the business of the company, and subject it to great and irreparable damage, and to liability to the beneficiaries aforesaid, to the irreparable damage of complainant and all its shareholders.
The bill further averred that this was a suit of a civil nature in equity; that the matter in dispute exceeded exclusive of costs the sum of five thousand dollars, and arose under the Constitution or laws of the United States; and that there was furthermore a controversy between citizens of different States.
The prayer was that it might be adjudged and decreed that the said provisions known as the income tax incorporated in said act of Congress passed August 15, 1894, are unconstitutional, null, and void; that the defendants be restrained from voluntarily complying with the provisions of said act, and making the lists, returns, and statements above referred to, or paying the tax aforesaid; and for general relief.
The defendants demurred on the ground of want of equity, and the cause having been brought on to be heard upon the bill and demurrer thereto, the demurrer was sustained and the bill of complaint dismissed with costs, whereupon the record recited that the constitutionality of a law of the United States was drawn in question, and an appeal was allowed directly to this court.
An abstract of the act in question will be found in the margin.1Page 435
By the third clause of section two of Article I of the Constitution it was provided: "Representatives and direct taxes shallPage 436be apportioned among the several States which may be included within this Union, according to their respective numbers,Page 437which shall be determined by adding to the whole number of free persons, including those bound to service for a term ofPage 438years, and excluding Indians not taxed, three-fifths of all other persons." This was amended by the second section of thePage 439Fourteenth Article, declared ratified July 28, 1868, so that the whole number of persons in each State should be counted,Page 440Indians not taxed excluded, and the provision as thus amended, remains in force.Page 441
The actual enumeration was prescribed to be made within three years after the first meeting of Congress and within every subsequent term of ten years, in such manner as should be directed.
Section 7 requires "all bills for raising revenue shall originate in the House of Representatives."
The first clause of section 8 reads thus: "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." And the third clause thus: "To regulate commerce with foreign nations, and among the several States, and with the Indian tribes."
The fourth, fifth, and sixth clauses of section 9 are as follows:
"No capitation, or other direct, tax shall be laid, unless in proportion to the census or enumeration hereinbefore directed to be taken.
"No tax or duty shall be laid on articles exported from any State.
"No preference shall be given by any regulation of commerce or revenue to the ports of one State over those of another; nor shall vessels bound to, or from, one State, be obliged to enter, clear, or pay duties in another."
It is also provided by the second clause of section 10 that "no State shall, without the consent of the Congress, lay any imposts or duties on imports or exports, except what may bePage 442absolutely necessary for executing its inspection laws;" and, by the third clause, that "no State shall, without the consent of Congress, lay any duty of tonnage."
The first clause of section 9 provides: "The migration or importation of such persons as any of the States now existing shall think proper to admit, shall not be prohibited by the Congress prior to the year one thousand eight hundred and eight, but a tax or duty may be imposed on such importations, not exceeding ten dollars for each person.
Article V prescribes the mode for the amendment of the Constitution, and concludes with this proviso: "Provided that no amendment which may be made prior to the year one thousand eight hundred and eight shall in any manner affect the first and fourth clauses in the ninth section of the first article."
This case was argued withHydev.Continental TrustCompany, No. 894 andMoorev.Miller, No. 915.Hydev.Continental Trust Companyis disposed of, (post, 654.) in accordance with the opinion and judgment in this case.Moorev.Milleris still undecided; but, asMr. Edmunds'sargument for the appellant formed an important part of the general discussion, it is reported in this connection.
The reporter has had the advantage of consulting stenographic reports of all the arguments here reported, except that ofMr.Whitney, who has been good enough to furnish material for the report of his argument.
The provisions as to an income tax contained in the act of August 28, 1894, are unconstitutional, in that they violate the requirement of the Constitution as to apportionment in respect of direct taxes, or as to uniformity in respect of duties, imposts, and excises.Page 443
Congress has no constitutional power to impose taxes, duties, or excises which shall vary according to ownership of the subject-matter of the tax, and which shall be at one rate upon the income of individuals, and at an entirely different rate upon the income of corporations and of those who derive their income from corporate profits. It has no power to foster and aid favored classes of corporations and associations by arbitrarily exempting them from taxation. It is the fundamental rule of all taxation that there shall be equality of burden among those of the same class; and that, under well-settled principles, if a tax be levied upon any citizens at a higher rate than is imposed upon others of the same class, having like property, it is depriving the former of their property without due process of law and taking the same for public use without just compensation. It is also submitted that Congress cannot tax income derived from state, county, and municipal bonds.
The issues in No. 893 and No. 894 are substantially the same; but in the Pollock suit, No. 893, the interests involved are larger and more important, and I shall confine the statement of facts to that case. The Farmers' Loan Trust Company is one of the largest trust companies in the United States, and is a private trading corporation organized under the laws of the State of New York. It carries on no business which a partnership could not transact; it exercises no special privileges; it performs no public duty; its business is impressed with no public interest; its capital stock is $1,000,000, divided into 40,000 shares scattered over the United States and abroad. The present capital and accumulations exceed the sum of $5,000,000, and the annual profits amount to over $300,000. The company owns in its own right real estate which brings in an income from rents of $50,000 a year. It also owns $2,000,000 of municipal bonds of the city of New York, the income of which is over $60,000. It holds one hundred parcels of real property for minors and other beneficiaries of the value of over $5,000,000, and collects as trustee, annually, rents exceeding $200,000.
The provisions of the act of 1894 impose a tax of two perPage 444cent upon the gains, profits, and income derived from any kind of property, including rent and the growth and produce of land and profits made upon the sale of land if purchased within two years. Every element that could make real or personal property a source of value or income to an owner is taxed. An excise or duty is also imposed upon income derived from any profession, trade, employment, or avocation. The tax upon persons generally is not upon their entire income, but upon the excess over and above $4000. All persons having incomes of $4000 or under are exempted. The whole burden of the tax falls upon less than two per cent of the population of the country.
The rate of taxation upon corporations and associations is in excess of the rate imposed upon individuals and associations. Persons having incomes of $4000 or under pay nothing; corporations having like incomes pay two per cent. Persons having incomes of over $4000 pay on the excess. Corporations having like incomes, derived from like property and like values, pay two per cent upon the entire amount. Partnerships are expressly exempted from the operation of the act. An individual owning lands, the rents of which net him $8000, pays $80, or two per cent upon the excess over $4000. A corporation or association having like property pays a tax of two per cent upon the whole $8000, or $160, double the tax upon the individual. Five individuals as partners own property or carry on business netting them, after paying all taxes and expenses, $20,000, which they divide equally. The partnership is entirely exempted from taxation, and each member is exempted. If those same five individuals organized a private trading corporation or association under the laws of one of the States, and held the property in that form, they would have to pay an income tax of $400, simply and solely because they had united their interest in a corporate or associate form instead of a partnership. In a word, the rate varies according to the form or nature of ownership. Citizens whose income is $4000 and under, derived from profits and dividends of corporations, are deprived of the benefit of the exemption, because their shares or interestsPage 445in the profits of corporations are subjected to a tax of two per cent, while the same income derived from similar business and similar property by those who carry on business individually or as partners would be wholly exempted. If the exemption of the $4000 was to cover the expenses of a household, certainly all persons having all their means invested in corporate shares equally have their household expenses. Why not exempt them?
The act of 1894 is new in the provisions discriminating against those whose income is derived from dividends of corporations and in the exemptions from taxation of favored private corporations and associations. Under the old income tax laws, the business of certain selected classes of corporations, such as banks, saving institutions, insurance companies and railroads was taxed. The language of the present act is "all corporations, companies, or associations, doing business for profit in the United States, no matter how created and organized, but not including partnerships." The tax upon classes of corporations under the old law was sustained, not because it was a tax upon the property of the corporations selected, but upon the distinct ground that it was an excise upon their business. Such was the reason assigned by Mr. Justice Swayne in the case ofPacific Insurance Co. v.Soule, 7 Wall. 433, and such the ground reiterated by Mr. Justice Miller in delivering the opinion of the court inRailroad Co. v.Collector,100 U.S. 595. The bank tax was held to be a tax, not upon property or income, but upon the act of issuing notes; not on the obligation itself, but on its use in a particular way. The judgment inVeazie Bankv.Fenno, 8 Wall. 533, followed byNational Bankv.UnitedStates,101 U.S. 1, clearly shows this to be the true ground.
The act of 1894 not only exempts charitable, religious, and educational institutions, but it specially excepts from the operation of the tax certain private business concerns, such as building and loan associations, savings banks and mutual insurance companies — not merely mutual life companies, but all mutual insurance companies or associations, whether life, fire, marine, inland, or accident. The exemption is granted without regardPage 446to the amount of property or income. If the business of an insurance company is conducted on the stock plan for the benefit of its shareholders, every dollar of profit is taxed; if it is carried on for the benefit of its members of policy-holders, who are but another form of shareholders, it is wholly exempted. The census reports show the immense accumulations of estates in the hands of these exempted corporations or institutions. In the State of New York, the act exempts hundreds of millions of property.
The census reports show that when the statistics were compiled in 1890 there were 1926 insurance companies transacting insurance business relating to property, of which 1689 were doing business on the mutual plan. The assets of all these companies are not reported, but taking those ascertained, we find $278,000,000 of assets owned by stock insurance companies and $1,200,000,000 of assets owned by mutual companies: the former are subjected to the income tax; the latter are absolutely freed from any such burden simply because the method or manner of conducting the very same business happens to be the mutual plan. The amount of tax saved to these favored mutual companies is at least $1,200,000 per annum.
It is not contended that any doubt exists as to the power of Congress to tax the property or income of private corporations organized under state laws in the same manner and at the same rate that it taxes the property and income of individuals; but it is insisted that the property or income of corporations or of citizens deriving their income therefrom cannot be singled out to be assessed and taxed at a higher rate than the property or income of other individuals or partnerships. If exemptions are to be granted, then such exemptions must be equally allowed to those who have their means invested in corporations and who derive their income from the corporate profits. The question is not whether Congress can select particular classes of property or income for taxation, — whether it can tax one article at one rate and another article at a different rate, — but whether it can prescribe rules of taxation upon like property or like income which shall vary as it is held or collected by individuals and partnerships on the onePage 447hand or by corporations and their stockholders on the other. The power of Congress to impose an excise upon certain peculiar or distinct businesses or occupations is not challenged; the question is regarding its right to impose an excise tax upon a particular business or occupation which shall vary as it is carried on by individuals or by corporations.
Congress has no power, at the expense of others owning property of the same character, to foster and aid private trading corporations, such as building and loan associations, savings banks and mutual life, fire, marine, inland, and accident insurance companies or associations, which serve no national purpose or public interest whatsoever and which exist solely for the pecuniary profit of their members. There seems to be a notion that the courts have held that the right to exempt is one of legislative discretion, and that there is no check upon it and no limit to its exercise. With us, under the American system, no power of government is untrammelled or unrestrained. The exercise of the discretion to exempt must be regulated by some public interest; it cannot be arbitrary or capricious; there must be some principle of public policy to support the presumption that the public and not private interests will be subserved by the exemptions which are allowed. Private enterprises for the pecuniary profit of their members can never be aided under the guise of the exercise of the discretion to exempt.LoanAssociationv.Topeka, 20 Wall. 655;Parkersburgv.Brown,106 U.S. 487;Colev.La Grange,113 U.S. 1;Peoplev.Eddy,43 Cal. 331,339;Statev.Indianapolis,69 Ind. 375,378;Barbourv.Louisville Board of Trade,82 Ky. 645,654,655;Railroad Co. v.Smith,23 Kan. 745,751;Brewer Brick Co. v.Brewer,62 Me. 62,72;Lexingtonv.McQuillan's Heirs, 9 Dana, 513, 516, 517;Sutton's Heirsv.Louisville, 5 Dana, 28, 31.
We now come to the question whether these gross inequalities and discriminations are unconstitutional. Section 8 of Article I of the Constitution is as follows: "The Congress shall have power to lay and collect taxes, duties, imposts, and excises; to pay the debts and provide for the common defence andPage 448general welfare of the United States; but all duties, imposts, and excises shall be uniform throughout the United States." The contention of the government and of the appellees, in support of the act, seems to be that the uniformity required is simply geographical in character, and does not prohibit inequality among persons in regard to the same property or subject of the tax, provided the inequality be uniform throughout the United States. This contention is without merit, and is certainly not sustained by authority. The true meaning of that clause in the Constitution is that duties, imposts, and excises shall bear equally upon the subject of taxation and be uniform throughout the United States.Loan Associationv.Topeka, 20 Wall. 655;Parkersburgv.Brown,106 U.S. 487;Colev.La Grange,113 U.S. 1;Peoplev.Salem,20 Mich. 452;Albany Bankv.Maher, 9 F. 884;Mobilev.Dargan,45 Ala. 310;Davisv.Litchfield,145 Ill. 313,327;City of Lexingtonv.McQuillan, 9 Dana, 513;Statev.Readington,36 N.J. Law 66;Statev.Newark,37 N.J.L. 415;Tide-Water Co. v.Coster,18 N.J. Eq. 518;S.C. 90 Am. Dec. 634;Statev.Express Co.,60 N.H. 219,252;Gatlinv.Tarboro,78 N.C. 119,122;Durach's Appeal, 62 Penn. St. 491, 494;Taylorv.Chandler, 9 Heisk. 349, 356; see alsoWashington Avenue, 69 Penn. St. 352, 363;Hammettv.Philadelphia, 65 Penn. St. 146, 153;Talbot Countyv.Queen Anne's County,50 Md. 245,260;Ryersonv.Utley,16 Mich. 269;McCormackv.Patchin,53 Mo. 33.
A tax which imposes one rate upon individuals and a higher rate upon corporations, which exempts individuals generally to the extent of $4000, but practically denies any such exemption to those deriving their income from corporate investments, and which arbitrarily exempts immense accumulations of property in the hands of favored private corporations and associations, is not uniform in any sense or in any part of the United States.
The court cannot strike out the exemptions and itself remodel the act so as to make it uniform. The act of 1894 must fall because of its utter lack of uniformity. It is not within the judicial province to make a new law. It would bePage 449decreeing as law what Congress deliberately refused to enact. If these immense accumulations of property had not been exempted, if corporations had not been discriminated against, the law might never have been passed: at all events, the rate of taxation would probably have been reduced to one per cent. The court will not strike out these exceptions and exemptions so as to give the act an operation which Congress confessedly never meant. If you annul the exemptions, what warrant of law would exist for collecting a tax from these mutual concerns? As Mr. Justice Matthews said in the case ofSpraiguev.Thompson,118 U.S. 90,95, delivering the opinion of the whole court, this would confer "upon the statute a positive operation beyond the legislative intent, and beyond what any one can say it would have enacted in view of the illegality of the exceptions."
But, irrespective of the constitutional limitation, the grant to Congress of the power to tax necessarily implied the limitation that all taxes should be equal, impartial, and uniform as to all similarly situated.
The requirement of approximate equality inheres in the very nature of the power to tax, and it exists whether declared or not in the written Constitution. It may be difficult, if not impracticable, to obtain absolute equality as between all classes of property. We recognize that; but there must be absolute equality as between persons or owners of the same kind of property. The taxing power may select land and omit personal property, or select any particular kind of personal property and omit land, and the courts cannot interfere; but on whatever subject the tax is imposed, it must apply equally and uniformly to all owning similar property; it cannot vary according to ownership; it cannot tax one and arbitrarily exempt another; it cannot be at one rate for the individual, and at another rate for the corporation.
The provisions of theFifthAmendment, prescribing due process of law and just compensation if private property be taken for public use, restrain the Federal government from enforcing unequal and partial tax laws.
When the Constitution was adopted, the people expressedPage 450their apprehension that powers not intended to be conferred might be claimed and exercised by the Federal government, and that there might be an abuse of taxation. Hamilton had argued in the Federalist that adequate precautions had been inserted, and that the door had been closed to partiality and oppression; but the people insisted on further specific restrictions upon Congress, and to that end ten amendments were proposed at the first session of the First Congress in March, 1789.
TheFifthAmendment, thus adopted to restrict the powers of Congress, provides that no person shall be deprived of life, liberty, or property, without due process of law, nor shall private property be taken for public use without just compensation. We contend that an act of Congress which imposes the burden of a tax upon the property or income of certain citizens, while others owning like property or having like income are exempted, or which imposes a rate of taxation upon like subjects which varies according to their ownership, deprives those discriminated against of their property without due process of law and arbitrarily takes such property for public use without just compensation. To impose a tax on A and B, and exempt C and D similarly situated, is not taxation, but exaction and confiscation. Our conception of the rights of our clients under the shield and protection of due process of law finds its definition in the language of the Chief Justice inCaldwellv.Texas,137 U.S. 692,697: "`Due process of law' is so secured by laws operating on all alike and not subjecting the individual to the arbitrary exercise of the powers of government, unrestrained by the established principles of private right and distributive justice."
And further, there can be no doubt that in enacting the income tax law of 1894, it was the deliberate intention of Congress to tax the income derived from state, county, and municipal securities. The precise question as to the power of Congress to tax income derived from state, county, and municipal bonds has never been decided, but it has often been held that the instrumentalities of the state governments cannot be, directly or indirectly, taxed, and of course, a municipal corporationPage 451is but a branch of the government of the State. The authorities fully sustain the proposition that Congress cannot tax the borrowing powers of the States or their municipalities; for clearly if the right to tax existed, it would place the borrowing powers of the States completely at the mercy of a majority in Congress.Holy Trinity Churchv.United States,143 U.S. 457;Blakev.National Banks, 23 Wall. 307;Jennisonv.Kirk,98 U.S. 453;United Statesv.Union Pacific Railroad,91 U.S. 72;American Net Twine Co. v.Worthington,141 U.S. 468;Collectorv.Day, 11 Wall. 113;United Statesv.RailroadCompany, 17 Wall. 322;Westonv.Charleston, 2 Pet. 449;Wisconsin Central Railroadv.Price County,133 U.S. 496,504;Van Brocklinv.Tennessee,117 U.S. 151,178;Wardv.Maryland, 12 Wall. 418, 427;Fifieldv.Close,15 Mich. 505;Jonesv.Estate of Keep,19 Wis. 369,373;Saylesv.Davis,22 Wis. 225;Union Bankv.Hill, 3 Coldwell, 325;Warrenv.Paul,22 Ind. 276;Statev.Garton,32 Ind. 1,4.
The discrimination in the present case cannot be sustained upon the theory that the taxing power may classify the various kinds of property or the various kinds of business for purposes of taxation. It is not classification to impose a tax at one rate on the income or business of corporations and at a different rate upon the same income or the same business if carried on by individuals or partnerships. Classification to be lawful must distinguish between different kinds of property, not different ownership, or between different business pursuits, not between particular or selected individuals or corporations of the same class. If the difference in the rate of taxation is not based upon the nature of the property, nor upon the use made of the property, irrespective of its ownership, then it is based on ownership and involves a discrimination against particular owners, which is unlawful. In the present case, corporations have not been classified as a class, but the same tax is imposed upon companies or associations as distinguished from corporations, no matter how created and organized. Besides, under this act, a large class of these corporations, companies, and associations are withdrawn from the operation of the act, andPage 452it cannot be said, therefore, that Congress has classified corporations as a class, even if it had the power to do so.
We are not instructed to present any argument which shall abridge the taxing power of Congress or embarrass the government in any emergency that may now exist or hereafter arise. Let Congress remodel the act, apportioning direct taxes and equalizing indirect taxes, within the limitations of the Constitution, and none more willingly than our clients will contribute their share of the burden to maintain, defend, and preserve the national government, even if it shall take all their property. We ask you to impose no limitation upon the right of Congress to tax up to the full measure of the requirements of the Nation. Recognizing that authority to tax in its nature must be without limitations except equality of burden, and that it involves the power to destroy, we are here to plead that the destruction must result from some necessity or peril of the Union, and that however the occasion may arise, the destruction must be equal and uniform and not of selected individuals or classes: we are here to plead that Congress cannot sacrifice one — the lowliest or the richest — for the benefit of others.Mr. Clarence A. Sewardfor Pollock, appellant in 893, and Hyde, appellant in 894.
Is an income tax a direct tax within the provisions of the Federal Constitution? This is a question of fact, to be determined by the meaning of the term "direct tax" at the time of the adoption of the Constitution.
There is no doubt that that term as used in state statutes and constitutions at the present day is universally construed not to be limited to a tax on land, but to include also a tax on income. How was it in the year 1787? The theory that the words "direct taxes," as used in the Constitution, did not include a tax on income was first judicially voiced in theSpringer case, decided in 1880,102 U.S. 586. This case was founded uponHyltonv.United States, 3 Dall. 171, decided in 1796. Alexander Hamilton, as counsel for the governmentPage 453in that case, undertook to define the phrase "direct taxes" so as to exclude from it a tax on carriages. He said: "The following arepresumedto be the only direct taxes: Capitation or poll taxes; taxes on lands and buildings; general assessments, whether on the whole property of individuals, or on their whole real or personal property. All else must of necessity be considered as indirect taxes."
When the case passed into the hands of the court, Mr. Justice Paterson said: "Whether direct taxes, in the sense of the Constitution, comprehend any other tax than a capitation tax and a tax on land, is a questionable point." Mr. Justice Chase said: "I am inclined to think, but of this I do not give a judicial opinion, that the direct taxes contemplated by the Constitution are only two; to wit, a capitation or poll tax simply, and a tax on land. I doubt whether a tax by a general assessment of personal property within the United States is included within the term `direct tax.'" Mr. Justice Iredell said: "Perhaps a direct tax, in the sense of the Constitution, can mean nothing but a tax on something inseparably annexed to the soil. A land or poll tax may be considered of this description. In regard to other articles, there may possibly be considerable doubt."
There was no evidence adduced by Mr. Hamilton in support of his presumption. The question arose solely and wholly upon the statement by him that that was his presumption. It is upon this presumption of Mr. Hamilton and these three doubtful expressions of judicial opinion that the subsequent decisions of this court inPacific Insurance Companyv.Soule, 7 Wall. 433;VeazieBankv.Fenno, 8 Wall. 533;Scholeyv.Rew, 23 Wall. 331; andSpringerv.United States,102 U.S. 586, were founded.
If the conclusion reached in theHylton casewas unsupported by evidence — was in direct antagonism to the evidence as it exists — and which was not produced or passed upon — and if a time of peace is more favorable for an absolute disassociation from political atmosphere than was possible when theSpringercasewas decided, then the rule ofstare decisisought not to constitute a bar to a new examinationPage 454of the question involved, upon grounds not heretofore presented, nor the reaching of a different conclusion, if such a conclusion can be judicially justified.Leloupv.Mobile,127 U.S. 640.
In considering this question, this court has supplied inMartinv.Hunter's Lessee, 1 Wheat. 304, 323;Gibbonsv.Ogden, 9 Wheat. 1, 188; andRhode Islandv.Massachusetts, 12 Pet. 657, 721, rules for the interpretation of the Constitution. Words are to be taken in their natural sense, and the courts may resort to such sources of judicial information as are resorted to by all courts in construing statutes.
Is there any persuasive evidence that the framers of the Constitution did not use the words "direct taxes" in their "natural and obvious sense?" Would there be any absurdity or injustice in holding that they did so use them, and that they intended precisely what they said? Is there any persuasive evidence that they intended to restrict the present meaning of the phrase to a more limited signification, and to reject therefrom the inclusion of a tax on income?
It would seem, from a reference to such sources of judicial information as are resorted to by the courts in construing the Constitution, that these questions must be answered in the negative. There is no evidence that either the constitutional convention or the assenting conventions of the several States, or the people who attended both, used the words "direct taxes" with any restricted meaning, in an unnatural sense, or that they intelligently excluded a tax on incomes therefrom. The only qualification of this explicit statement is to be found in the language of this court inVeazie Bankv.Fenno, 8 Wall. 533, 546, where, in treating of the decision in theHylton case, the court spoke of Mr. Justice Paterson's statements as "testimony." There is nothing either in Elliott's Debates or Madison's Reports which shows that the question of the definition of the words "direct tax" or "direct taxes" ever came before the Philadelphia convention. It was not there discussed, debated, or decided. Under these circumstances, any opinion which Justice Paterson expressed was an opinion rendered nine years after the conventionPage 455had ceased its labors — was his individual opinion, and was not fortified by any reference to the evidence. Such an opinion ought not to be construed as"testimony."Apart from this so-called testimony no evidence has been produced before the courts in antecedent cases tending to show that a tax upon incomes was intentionally excluded by the people and by the framers of the Constitution from the meaning of the phrase "direct taxes," or that such taxes were limited to taxes on land only. This conclusion has been reached only as a matter of opinion, and not as a conclusion founded upon the weight of evidence.
At the date of the Constitution (1787) the words "direct taxes" and "indirect taxes" were household words. They were borrowed from the literature and practice of Great Britain and the continent of Europe. They are to be found in the literature of the period, and in the debates of both Federal and state conventions. They had been used in Europe as meaning taxes which fell directly upon property and its owner, like a land tax or a tax on incomes, and as meaning taxes of which the ultimate incidence might fall upon another than the one who originally paid them, like taxes upon consumption. The inquiry, therefore, now is, whether, when adopted in this country, they carried with them the signification which universally obtained elsewhere, or whether they were accepted with a limited and restricted signification, which confined the meaning of the words to taxes on land and capitation taxes.
The Articles of Confederation, as originally adopted, provided for a common treasury, to be supplied by the several States, in proportion to the value of all land within each State, the taxes for paying that proportion to be levied by the authority and direction of the state legislatures. But in 1783 this was amended by providing that this treasury should be "supplied by the several States in proportion to the whole number of white and other free citizens and inhabitants, of every age, sex, and condition, including those bound to servitude for a term of years, and three-fifths of all other persons, not comprehended in the foregoing description, except Indians not paying taxes, in each State; which numberPage 456shall be triennially taken and transmitted to the United States in Congress assembled, in such mode as they shall direct and appoint." 1 Ell. Deb. 95.
Why was this phrase "land, buildings, and improvements thereon," in the original Articles, stricken out by this amendment? Mr. Rufus King answers this inquiry. He said: "According to the Confederation, ratified in 1781, the sums for the general welfare and defence should be apportioned according to the surveyed lands and improvements thereon in the several States; but that it hath never been in the power of Congress to follow that rule, the returns from the several States being so very imperfect." 2 Ell. Deb. 36. "In 1778, Congress required the States to make a return of the houses and lands surveyed; but one State only complied therewith — New Hampshire. Massachusetts did not. Congress consulted no rule. It was resolved that the several States should be taxed according to their ability." 2 Ell. Deb. 45. "Massachusetts has paid while other States have been delinquent. . . . Requisitions on the States for that money were made. Who paid them? Massachusetts and a few others. . . . But $1,200,000 have been paid. And six States have not paid a farthing of it." 2 Ell. Deb. 56.
Therefore, there is this concurrent testimony that the words "land, buildings, and improvements thereon" were intelligently rejected by the Confederate Congress as not being either a just, an equal, or a convenient source of revenue for the Federal government, and if that was the opinion prior to the adoption of the Constitution, how comes it at a later day that the phrase "direct taxes" is to be interpreted as relating only to a tax on "land, buildings, and improvements thereon," and thus to place the tax back upon that which had been previously rejected as the only source of Federal taxation?
In his letter to the Georgia convention of the 10th of October, 1787, Governor Randolph said: "There is another consideration not less worthy of attention — the first rule for determining each quota by the value of all lands granted or surveyed, and of the buildings and improvements thereon. ItPage 457is no longer doubted that an equitable, uniform mode of estimating that value is impracticable; and therefore twelve States have substituted the number of inhabitants, under certain limitations, as the standard according to which money is to be furnished." 1 Ell. Deb. 484.
This amendment to the Articles of Confederation was sent forth by Congress to the people, accompanied by an address prepared by Messrs. Madison, Ellsworth, and Hamilton. In this, when speaking of population as the rule of taxation, they said: "This rule, although not free from objection, is liable to fewer than any other that could be devised. The only material difficulty which attended it in the deliberations of Congress was to fix the proper difference between the labor and industry of free inhabitants and of all other inhabitants. The ratio ultimately agreed to was the result of mutual concessions."
Two of the States accepted these amendments in full. All the others accepted the first part, which related to the appropriation by them of substantial and effectual revenues for the support of the general government, as they might deem most convenient. Two of the States, New York and Georgia, did not act upon the amendments at all (Jour. of Congress, 1783-4); but the fact remains that from the time of their adoption by the Confederate Congress until the decision in theHylton case, land and buildings and improvements thereon were never thereafter regarded as the source of revenue for the Federal government. It results, therefore, that after "land, buildings, and improvements thereon" were withdrawn as a subject of Federal taxation, the requisitions of Congress were met by the States by their own system of taxation. What was that system?
A careful examination of state legislation prior to 1787 establishes that the States of Vermont, Massachusetts, Connecticut, Pennsylvania, Delaware, New Jersey, Virginia, and South Carolina assessed their citizens upon their profits from their professions, trades, and employments, and collected a tax thereon for the benefit of the States and of the general government.Page 458
In addition to these taxes upon income, nearly all the States imposed poll taxes, taxes on lands, on cattle of all kinds, and various kinds of personal property.
How were all these taxes known to the people of the States at the time when they were paying them?
The Century Dictionary says: "In the United States, all state and municipal taxes are direct, and are levied upon the assessed valuations of real and personal property." Cooley and the American Cyclopædia also assert that all state taxes are direct taxes. But there is more persuasive evidence as to what kind of taxes the people at the time called those which they were paying in the States for the joint support of the States and of the general government.
In the Massachusetts convention, Mr. Dawes said: "Congress had it not in their power to draw a revenue from commerce, and therefore multiplied their requisitions on the States. Massachusetts, willing to pay her part, made her own trade law, on which the trade departed to such of our neighbors as made no such impositions on commerce; thus we lost what little revenue we had, and our only course was, to a direct taxation." 2 Ell. Deb. 41.
Mr. Nicholas, in Virginia, said: "Nine-tenths of the revenues of Great Britain and France are raised by indirect taxes; and were they raised by direct taxes, they would be exceedingly oppressive. At present the reverse of this proposition holds in this country, for very little is raised by indirect taxes. The public treasuries are supplied by means of direct taxes, which are not so easy for the people." 3 Ell. Deb. 99.
Mr. Iredell, of North Carolina, said: "Our state legislature has no way of raising any considerable sums but by laying direct taxes. Other States have imports of consequence. This may afford them a considerable relief; but our State, perhaps, could not have raised its full quota by direct taxes without imposing burdens too heavy for the people to bear." 4 Ell. Deb. 146.
Gouverneur Morris, in his observations on the Finances of the United States, says, two years after the Constitution was adopted: "There is a concurrent jurisdiction respecting internal or direct taxes."Page 459
In his report to Congress, in 1812, Albert Gallatin said: "The direct taxes laid by the several States during the last years of the Revolutionary War were generally more heavy than could be paid with convenience; but during the years 1785 to 1789, an annual direct tax of more than two hundred thousand dollars was raised in Pennsylvania, which was not oppressive, and was paid with great punctuality."
This establishes the fact that all the taxes which the people were paying in 1787 were, according to their common understanding, expressed in their conventions, and expressed afterwards in the writings of those who had been constituents of the State at the time, direct taxes; that such direct taxes were paid out of income, and were so paid for the support of the Federal government. True, they were collected by state officers, but the fact that it is now proposed to collect them out of income by Federal officers, does not seem to change the income tax from the direct tax of 1787 into the indirect tax of 1894.
The inquiry now arises, whether the practical interpretation given to the words "direct taxes" by the people and the laws of the several States, was in any way limited or restricted by the proceedings of the Philadelphia convention. In speaking of this convention this court said, inDanielsv.Tierney,102 U.S. 415,419: "The circumstances which surrounded the convention and controlled its action are a part of the history of the times, and we are bound to take judicial notice of them."
In examining the debates it must be borne in mind that the words "direct taxation" do not occur in the Constitution. That instrument is limited to the words "direct tax" and "direct taxes." A careful examination of the debates warrants the assertion that the phrase "direct taxation" as used in the Philadelphia convention was not always used as a synonym for "direct taxes." The term "direct taxes" implies one of two things; either the objects upon which the tax is placed, or the incidence of the tax upon the property and upon the person of its owner. "Direct taxation," in very many instances, refers to themodus operandiof collectingPage 460the tax; that is, whether the power should be given to Congress to collect the tax by direct taxation, or whether the power to collect Federal taxes should be exercised only after requisitions upon the States had been dishonored.
Mr. Pinckney's draft of the Constitution regulated direct taxation according to the whole number of inhabitants and left the power to Congress. Mr. Paterson's resolution authorized Congress to make a requisition upon the basis of population, estimated according to the old Articles of Confederation. Mr. Wilson introduced a resolution providing that in order to ascertain the alterations that may happen in the population and wealth of the several States, a census should be taken; thus reaffirming the original doctrine that population was the true criterion and index of wealth, and this resolution was thereupon adopted: "That in order to ascertain the alterations that may happen in the population and wealth of the several States, a census shall be taken."
Then came the appearance of representation, and it was moved, and agreed to, that direct taxation ought to be proportioned according to representation, thus striking out population and substituting the number of representatives as the basis for the apportionment of direct taxes. The amendment rejected representation as the basis of taxation, and substituted the old rule of population, computed in the given manner. It was again moved that representation ought to be proportioned according to direct taxation, and in order to ascertain the alterations in the direct taxation which might be required, that a census should be taken. This was the introduction of the rule finally adopted, that representation ought to be proportioned in the same manner as taxation.
There was an animated contest over this proposition, and there were extended debates over the question whether direct taxation should be proportioned to representation or according to population. Finally, on the 16th of July, 1787, this resolution was adopted: "Representation ought to be proportioned according to direct taxation. And in order to ascertain the alteration in the direct taxation which may be required, from time to time, by changes in the relative circumstances of thePage 461States — Resolved, That a census be taken, . . . and that the legislature proportion the direct taxation accordingly."
There was again a debate over this suggestion, which culminated in the draft of a constitution which apportioned direct taxation according to the number of the representatives. This was remodelled, and on the 12th of September, 1787, a revised draft of the Constitution was introduced, which provided that "representatives and direct taxes shall be apportioned on the basis of population," and under the rule prescribed by the Articles of Confederation. On this same 12th of September, 1787, the revised draft of the Constitution contained these words: "That no capitation tax shall be laid unless in proportion to the census hereinbefore directed to be taken." Then there came a debate in which these questions were discussed: The States are asked to give the power of internal taxation, now exercised by them respectively for the benefit of the general government, directly to Congress, so that it may exercise such power concurrently with the States, and directly upon the property and inhabitants of the States. This was the understanding of what the States were asked to do, and, after the constitution was adopted, of what they had done.
In the Massachusetts convention, Mr. Parsons said: "Congress have only a concurrent right with each State, in laying direct taxes, not an exclusive right; and the right of each State to direct taxation is equally extensive as the right of Congress." 2 Ell. Deb. 93.
In New York, Chancellor Livingston said: "It is observed that, if the general government are disposed, they can levy taxes exclusively. But they have not an exclusive right. . . . Their right is only concurrent." 2 Ell. Deb. 346.
Mr. Hamilton said: "Unless, therefore, we find that the powers of taxation are exclusively granted, we must conclude that there remains a concurrent authority." 2 Ell. Deb. 363.
The States were also asked to give up their right of laying imposts and duties on imports and exports, the surrender of which right would confine them thereafter to their own internal taxes. They said in substance: If we surrender the right to imposts and duties, and if we divide the power of directPage 462taxation by giving to Congress a concurrent right with ourselves to lay direct taxes, such as have heretofore existed in our States, how are we to guard the exercise of this power so that it shall not be used oppressively? How is it to be restricted so that Congress will not have the right to impose undue burdens upon the States?
The answer to this was: Such restriction can be properly imposed with justice to ourselves and to Congress by limiting the exercise of this concurrent power to the rule of population, which is the index and criterion of wealth. If we give this power to the Federal government to come into the States and tax the same objects which we are there taxing, the amount of such tax on behalf of Congress must be apportioned upon the basis heretofore obtaining, and so that each State will know precisely how much it is called upon to contribute.
It would indeed be singular if, when the States were giving to the Federal government a concurrent right to levy and collect the direct taxes which they themselves were collecting, only the right to collect this unjust, unequal, and inconvenient tax on lands actually passed. This limitation, if it exists, does not arise from the language which the States used, "direct taxes," but only from an interpretation which, without supporting evidence, excludes the residue.
The struggle was, first, to require Congress to apply to the States before having the right of direct taxation; and second, if that could not be carried, then to limit the right of direct taxation to population. Mr. Martin voiced this when he said: "Many of the members, and myself in the number, thought that States were much better judges of the circumstances of their citizens, and what sum of money could be collected from them by direct taxation, . . . and that the general government ought not to have the power of laying direct taxes in any case but in that of the delinquency of a State." 1 Ell. Deb. 369.
That the States believed that they had limited the power of assessing and collecting direct taxes to the rule of population, is further clearly shown in the debates in the state conventions. Having relinquished imposts and duties, and given toPage 463Congress a concurrent power to collect direct taxes, they limited the exercise of the collection of such taxes to the rule of population. Hence the phrase, "representation and direct taxes;" hence the phrase, "no capitation tax shall be laid unless in proportion to the census hereinbefore directed to be taken." This latter phrase was, on the 14th of September, 1787, amended on motion of Mr. Read of Delaware. He "moved to insert after `capitation' the words `or other direct tax.' He was afraid that some liberty might otherwise be taken to saddle the States with the readjustment by this rule of past requisitions of Congress, and that his amendment, by giving another cast to the meaning, would take away the pretext." 5 Ell. Deb. 545. Mr. Williamson seconded the motion, which was agreed to.
The effect of adding the words "or other direct tax," so that the sentence should read "No capitation or other direct tax shall be laid, unless in proportion to the census," was to include therein not only a capitation tax, but also all the other taxes which the States at that time were collecting to pay their indebtedness to the general government.
Thus far, therefore, there is nothing in the debates to indicate that the words "direct tax" were to have a restricted and limited meaning, or were to apply only to taxes on land and taxes on polls.
Mr. Madison's Journal is printed as the fifth volume of Elliot's Debates. He there states that "Gouverneur Morris moved to add to the clause empowering the legislature to vary the representation according to the principles of wealth and number of inhabitants, a proviso that taxation should be in proportion to representation. . . . He admitted that some objections lay against his motion, but supposed they would be removed by restraining the rule to direct taxation. With regard to indirect taxes on exports and imports and on consumption, the rule would be inapplicable."
Mr. Morris, having so varied his motion by inserting the word "direct," it passed as follows: "Provided always, that direct taxation ought to be proportioned to representation." 5 Ell. Deb. 302.Page 464
Mr. Ellsworth moved to amend, in substance, (Id. 302,) so that the rule of contribution by direct taxation for the support of the government of the United States should be the rule as stated in the Articles of Confederation.
In the debates on the 20th of August, 1787, (Id. 451,) Mr. King of Massachusetts asked what was the precise meaning of direct taxation? No one answered. This inquiry, it is to be observed, was not "What is meant by a direct tax, or by direct taxes?" If so, there would doubtless have been an answer that by direct taxes was meant such taxes as the States were then paying; but having asked the question "What was meant by direct taxation?" he left it to be inferred that he used the phrase "direct taxation" not with reference to the objects upon which direct taxes were to be assessed and collected, but that he had reference to the same question ofmodus operandi, and he asked "What was meant by direct taxation?" that is, whether Congress should have power to levy and collect the tax, or whether requisitions therefor should be first made upon the States. The question was answered by Mr. Gerry, if it related to themodusoperandiof taxation, for he moved, (5 Ell. Deb. 451,) that "from the first meeting of the legislature of the United States, until a census shall be taken, all moneys for supplying the public treasury by direct taxation shall be raised from the several States according to the number of representatives respectively in the first branch."
The motion was lost. The practical result, therefore, was that the old words of the amended Articles of Confederation were taken as affording the standard for both taxation and representation. The South secured the exclusion of two-fifths of its slaves in apportioning the taxes, and the North secured the exclusion of the same two-fifths in apportioning the representatives. The latter object was attained, as Mr. Morris said, "incidentally," leaving the ostensible exclusion as referable to taxes only, as it had been under the Confederation. The North was satisfied to have the apportionment of representation controlled by the same rule of taxation, and to which latter rule the States had theretofore consented. So long asPage 465the rule was adopted for controlling both representation and taxation, it was immaterial whether such rule was introduced "incidentally" or otherwise. The attempt to limit taxation by representation was defeated, and representation was subjected to the old rule, which had been in force as to taxation since 1783.
It is evident, therefore, that the interpretation given by the people and the laws of the several States to the words "direct taxes" was not limited or restricted by any of the proceedings of the Philadelphia convention.
And further: It is conclusively and affirmatively established that the people, as represented by their delegates to the state conventions called to adopt and ratify the Federal Constitution, did not limit the phrase "direct taxes" to a tax on land only. The language used by Mr. Dawes and Mr. Adams in Massachusetts, by Mr. Ellsworth in Connecticut, by Chancellor Livingston and Mr. Jay in New York, and by Mr. Nicholas, Mr. Mason, and John Marshall in Virginia, proves this. The latter said: "The objects of direct taxes are well understood. They are but few. What are they? Lands, slaves, stock of all kinds, and a few other articles of domestic property." 5 Ell. Deb. 229.
What were the direct taxes to which he was referring? Not the direct taxes of the United States, because the United States had yet no power to levy any tax, whether direct or indirect. Therefore, when he spoke of "direct taxes" he was speaking of them as he understood them and as they existed in the States and in the State of Virginia, from which he was a delegate.
Mr. Wolcott, in his Report to Congress, when speaking of taxes assessed under the laws of Virginia of 1781, 1782, said that "taxes were assessed on lots and houses in towns;" being the "lands" of Mr. Marshall; on "slaves," being the "slaves" of Mr. Marshall; on "stud horses, jackasses, other horses and mules," being the "stock of all kinds" of Mr. Marshall; and on "billiard tables, four-wheeled carriages, phaetons, stage wagons, and riding carriages with two wheels," being the "few other articles of domestic property" referred to by Mr. Marshall,Page 466as being the objects of direct taxes which were then well understood.
It is fair to infer from this statement of Mr. Marshall that if he had been a member of the court at the date of the decision in theHylton case, he would not have concurred in the opinions of Justices Chase, Paterson and Iredell. When Congress undertook to pass the law which was under judgment in theHylton case, Mr. Madison said that he should vote against it because it was unconstitutional. Why? Because the tax was a direct tax.
It is evident, therefore, that the delegates to the state conventions understood that by "direct taxes," which the Constitution gave Congress the power to levy and collect, they meant not taxes on lands only, but all such taxes as the States were then levying and collecting, under the name of "direct taxes," exclusive of duties and imposts on exports and imports. Chancellor Livingston and Mr. Jay said that direct taxes meant taxes on land and specific duties, and these were the kind of taxes which all the States were then levying and collecting, with the exception of New York, which had a property tax. The other States had direct taxes on property; on incomes, on slaves, on stock, and two of them on carriages. All were taxing by direct taxes that description of property more or less enumerated by Mr. Marshall. Recalling the fact that in 1787 there was no standard of Federal taxation from which can be drawn a definition of the words "direct taxes;" bearing in mind that "direct taxes" were known to the people of all the States by that name and as "direct taxes," and that in various of the States such taxes included a tax on incomes, the conclusion is inevitable that both in the Philadelphia convention and in the state conventions the "direct taxes" referred to by the delegates were those to which they were accustomed in their own States; that those delegates used the words "direct taxes" in their natural sense, as the people then understood them; that they used the phrase "direct taxes" as a noun of multitude, as Congress to-day speaks of the Supreme Court, the Army, the Navy, and the United States without particularizing any member of either.Page 467
The phrase "direct taxes" was a household phrase known to all, and is susceptible of definition only in accordance with the literature; in accordance with the definition placed upon it by other nations, or it must include the taxes of the period which the people were then paying in their respective States for the joint support of the States and of the Federal government; and those "direct taxes" were not limited to a tax on lands, but included all the internal taxes which fell upon the property and upon the person of the citizen of the State who owned it.
The "presumption" advanced by Mr. Hamilton is overcome by the historic evidence here produced. Possibly such evidence was not accessible when theHylton casewas argued.
One word as to the literature.
Adam Smith's Wealth of Nations was published in 1776. It was referred to by the court in theHylton case. It is spoken of by Judge Cooley as a book whose maxims had secured for them universal acceptance. It was a recognized authority on both sides of the Atlantic. Smith made it clear that by "direct taxes" he meant taxes on persons assessed according to property or income, and as opposed to "indirect taxes" on expenses or consumption.
Turgot, the French author, lived from 1727 to 1781. He published in 1764 a work on taxation. He says of its forms: "There are only three possible: Direct upon the funds; direct upon the person, which becomes a tax upon labor; the indirect imposition, or that which is placed upon consumption."
In the American Museum for January, 1787, this work of Turgot is quoted, showing that it was then in circulation in America.
Inasmuch as these words of the Constitution are written words selected deliberately and discussed, after they were selected, anxiously and patiently by the several States, and that no question was ever raised until the carriage case as to what was meant by the term "direct taxes," — as to whether such phrase in the Constitution had a different interpretation from what it had when used in the States — the inquiry arises whether the States have ever given to the judiciary the powerPage 468to say that the language so selected and so discussed was to have a more limited and restricted signification than the natural sense of the words as they were understood by those who used them.
If the words "direct taxes" are to be interpreted as being a tax on land only, then it is to be said that the interpretation was not placed upon them by the Philadelphia convention, and was repudiated by the conventions of the several States. It is a new interpretation, equivalent to substituting a new word.
That the Philadelphia convention, or the conventions of the States, would have assented to and adopted this new and restricted meaning, and surrendered their judgment as to what they were then doing to the new meaning, cannot now be affirmed.
The words had a natural sense; they were commonly understood to mean what they imported; they were used for the purpose of expressing a fact then existing, and if a new interpretation is to be placed upon them, it must be so placed without the assent of either Federal or state conventions.
If the court is to strike out "direct" and insert "land," either by expunging the word "direct" or by interpreting it as confined in its meaning only to land, it is in effect inserting a new phrase in the Constitution, which is not there to be found, and to which the States have never given their assent.
It results, therefore:
(1) That an income tax as a direct tax existed long before the Constitution; existed in some of the States after the Constitution, and in one of the States until the present day. It was as well recognized in the localities as any other tax. It was known and called a direct tax, as one of the taxes imposed by the States.
(2) When the words were introduced into the Constitution, they were used, as Chief Justice Marshall said, "in their natural sense," and are to be taken, as he also said, "in their natural and obvious sense." It is not a "natural sense" nor a "natural and obvious sense" to reject from the taxes which the people were paying when the words were used, all of such taxes except a tax on land, and to limit and restrict the wordsPage 469which they did use to that individual tax. The people have never assented to that restriction in any convention.
(3) If an income tax be a direct tax, then, in order to be a constitutional tax, it must be apportioned and collected as such.
(4) Such apportionment and collection do not involve any practical difficulty.Mr. Assistant Attorney General Whitney, who appeared by leave of court, for the United States.
The method by which the questions are presented in thePollockandHyde caseswas not chosen with the consent of the government. The corporations have ample remedy at law, either by standing on the defensive, or by paying the tax under protest and suing to recover the amount paid. Plaintiffs would be sufficiently protected by a decree restraining the corporations fromvoluntarypayment. Yet the bills do not allege that the corporations intend to pay voluntarily. No injunction, it is believed, has ever been granted against the payment of a tax to the United States government; or against the execution of a law of the United States on the ground that the law was unconstitutional. It is believed that in no case can such an injunction properly be granted; and it is regarded as important not to break the chain of precedent against such relief. These objections, however, are not jurisdictional in the strictest sense.Hollinsv.Brierfield Coal Co.,150 U.S. 371,380,381, and cases cited;Insleyv.United States,150 U.S. 512,515, and are not taken by defendants. In view of the great public interest aroused, and of the fact that no cases in proper form are now pending, these objections are waived on behalf of the government, so far as it is in the power of its officers to waive them.
As to the method in which the questions are presented in theMoore case, the objection to the form of action is not waived. The appellant had full remedy by suit, to recover taxes paid under protest (Elliottv.Swartwout, 10 Pet. 137;InsuranceCo. v.Ritchie, 5 Wall. 541;City of PhiladelphiaPage 470v.Collector, 5 Wall. 720;Railroad Co. v.Jackson, 7 Wall. 262;Assessorsv.Osbornes, 9 Wall. 567;Collectorv.Day, 11 Wall. 113;Collectorv.Hubbard, 12 Wall. 1;Erskinev.Van Arsdale, 15 Wall. 75;Barnesv.TheRailroads, 17 Wall. 294;Stockdalev.Insurance Cos., 20 Wall. 323;Cheathamv.United States,92 U.S. 85;RailroadCo. v.Commissioners,98 U.S. 541;Railroad Co. v.Collector,100 U.S. 505;Wrightv.Blakeslee,101 U.S. 174;Jamesv.Hicks,110 U.S. 272;Manhattan Co. v.Blake,148 U.S. 412); because the general laws concerning collection of internal revenue apply to the income tax. SeeStuartv.Maxwell, 16 How. 150;United Statesv. 67Packages of DryGoods, 17 How. 85;Ringv.Maxwell, 17 How. 147;SaxonvilleMillsv.Russell,116 U.S. 13. Hence a remedy by injunction will not lie.Cheathamv.United States,92 U.S. 85;UnitedStatesv.Pacific Railroad, 4 Dill. 66. This is confirmed by a declaratory statute, Rev. Stat. § 3224;Snyderv.Marks,109 U.S. 189;State Railroad Tax Cases,92 U.S. 575. A taxpayer cannot have a vested right in any particular remedy.Collectorv.Hubbard, 12 Wall. 1. Proceedings to collect taxes have been, are, and always will be arbitrary.Fong Yue Tingv.UnitedStates,149 U.S. 698, and cases cited;Origetv.Hedden,155 U.S. 228. The execution of a law will not be enjoined on the ground that the law is unconstitutional.Mississippiv.Johnson, 4 Wall. 475;Gainesv.Thompson, 7 Wall. 347;Robbinsv.Freeland, 14 Int. Rev. Dec. 28, approved inSnyderv.Marks, supra. This follows from the doctrines that injunction is a remedy correlative to mandamus (Gainesv.Thompson, supra; Noblev.Union River Logging Railroad,147 U.S. 165); and that mandamus will not lie when the law is doubtful.Bayardv.White,127 U.S. 246. The constitution does not guarantee to the citizen all common law and equitable remedies known in 1787. Notwithstanding its provisions he may have a right without any remedy in a judicial tribunal.McIntyrev.Wood, 7 Cranch, 504;Caryv.Curtis, 3 How. 236.
The government presents no synopsis or review of economic writings relating to direct and indirect taxation, or of the discussions upon this point prior to the excise laws of 1794. ThisPage 471is because the definition of "direct taxes" has been settled, and the constitutionality of the income tax sustained, by decisions of this court which the government assumes will not be reconsidered.
Economic definitions are inapplicable. By general consensus of the economists of the present century, a direct tax is a tax which can be shifted by the taxpayer on to the shoulders of some other person, as upon a buyer, mortgagor, or tenant. Whether or not a particular tax can be shifted is in many instances a difficult question upon which economists are not agreed. Some taxes can be shifted in part only. It cannot have been intended that the validity of a tax law should depend upon such abstruse discussion. SeeState Tax on Railway Gross Receipts, 15 Wall. 284, 294. Nor was there any settled definition of "direct taxes" in the last century. The French economists, who then had great influence in America, held that poll taxes and land taxes were direct and all others indirect. No general income tax was then known in Europe. The English partial income tax of 1759 on salaries, professional receipts, etc., was called a "duty," as distinguished from a "tax" like the land tax. The inapplicability of the economic definition, however, was settled during Washington's administration by Congressional construction, confirmed by a decision of this court. The excise laws of 1794 were hotly contested in Congress upon constitutional grounds, the opposition being led by Madison. Shortly after the passage of these laws, a test case was made in Virginia, doubtless upon consultation with Madison and the other leaders. This was the carriage tax case ofHyltonv.United States, 3 Dall. 171. According to strict economic definition, a carriage tax is part direct and part indirect. It is direct as against pleasure carriages kept for use of their owners; indirect as against carriages belonging to livery stables. The tax is usually classified by economists as direct. It was held, however, to be a "duty," as it had been called by Congress. The inapplicability of economic definitions was further confirmed by practical construction during the period of the war of 1812 by the levy under the rule of uniformity of taxes which economists would classifyPage 472as direct. Acts of July 24, 1813, c. 24,3 Stat. 40; Dec. 15, 1814, c. 12,3 Stat. 148; Jan. 18, 1815, c. 23,3 Stat. 186; Feb. 27, 1815, c. 61,3 Stat. 217. Similar legislation during and after the civil war, completed a course of practical construction which should of itself be conclusive. The economic definition was then again repeatedly disavowed by this court. InPacificInsurance Co. v.Soule, 7 Wall. 433, the taxes under discussion included a tax upon dividends and undistributed sums, — in fact, a complete corporation income tax, — inScholeyv.Rew, 23 Wall. 331, a succession tax upon real estate was discussed; and inSpringerv.United States,102 U.S. 586, an individual tax. All of these were unanimously sustained. All would be construed direct taxes by economists. That the true definition is not the economic definition is indeed shown by the Constitution itself. The distinction there drawn is not between direct taxes and indirect taxes, but between direct taxes on the one hand and "duties, imposts, and excises" on the other. This is radically different from the economic definition. Many or most excises are direct taxes as understood by economists.
The constitutional definition as "direct taxes," as thus far settled, is negative in character. The best evidence of the intentions of the friends of the Constitution is to be found in theHylton case, in which two of the concurring Justices were not only prominent members of the Constitutional Convention, but members who gave especial attention to questions of taxation. Without definitely so deciding, the court intimated, as stated by Mr. Justice Chase, "that the direct taxes contemplated by the Constitution are only two, to wit: a capitation or poll tax simply, without regard to property, profession or any other circumstance, and a tax on land" (3 Dall. 175) — in other words, the French definition. After a series of cases in which this question was considered (see particularlyVeazie Bankv.Fenno, 8 Wall. 533), this court finally and deliberately laid down in theSpringer casethe following proposition through Mr. Justice Swayne: "Direct taxes within the meaning of the Constitution are only capitation taxes as expressed in that instrument, and taxes on real estate." This definition, closing a controversy of 88 years'Page 473standing, should be regarded as one upon which Congress might implicitly rely.
"Direct taxes," by a more practicable definition, would mean taxes falling directly upon the thing taxed and, at least primarily, collectible out of it. Familiar instances are poll taxes, and in many States land taxes chargeable only against the land and not a charge against its owner at all. An income tax is less direct than a carriage tax, which may be made to fall directly upon the carriages by distraint; or even than an import duty upon goods, which are seizable for non-payment of the tax. It is not a tax on property at all; it is a tax not on what a man now has, but on himself, measured by what he did have, although most of it he may have already spent.
Not only, however, has this court held an income tax not to be a direct tax; it has expressly held it to be an excise or duty. A tax on net income is similar in character to a tax on gross receipts, and is even less direct. Such taxes have been often defined as duties or excises. In theSpringer casethis court said: "The tax of which the plaintiff in error complains is within the category of an excise or duty."102 U.S. 602. Besides thePacific InsuranceandScholey cases, we may refer toState Tax on Railway Gross Receipts, 15 Wall. 284, 293;Railroad Co. v.Collector,100 U.S. 595,598;MemphisCharleston Railroad Co. v.United States,108 U.S. 228,234;Mainev.Grand Trunk Railway,142 U.S. 217,228;Ficklenv.Shelby County,145 U.S. 1,24;Postal Telegraph Cable Co. v.Adams,155 U.S. 688,699; see also 2 Steph. Com. 6th ed. p. 603;Portland Bankv.Apthorp,12 Mass. 252,256;Commonwealthv.Hamilton Manufacturing Co. 12 Allen, 298, 307, aff. 6 Wall. 632;Commonwealthv.Lancaster SavingsBank,123 Mass. 493;Connecticut Ins. Co. v.Commonwealth,133 Mass. 161;Minotv.Winthrop,162 Mass. 113.
If the tax were an excise and also a direct tax, the former term governs. It is more specific, and, as held in theHyltoncase, the rule of apportionment as applied to "direct taxes" was "the work of compromise" and "radically wrong" asPage 474well as impracticable, and therefore "not to be extended by construction." The two words, however, are used exclusively by the Constitution, and whatever is an excise cannot be a direct tax within the meaning of that instrument.
Next as to the "uniformity clause." This is geographical in character and means that the tax must be the same in each State as it is in every other State. The construction is clear from a comparison of the two clauses under consideration. The words "uniform throughout the United States" are evidently used in contradistinction to the words "apportioned among the several States . . . according to their respective numbers." It is also well established.Head Money Cases,112 U.S. 580,594; Miller on Constitution, pp. 240, 241; Pomeroy's Constitutional Law, §§ 280, 287; 1 Story on the Constitution § 957. Moreover, the history of the Constitutional Convention of 1787 shows clearly that its members had in mind uniformity between the different States and not uniformity between different classes of individuals. The same phraseology is elsewhere used in the same article with reference to naturalization and bankruptcy. The uniformity requirement as to these has never been supposed to be other than geographical.
While the "uniformity clause" is merely geographical in character, there is, however, a certain degree of uniformity involved in the very word "tax;" a uniformity requirement involved in the definition of that word and guaranteed by theFifthAmendment to the Constitution. While A cannot be taxed merely to benefit B (Calderv.Bull, 3 Dall. 386;LoanAssociationv.Topeka, 20 Wall. 655;Colev.La Grange,113 U.S. 1; Pomeroy's Constitutional Law, § 295c;MilesPlanting Manufacturing Co. v.Carlisle, Ct. App. Dist. Columbia, January 8, 1895), so on the other hand, if A and B belong to the same class, we may concede that they are to be taxed alike. A special tax cannot be laid upon A simply because he is A and not B. Such a law would be an attempt to exercise not a taxing power, but the power of eminent domain, and would require compensation for the property taken. Thus the constitution of Pennsylvania provides that taxes shall be "uniformPage 475on the same class of subjects;" while the Supreme Court of that State has decided that this requirement is merely declaratory.Kitty Roup's Case, 82 Penn. St. 211.
The question, therefore, arises, how far the legislative power of classification extends. Most decisions in State courts are inapplicable, as they construe provisions not found in the Federal Constitution. Under the Pennsylvania requirement above quoted, the power of classification is very extensive.Commonwealthv.Germania Brewing Co., 145 Penn. St. 83, 86, 89;Commonwealthv.National Oil Co., 157 Penn. St. 516. In the absence of special Constitutional restrictions, similar latitude has been allowed by this and other courts.Bell's GapRailroad Co. v.Pennsylvania,134 U.S. 232,237;Home Ins.Co. v.New York,134 U.S. 594,606,607;Pacific Express Co. v.Seibert,142 U.S. 339,351;Giozzav.Tiernan,148 U.S. 657,662;Matter of McPherson,104 N.Y. 306,316,317,318;Gibbonsv.District of Columbia,116 U.S. 404,408; Cooley on Taxation, 2nd ed., p 164.
Congress in this act has simply exercised its right of classification. The provisions now objected to are nearly all to be found in the income tax laws of the war and reconstruction period, and many are general in all similar fiscal systems. It is impossible to construe this law and discuss its constitutionality or application without understanding its underlying principle. This principle is one of compensation. Certain principles of taxation are well settled, and almost universally recognized: first, that taxes on consumption bear unduly hard upon the poor and upon what is called by the economists the lower middle class, financially speaking, because the comparatively poor consume all or nearly all of their income; second, that the fairest method of equalizing taxation is by an income tax with an exemption of all incomes below a certain amount. John Stuart Mill's Political Economy, Vol. 2, p. 476; Sir Robert Peel, quoted by Senator Sherman, Cong. Globe, May 23, 1870, p. 381; Senator Fessenden, Id. July 25, 1861, p. 255; Senators Sumner and Trumbull, Id. May 28, 1864, pp. 2512-15; Senator Sherman, Id. May 23, 1870, Appendix, pp. 377-380; and March 15, 1872, p. 1708. This exemption approximatelyPage 476represents the incomes which, prior to the establishment of the income tax, bore more than their fair share of taxation. Economists and statesmen differ as to the advisability of adopting this method of compensation. Many urge that the familiar objections to it as inquisitorial, productive of dishonesty, discriminating against the honest, etc., are sufficient to counterbalance its advantages. Such practical considerations are exclusively for the economists and statesmen and not for the court to decide.Penningtonv.Coxe, 2 Cranch, 33, 59.
The various objections upon the score of uniformity will now be considered in their order.The minimum of $4000. This has already been explained. It is the limit fixed by Congress as dividing the incomes previously unduly taxed from those previously unduly favored. The whole attack on the justice of thisminimumfeature is based upon a fundamental fallacy; upon the notion that the income tax stands alone instead of forming part of a general fiscal system, the different parts of which are set to balance each other in approximation to that equality which in its perfection is "a baseless dream."Head Money Cases,112 U.S. 580,595. All our previous income tax laws contained a similarminimumprovision, and some of them levied graduated taxes. The last previous one, that of July 14, 1870, c. 255,16 Stat. 256, taxed only incomes over $2000. The same is true of all or nearly all similar laws, past and present, domestic and foreign. Personal property and succession taxes and many others carry a like exemption. The uniformity clause of the Constitution applies to import duties as well as to internal taxes. From 1846 to 1861 import duties weread valorementirely. At all other periods they have been partly specific, although specific duties are notoriously unequal, bearing harder on the poor than on the rich. Instances have also been common of compound duties classifying the same article according to value with a series ofminimumrates (Arthurv.Vietor,127 U.S. 572,575;Heddenv.Robertson,151 U.S. 520,521), and exempting all imports below a certain value.Arthurv.Morgan,112 U.S. 495,498. Our first excise act taxed city distilleries at one rate and country distilleries at another. Act ofPage 477March 3, 1791, c. 15,1 Stat. 199. The next provided for drawbacks on distilled spirits, but not on any quantity less than 100 gallons. Act of May 8, 1792, c. 32,1 Stat. 267. The early excise acts also containminimumprovisions. Act of June 9, 1794, c. 65,1 Stat. 397; acts of January 18, 1815, c. 22,3 Stat. 180; c. 23,3 Stat. 186. This legislation is a Congressional assumption of the very widest possible powers of classification. Having stood so long unquestioned, it constitutes a practical construction of the Constitution which should be conclusive.Fieldv.Clark,143 U.S. 649,691;McPhersonv.Blacker,146 U.S. 1. Similarminimumprovisions are familiar in the succession taxes levied by the States.Minotv.Winthrop,162 Mass. 113;Matter of McPherson,104 N.Y. 306. InHome Insurance Co. v.New York,119 U.S. 129;122 U.S. 636;134 U.S. 594,607, this court sustained under theFourteenthAmendment a law taxing corporations dividing over 6 per cent per annum by one system, and those dividing less at one wholly different, Mr. Justice Field saying: "All corporations, joint-stock companies, and associations of the same kind are subjected to the same tax. There is the same rule applicable to all under the same conditions in determining the rate of taxation. There is no discrimination in favor of one against another of the same class."Minimumprovisions are familiar in exemptions from levy on execution and bankruptcy laws, laws relating to criminal as well as civil procedure, right of appeal, qualification of jurors and sometimes of voters.
Objection is further made that but one exemption is allowed to each family, whether its income belong to one member or is contributed by more than one — that is, when the family consists of husband and wife, or parents and minor children, so that the income is combined by the common law. This is a corollary to the reasoning upon which the law is based. Two families of equal size and pecuniary ability may be presumed to suffer to the same extent from taxes upon consumption, whether the income all belongs to one member of the family, or not.
It is further said that a corporation is not allowed to deduct $4000 from its income before paying the tax, as is the casePage 478with an individual. The reason is plain. This is not a tax upon gross income, but a tax upon net income. The net income of a corporation is radically different in character from that of an individual. Among the elements which go to make up the so-called net profits or income of an individual is that known to economists as "wages of superintendence" or the value of the labor of the individual himself. SeeMuserv.Magone,155 U.S. 240. The individual business man does not pay himself wages or keep any account representing his estimate of the value of his own services. Everything that he makes over and above what he pays out to somebody else must be returned as net income. The net income of a corporation, on the other hand, contains no such element. The "wages of superintendence" consist of the salaries of its managers and is counted as an expense. When the individual owner of a business incorporates it, he at once begins to pay himself a salary from the funds of the corporation. If, therefore, the corporation were allowed the sameminimumas an individual, there would be a lack of uniformity prejudicial to the individual.Next as to exemptions. The law exempts certain classes of corporations from taxation. Some of these exemptions are contained also in the prior income tax laws. The power to exempt is well settled.Bank of Commercev.New York City, 2 Black, 620, 631;Home of the Friendlessv.Rouse, 8 Wall. 430, 438;Welchv.Cook,97 U.S. 541;Bell's Gap Railroadv.Pennsylvania,134 U.S. 232,237. Congress thought that by making these exemptions it was encouraging thrift and providence on the part of the poor. (Cong. Rec., April 29, 1894, p. 5190; June 2, 1894, pp. 6565, 6568; June 22, 1894, p. 7828; see Stat. 16 and 17 Vict. c. 34, §§ 49, 54; 5 and 6 Vict. c. 35, § 88; Barry on Bldg. Soc., §§ 1, 2, and pp. 48, 111, 112; Endlich Law of Bldg. Asso., § 1;Loan Associationv.Morgan,57 Ala. 53; Acts of June 30, 1864, c. 173, § 120; July 14, 1870, c. 255, § 15.) The incomes exempted are comparatively small in total amount, although large in actual figures. Their inclusion cannot, therefore, be regarded as a vital part of the whole scheme of taxation; hence, if thePage 479exemption is improper, it does not invalidate the lawin toto.Supervisorsv.Stanley,105 U.S. 305,312;Huntingtonv.Worthen,120 U.S. 97,102;Fieldv.Clark,143 U.S. 649,695-6.
The other objections to the law as a whole do not seem to be seriously pressed. It is no objection to a tax that it is measured in part by income received prior to the passage of the act.Stockdalev.Insurance Companies, 20 Wall. 323;Railroad Companyv.Rose,95 U.S. 78;Lockev.NewOrleans, 4 Wall. 172;Grayv.Darlington, 15 Wall. 63, 66;Wrightv.Blakeslee,101 U.S. 174. If there be anything invalid in the administrative provisions of the law (a subject which we do not discuss), the whole law is not thereby invalidated.The claimed exemption of rentals. Such a claim is made in briefs filed. It is submitted that this tax on income, so far as the income is from rentals, is not a tax on the land rented and is therefore not a direct tax. "The tax is payable by the person because of his income, according to its amount and without any reference to the way in which it was obtained.MemphisCharleston Railroadv.United States,108 U.S. 228,234. SeeState Tax on Railway Gross Receipts, 15 Wall. 284;Osbornev.Mobile, 16 Wall. 479, 481;Murrayv.Charleston,96 U.S. 432,446;Philadelphia Steamship Co. v.Pennsylvania,122 U.S. 326,344,345.
This law does not contain any tax measured by land values. Land may have a good selling value, but little or no rental value; a high present rental value, but a low stipulated rental; a high stipulated rental, but little or no collections. Moreover, the value of land is quite independent of mere temporary taxes or assessments laid by States and municipalities; and is never affected by the question whether the losses by fire, incurred during the past year, were compensated to the owner by insurance. Nevertheless, in estimating for the income tax, he is allowed for all such taxes, and is allowed for all losses not compensated by insurance, while disallowed the rest. Finally, these net rentals thus estimated are then lumped with all other sources of income and subjected to a deduction to offset the estimated average excess of expenditure in dutiesPage 480upon articles of consumption from the first $4000 of one's income. Hence, the measure of this tax does not bear the slightest proportion to the values of land.
Moreover, the tax on land, when it is a direct tax, is a tax upon, and collectible out of, the land itself. Here there is not even a lien, for the tax, upon the land whose rentals have entered into the gross income of the tax-payer.
An income tax is no more a tax on land than is a succession tax when the succession is to land.Scholeyv.Rew, 23 Wall. 331, is, therefore, in point. In that case the tax was even made a specific lien upon the land itself. The government relied on authorities holding that a covenant in a lease to pay taxes on land does not cover a tax imposed on the landlord in respect to the land. The court held that it was not a tax on land. See alsoMinotv.Winthrop,162 Mass. 113, andcas. cit.; Wallacev.Myers, 38 F. 184.
In political economy a tax on all property or all income is not regarded as the equivalent of a series of special taxes covering all parts of the property or income. The same distinction is recognized by the law.Railroad Companyv.Collector,100 U.S. 595;United Statesv.Erie Railway,106 U.S. 327;Society for Savingsv.Coite, 6 Wall. 594;Hamilton Companyv.Massachusetts, 6 Wall. 632;HomeInsurance Co. v.New York,134 U.S. 594. See alsoVan Allenv.The Assessors, 3 Wall. 573, 583;Bradleyv.The People, 4 Wall. 459;Tennesseev.Whitworth,117 U.S. 129,136-7;Wilcoxv.Middlesex County Commissioners,103 Mass. 544;State Tax on Railway Gross Receipts, 15 Wall. at p. 294.
If the tax on rentals is so vital an element in the whole scheme as to make void the entire law if the rentals are not taxable by the rule of uniformity, then theSpringer caseis in point. While Springer's own particular income included no rentals of real property, nevertheless, the question was involved in his case; for if the law was voidin totoas to persons whose income was in part made up of rentals, so it was voidin totoas to everybody else also.
If the rentals are regarded as separable from the rest of the tax, then theScholey caseis still in point as already shown.Page 481
We do not discuss the suggestion that income from personal property is non-taxable, for two reasons; first, that theHyltoncasesettles the rule that a tax on personal property, at least a tax other than on all personal property at a valuation, is a duty or excise; second, that these appellants did not appear to have any income from personal property other than municipal bonds.Municipal bonds. It is settled that the bonds of one State or its municipalities may be taxed by another State.Bonapartev.Tax Court,104 U.S. 592; but it is not settled whether they may be taxed by the Federal government. See dissenting opinion of Mr. Justice Bradley inCollectorv.Day, 11 Wall. 113, 128, 129. The remarks of Mr. Justice Matthews inMercantile Bankv.New York,121 U.S. 138,162, areobiter. Chief Justice Marshall regarded the question as left open, whether the Federal government could tax state bonds, even if it were decided that the State could not tax Federal bonds.McCullochv.Maryland, 4 Wheat. 316, 435, 436. It has never been decided that the State could not include Federal bonds in a general property tax (in the absence of express prohibition by Congress), except inBank ofCommercev.New York City, 2 Black, 620. SeePeoplev.Commissioners of Taxes,23 N.Y. 192;26 N.Y. 163. The power of the States was asserted by the dissenting Judges inWestonv.Charleston, 2 Pet. 449. The question was not involved in that case, however, and not decided by the court; for that was not a general property or income tax, but a special tax on certain named securities (p. 450), and it is undoubted that a special tax cannot be laid by the State on Federal securities, since the power to tax in that manner is the power to destroy; and therefore such a tax may justly be described as a tax upon the borrowing power of the government. No such argument can be drawn from the inclusion of Federal bonds in a general income tax. The power to tax in that manner would not be the power to destroy, by any reasonable interpretation. The Federal borrowing power could not be destroyed without destroying all the property in the State and reducing all its laborers to a condition of slavery, except thosePage 482who were fortunate enough to divide its spoils. A general state income tax could not impede or disadvantage in any way the Federal right to borrow. The property of the lender was taxable before the loan. He simply changes its form. The tax goes on at the same rate. Exemption, on the other hand, is a positive advantage to the Federal borrower. If the citizen lends to the government, he will pay no more taxes to the State. He therefore is supposed to calculate the principal sum representing the interest he will thus save, and pays that principal sum, in the form of a premium, to the government. What is the net result? The government has confiscated the taxable value of some of the taxable property in the State, and then sold it to somebody for cash.
The question in theBank of Commerce casenever came before the court a second time, because Congress, by the act of February 25, 1862, c. 33,12 Stat. 345, expressly exempted United States bonds from State taxation. The court's line of reasoning has not been sustained in other cases. The principle of the case has not been applied to other Federal agencies.Railroad Co. v.Peniston, 18 Wall. 5. The argument that, if the Federal bonds were taxable at all, the State could establish a general tax with exemptions, which would be the substantial equivalent of a special tax, and that the Federal courts would be unable to pass upon the propriety of the exemptions, has been overruled inMercantile Bankv.New York,121 U.S. 138,161,162.
I am first to consider whether my client, Mr. Moore, has any standing to be heard in this court. There are very important questions involved in this so-called income tax law. It is objected to his right to be heard by the judicial power of the United States against what he conceives to be, and what we believe and maintain to be an absolute and unauthorized invasion of his private rights, that Congress has said that he shall not be heard.Page 483
If he has no right under the Constitution to appeal to the courts of his country for protection against that which no law authorizes, and which is absolutely destitute of authority on the part of persons who thus undertake to invade his office, explore his books, and compel him to pay, and to finally decide in fact, so far as that goes, whether he has told the truth about it or not, and if they think he has not told the truth, to punish him by a penalty as a final judgment; if, in such a case, he cannot appeal to the courts, of course he has no business to be here.
But if the Constitution of our country has really created a judicial power of the United States, independent in itself, and standing on the rock of the Constitution — a department of the government to which the Constitution has imputed the authority and the duty to protect the citizen against unlawful and tyrannical invasions of his private rights — then he has a right to ask you to decide whether these invasions which are now threatened against him are those which the law has warranted, or are only those which have been invited by a body of respectable gentlemen, who had no right to speak, and who have now disappeared off the face of the political earth.
The Constitution declares that the judicial power shall extend to all cases in law and in equity arising under the Constitution and laws of the United States, and gives this Court original jurisdiction in such cases. The judiciary act of 1789 put the judicial power in motion, and it has continued so without change, as to the point about which I am speaking.
The statute which is supposed to bar Mr. Moore of the right to be heard in equity is the provision in Rev. Stat. § 3224, that "no suit for the purpose of restraining the collection or assessment of any tax shall be maintained in any court."
If that means any lawful tax, it is absurd. If it means, as it probably was intended to mean, to apply merely to questions of the amount of the assessment, of classification, of irregularities, of technicalities, etc., in one point of view it is consistent with public interest. But if it is meant, as I assume it to be, as a prohibition against every citizen to whom a man falsely pretending to be a collector or assessor of taxes comes,Page 484without any real act of Congress behind him, and by the sheer arbitrary force of an executive branch of the government, invades his office and his books, and decides whether he has reported truthfully or not, and finally seizes his property, I say it is a declaration that Congress had no power to make.
The Constitution certainly regarded cases in equity that accorded with acknowledged, settled, and well-known historical principles and the historic practice of jurisprudence for hundreds of years, as proper ones for an appeal to a judicial tribunal; it said so, and it meant what it said. And when it declared that the judicial power should consider and decide, in cases brought before it, all cases in equity arising under the Constitution and laws of the United States, it was a function that the Constitution implanted in the courts, and one which no so-called act of Congress could abolish or diminish.
Suppose Congress says that in exercising the original jurisdiction of this court no suit in equity shall be brought by one State against another, or respecting an ambassador. Can we think that there would be any want of unanimity in this supreme tribunal in holding that it was a matter beyond the competence of Congress to say that you could only exercise a part of what the Constitution had given you, and that you should not, in respect to particular States or ambassadors, or particular topics that fell within the range and scope of the Constitutional description and boundary of your powers, permit them to be heard while you did exercise your powers in all other cases?
All such action of Congress defies theFourteenthAmendment, if that amendment applies to the United States (as I think it does) as well as to the States, for it declares that the equal protection of the laws is to be everywhere inviolable for the protection of everybody.
So that I maintain, with confidence and hope, that this court will have no difficulty in saying that this prohibition of Congress against this particular kind of suit, on account of its being a suit in respect of a tyrannical and unconstitutional attempt on the part of the person who holds a particular office to invade the private affairs of my client, is no impediment to your consideration of the case.Page 485
I come now to the question whether there is equity jurisdiction. It is insisted that where there is a plain and adequate remedy at law the courts of equity cannot be appealed to. We all grant that. Everybody knows it. And then it becomes a question in tax cases, as in every other, whether there is an adequate remedy at law. While courts are inclined in tax cases, as they are in some other cases (when it is a question of stopping a railroad or stopping a trespass), to refrain from issuing injunctions, etc., yet the courts everywhere in respect to these tax cases have been careful to express a saving clause, meaning that if there be the circumstance of multiplicity of suits, irreparable injury in respect of matters incapable of redress in a just sense, by a suit at law for damages, equity will intervene.
Now, do we fall within the principle? Here is a statute, so called — I call it a statute for brevity — here is a statute which declares that a particular officer of the government and his deputies appointed by himself — which the Constitution gives him no authority to appoint at all, he is not the head of a department — but we do not now stand on that — I only speak of it as one of the plants of vice that bloom in this tax garden of injustice in the last Congress — may compel every citizen of the United States, not only if he has $4000 a year, but if he has earned $3500, in respect to which no tax is to be assessed — to make a report to him, answering a series of questions under authority of this act — and I assume for the moment that they are authorized by the act — which invade every item of his private transactions, and affect the interests of everybody with whom he has been in connection, in situations of trust of the most sacred confidence, as a lawyer, for instance; in situations of trust of the most sacred confidence, as a physician; in situations of the most private character in business purely his own; in situations of the most sacred confidence, as the president of a bank, or a broker acting for thousands of customers in the market, and compel him to expose everything to the satisfaction of this agent of the law, as he is called. And if he does not do it, what then? Then this so-called agent of the law is to make up his mind,Page 486from such inquiries as he chooses to make, how much the man's income really is. If the man has submitted to exaction far enough to make a return, and the collector or his deputy chooses to be dissatisfied, he may punish him by a penalty of 100 per cent added. Then the citizen may appeal to the collector of internal revenue for final justice. The collector is not a jury of his countrymen. Probably it is an equity trial, such as the statute forbids to the Circuit Court and to this court, but an equity trial before the collector of internal revenue. He decides upon the whole case, and the statute says it shall be final. That is the end of the jurisdiction. The judicial power is not to be invoked at all. It comes around to the question of whether the final disposition of these exactions under pretence of authority of law is to be determined by the judiciary, or whether it is to be determined by the administrative officers who are made the inquisitors as well as the final judges of everything.
We have been referred to theHylton case, decided in 1794. That was the case which allowed a duty on carriages as not a direct tax. In the court below Mr. Justice Blair — and you will find the whole case an extremely amusing and suggestive one — was of the opinion that this tax on carriages was a direct tax. The judges were divided in opinion. But the judges in the Supreme Court who heard the case held that that tax was valid, and that it was not a direct tax. Well, let us suppose for a moment that that is good law. I believe that this was a chariot, if it will add anything to the dignity of the case. But the tax on these was eight dollars each. The decision then was simply and solely that a tax on carriages was not a direct tax, but it was a duty, as the court called it, and how a duty in that sense differs from an impost I will not take up your time to discuss.
Now suppose that was so. A carriage is a thing which is separable from the person of the owner. There is no doubt that the owner is separable from the carriage when he is thrown out in a runaway. A carriage is a thing which we have an idea of as a definite and complete thing, as distinguished from the personality of the owner.Page 487
Can you have any such idea about an income? I take it not. Therefore, whatever we may say as it respects a tax upon a thing which moves about as a physical object, it is a different idea and a different thing to the conception of a tax upon a person, and that is all this income tax is or professes to be — a tax upon a person, because of a particular circumstance inseparable from him. It is curious that in old English times, and in the law dictionaries, even since the Constitution was formed, an income tax was described as a capitation tax imposed upon persons in consideration of the amount of their property and their profits.
In fact there is no escape from the proposition that the Supreme Court of the United States made a mistake when it said, doubtingly and with hesitation, that a tax upon carriages fell over into the region of indirect taxes which, as everybody described them, were those which are intended to fall upon the movement of commodities, and the voluntary occupations of men. So much for theHylton case.
Then we come along down through a series of corporation cases, of insurance and banks, etc., which I think your Honors would hardly excuse me for going over one by one, all of which, I submit, are entirely distinguishable from this.
At last we come toSpringer's case, which did hold, although the facts as to the sources of income were not all clear, that that income tax was within the competence of Congress without regard to apportionment.
That decision I request your Honors to reconsider, and to come back again to the true rule of the Constitution. It is always well, it is always necessary in the progress of human affairs and society and in government, to remember that gradual and infinitesimal departures from the Constitutional line marked out for our march (if there be one, and we all believe there is) gradually depart further and further, one precedent following another, until at last we are obliged, like the mariner after a storm, or like the traveller in the wilderness, when the stars come out, to take a new observation and correct our course.
Now, I propose to prove that at the time this Constitution was proposed, at the time it was discussed, both in the conventionPage 488and in public discussions, and in the conventions of the States that adopted it, the principles and practice of the government which led these gentlemen to employ these terms so industriously and carefully as they did, demonstrate beyond cavil or doubt that a tax upon the person in respect of his income did not fall within the category of the words, duties, imposts, and excises, but that it fell within the terms and description of capitation and other direct taxes. And if this be true, I submit that you ought to say so now. Every dictionary shows — I have looked at Johnson's dictionary — the great dictionary at that time — and in Jacob's, of the editions of those dates, and in the Acts of Parliament, and in Blackstone, and in Coke, and everywhere this distinction appears in the clearest way.
Our fathers who built this Constitution were as familiar with Blackstone as any of us below the bar are. They were as familiar with Coke. They knew as much of the meaning of the English language as anybody who has succeeded them. There can be no improvement upon the clearness and the style of the language of the Constitution. There are fewer phrases in it, probably, that are capable of different constructions and equivocal interpretations, than any other similar number of words in any document existing. It therefore does not do to say that they put words into the Constitution without consideration, and without intellectual and industrious selection of the terms which they intended to use, and without intending the clear and definite meaning that the universal practice of mankind at that time imputed to them.
There was Blackstone, for instance, whose work was printed in 1765, twenty-two years before this Constitution was formed. That book was undoubtedly on the tables of half the lawyers of the United States, and undoubtedly on the tables of the committees and on the tables of the constitutional convention.
He treats of taxes in this first volume (the whole is very interesting, but I only read the phrase in question). First, there is the direct tax, the land tax, and the subsidies, and all that variety of things, there being no income tax,eo nomine, except upon official salaries, etc., and there were stamps, etc.,Page 489but the idea of income at that time as being a measure of the contribution that the subject should make to the common treasury was found in the arrangement of their tax system in this way: The valuation was made of all the land and property, etc., in the several counties, and then when the Parliament or the kings, when they usurped the power — as this administration under the direction of Congress is usurping power now — wished to raise a levy of £ 100,000, this was apportioned among the counties, just as the Constitution says direct taxes shall be apportioned among the States, following the course of the English taxes. Then it came at last to the idea of adjusting that amount, the amount usually paid on the land and the property, which was already in the tax book — and they did not have a new assessment every year, but the valuation stood a long time — and they provided in the Acts of Parliament that the tax should be paid upon these ratable properties in proportion to the amount of income that the owners of the property got out of them. If the man's property was rated at £ 100, for instance, he was to pay a tax of a penny in the pound; if his property was rated at £ 1000 and his income was £ 500, then he had to pay a tax at the rate of sixpence in the pound, and so on.
That was the state of that kind of taxation at the time our Constitution was formed. That was the manner of regulating the burdens and taxes that were paid upon things and real estate and property by the inhabitants of the various counties of England; and that our forefathers knew when they made this Constitution; and our forefathers knew it was a direct tax as distinguished from duty, excise and impost.
But it may be said that the term "duties" covers any kind of taxes. So it would in its broadest sense; but when our Constitution distributes its description of subjects and modes of taxation, and says in one place "taxes," and in another says "duties" and "excises" and "imposts," is it not obvious that they intended to throw one part of the things into one class and the other part into the other class, and that duties were put into the association where they belonged according to Blackstone, as those imposts which were usually imposedPage 490upon customs, sometimes upon exports, which our Constitution forbids, but always upon imports, which our Constitution allows.
Blackstone says of these taxes that they are "the customs, or the duties, toll, or tariff payable upon merchandise exported or imported." Supposing that this book lay upon the table, and we were framing a constitution, and wished to class this income tax and put it in its proper place among the descriptions of taxes which Congress should be authorized to raise, would anybody doubt where we must put it? So I say, that in all the dictionaries of the time, in all the commentaries of the time, in all the statutes of the time in that kingdom from which we drew our inspirations of public liberty and our principles of judicial justice, there was never a thought or a suggestion of an income tax except as direct taxation upon the body of the property of the kingdom, regulated from time to time and graduated as a direct tax, according to the ability of the person that owned the property, as shown sometimes by his income for one year and sometimes by the average for three years.
If that be so — and it is so — how is it possible for us in an intellectual sense, the matter beingres nova, to conclude that a tax upon personal incomes falls under the head of duties, imposts, and excises, to be uniform throughout the United States? And a tax which, at that time, if the power had then been exerted in that way, would have accomplished the very mischief and the wrong that the founders of that Constitution intended to prevent, by imposing almost the entire burden of the government upon three or four States. And thus we see that, when this Constitution was adopted, the very point was in the discussions everywhere that those burdens from which the citizen could not ordinarily escape, or diminish by act of his own will, as he can in respect to how he lives and what he consumes, should not be committed to a mere majority of the voters to impose upon others, but that they should be apportioned among the States according to their population, and if it was found when it came to be applied that it would work injury and injustice, as sometimes all taxes do, then Congress need not adopt it.Page 491
Mr. Justice Harlan: — Have you formulated in your own mind any general rule by which we are to determine whether a tax is direct or indirect?
Mr. Edmunds: — I have. I am perfectly ready to state it. But like most general rules, it requires exceptions, as all judicial courts know and all people acquainted with affairs know. It is almost impossible to state a general rule which will not have its exceptions, and its qualifications, and its variations.
But my definition is — and I believe it to be generally found to be universally true — that a direct tax is a tax upon every kind of property and upon every kind of person in respect of himself, or in respect of his property, either in existence or acquired, or to be acquired, and not in respect to his voluntary calling, pursuit or acts, as importing goods which he may import or not import as he pleases, not in respect of his being a trader or manufacturer, etc., in all of which cases he is taxed as a consequence of his free choice of business and in all of which the burden is to some degree moved on — but in respect of things that belong to the existence of property as an entity — a state of physical being.
Duties, imposts, and excises are, in large degree, and almost universally, heavy or light upon each person, depending upon his own will. If we say, as some writers do, that indirect taxes are those upon consumption, I repeat again what I believe I said before to some extent, that taxes upon consumption are not taxes which bear unequally upon the so-called poor and the so-called rich, because we all know — it is an everyday experience — that there are people in this very town and probably in this very room — I know there are — who live respectably and comfortably upon half that which it costs some who are their neighbors.
Mr. Justice Brown: — Is not the distinction somewhat like this: That direct taxes are paid by the taxpayer both immediately and ultimately; while indirect taxes are paid immediately by the taxpayer and ultimately by somebody else.
Mr. Edmunds: — Yes, sir; that is a much clearer definition than I have given, though I think the whole burden rarely falls on the last man. It is, I think, borne partly by eachPage 492agent in the movement. The income of a man is inseparable from him. It is as inseparable from a man as his character is, or his name. It is there. It is personal. It begins and ends with him. It was for that reason that I read the definitions in existence at the time this Constitution was made — as a capitation tax included an income tax. It is an inseparable quality, idea, entity that could not be grasped by the human mind otherwise than in connection with the person. It may be that it should not have been so. Perhaps our patriotic friends who have left us would have made it some other way. But our mission is to find out what it was, and not what it ought to have been. Personally, I think that if you were to impose an income tax upon the gains of all property as property according to valuation all over the United States, according to their population, it would come much nearer being uniform, man for man, throughout the United States, than a great many politicians and philosophers suppose.
I come now, if your Honors please, to the point of uniformity. The dictionary meaning of "uniform" is: "Having always the same form, manner, or degree; not varying, or variable; unchanging; consistent; equable; homogeneous."
I have to submit that the phrase in the Constitution, "duties, imposts, and excises shall be uniform throughout the United States," is not merely a geographical phrase. I take it that my learned friends on the other side will agree that the word uniform is not a geographical word taken alone. And what the Constitution meant, after it had provided that direct taxes should be apportioned according to population, and so on, by the requirement that duties, excises, and imposts should be uniform throughout the United States, was that they must be assessed and collected upon the principles of fundamental justice and of equality that are implied in the very name of taxes in a constitutional government of free men. And I submit that it would not, in a direct tax case, have been within the competence of Congress, having imposed a direct tax upon lands and apportioned it among the States according to population, to say that in any one State or all States the owners of two hundred acres of land should payPage 493all the tax, and all the owners of less than two hundred acres should pay none, although the Constitution said nothing about it.
And so in regard to uniformity under the other class — duties, imposts, and excises. When it speaks of uniformity throughout the United States it means, I submit, literally and grammatically, not merely that it shall be everywhere the same, but, first, that it shall be uniformper se, and after being uniformper se, that the uniformity shall be universal as to places. That is the grammar of it; the common sense of it. That is the sense in which the word uniform is used in my learned brother's brief for the defense. That is the sense and very phrase in which the writers, Hamilton and the others, preceding the Constitution, and in the discussions in the Federalist, speaking of the principles of taxation and the imposition of burdens, that these were to be uniform, used the word.
Mr. Justice Harlan: — You think the word "uniform" necessarily implies equality?
Mr. Edmunds: — I do. The dictionary says so. One of its definitions is equable.
Mr. Justice White: — Then the use of both the words "equal" and "uniform" was mere tautology?
Mr. Edmunds: — Yes. The word "equal" was in the original draft, and when being revised it was stricken out, not by the committee that was reforming it, but by the committee on style, as tautology. Thus making of this instrument, as I said before, as perfect a model of symmetrical and concrete English as was ever printed in the world.
So I maintain that it is not merely or chiefly a geographical word, but also a word qualifying duties, imposts, excises, thus made equable and homogeneous in respect of the things and the persons to which they applied, and that the equality shall be everywhere.
Mr. Justice White: — If your rule applies here, how do you meet the statement made by you a while ago in discussing the question of the exemption of a certain amount of furniture, which was universally not taxed?Page 494
Mr. Edmunds: — I meet it upon the principle and practice that existed when the Constitution was formed, and that has existed in every government since, that the lawmaking power does not tax things that are of so small value that the cost of collection of the tax is more than the amount of the tax; and in dealing affirmatively, by the implied consent prevailing in every constitution among civilized men, the principle and practice of leaving to the whole body of the citizens those small personal effects, etc., like furniture, family bibles, etc., free from taxation. And it is upon that principle and practice that charities and churches and schools and libraries and public buildings have been exempted; and also for these latter things that they are things devoted to the public use in one way and another, and therefore taxing them is merely taxing the public for itself, and, consequently, of no advantage. It seems so to me.
An illustration of this geographical notion of the uniformity, which has just occurred to me, might be stated, for I think it is a good one. It is the inscription that is still upon the old, cracked, but still inspiring Bell of Liberty, in Philadelphia. That bell was cast in England on the order of the colonial assembly before the Revolution, and had cast on it, very curiously enough and prophetically enough — in the land of Cromwell, and, perhaps, within reach of the ears of George III — these words: "Proclaim liberty throughout all the land, and to all the inhabitants thereof."
That was not geographical liberty. It was a liberty,per se, inherent in the rights of man, and that should expand and live everywhere, and among all. That was the uniformity, I think, that our fathers meant in using that phrase in the Constitution. There was the important and the fundamental principle of equal rights and justice embraced in the word uniform, and then there was the added requirement that everywhere within the borders of all the States that same principle of equality and justice should exist.
Mr. Justice White: — How do you meet the argument advanced by the other side in regard to the construction of the specific duties levied in all the tariffs during the last thirtyPage 495years? For instance, take the imposition of two cents per pound on cotton without reference to the value of the cotton. That would strike at the root of legislation which has existed since the foundation of the government. Is not that a necessary consequence of that construction?
Mr. Edmunds: — I think not, sir.
Mr. Justice White: — I would like to see why.
Mr. Edmunds: — The introduction of commodities from foreign countries into the United States is one that depends upon the free will of the importer. There is no statute of the United States that commands any citizen of Louisiana, of Vermont, of Iowa, or of Texas, or of California to do anything of the kind. Congress, having the power to exclude altogether, or to admit imports, has the power to say that they shall be admitted upon any qualification it likes. It may say you may bring them into the country upon the terms prescribed or not, as you please. It is the granting of a privilege. You may exclude or admit them, just the same as a State grants or refuses corporate rights. It may grant them on certain terms to A. and on entirely different terms to B.A. may have restrictions and B. may have none. There is another thing, it seems to me, and that is that in nearly all cases where specific duties have been assessed, and probably in all cases, those specific duties are based on the value of the article. For instance, cloths having forty threads to the inch and worth one dollar might be taxed ten cents a yard. Cloths having eighty threads to the square inch and worth two dollars shall pay so much more.
Then again, the language of this Constitution as applied to one set of subjects may have one meaning, and when applied to another set the meaning varies, as we all know it may, and as it has been decided by this court it may sometimes. Again, if all of a whole body of men or things are embraced in a tax or other burden the imposition would be uniform, without regard to any particular differences in the circumstantial characteristics or qualities of the men or things. A tax on polls does not distinguish between tall and short men, or their wealth or health. A tax on all horses, per head,Page 496would be uniform. A tax on all cotton at so much per pound would be uniform. But in every such case the tax would be direct.
But when it comes to the case of a tax imposed upon the people, which the people must pay, and which does not depend upon the conduct of the man or anything he may do, but is one from which he cannot escape, then the principle of universal uniformity, as among men as well as within boundaries, is applied, and the language is capable of that expansion and application according to the different subjects to which it might be applied.
Some allusion has been made to the head money cases. I will only say a word about this. The taxes, so called, could not be geographically uniform, because it is perfectly clear that in a State like Montana, and many others which are not on the water, where no ship could possibly get in, such a tax could not apply. But they could be and were intrinsically uniform as to men and things.
Congress had passed a law that people coming by vessel should pay a tax; but suppose Congress had said that in the port of New York the people coming by one line, the Cunard Line, should pay ten dollars; and that the people coming by the International Line (the Paris and New York), into the same port, should pay fifteen dollars a head. What do you think would have been the decision in that case? Would my brother Carter say that was uniform? I take it not. You would say that Congress had no power to do anything of the kind.
I shall ask your attention for only a few moments more with respect to the general aspects of this case. I insist that the inherent quality of taxation in a government professed to be founded on democratic principles (as in England it exists on an unwritten constitution — for the government of England is founded on democratic principles — it is in some respects more democratic than ours — administrations come and go by the mere will of one branch of that government), with written constitutions, with equal rights, equal responsibilities, equal duties, is that the name and idea of taxation is the imposition of the burdens upon its people for their common benefit, andPage 497that the imposition of the burdens in order to be just must be equal as far as human exertion can make it so. It must not be, as it is in this case, intentionally and tyrannically and monstrously unequal. If it were a state tax in the State of Vermont which provided that all persons owning property worth more than $80,000 should pay all the taxes of the State, and those having less shall pay none, probably not exceeding one hundred persons in the rural and modest State to which I belong — certainly less than two hundred — would bear the whole expenses of the State.
I maintain, therefore, that pervading every line of the instrument providing for the distribution and exercise of the powers of this government, the power to impose taxes, direct and indirect, must, to the greatest degree possible, be so exercised that the taxes bear upon its people equally in respect of the subjects, persons, and rates to which they can apply. Allowing large latitude as to where we draw the lines, still the taxes must be laid as nearly equal as fair human exertion can make them. And when you find a case where Congress or a state legislature has undertaken deliberately to make a discrimination which throws all the burden upon a very small minority of the people, and on purpose to do it, and not from any necessity of the situation, and a tax which relieves the vast majority, which is just as able to bear it as the minority, you must decide that the Congress has gone beyond the boundary of its powers, and that the judicial power, which Hamilton so prophetically said embraced the majesty and the justice of the government, is bound to see it and to hold the calm and regnant shield of the Constitution between the citizen and despotism.
So I maintain that it is a fundamental principle, written or unwritten, that the burdens of taxation should bear equally. But thefifthandfourteenthamendments of the Constitution certainly would relieve us of all difficulty, if any existed, in the fundamental principles I have stated. Take theFourteenthAmendment. In terms it does not say that Congress shall not deny to all the people the equal protection of the laws. Suppose it had said that Congress may deny, althoughPage 498the States may not, to all the people the equal protection of the laws? Everybody would have said that it was a monstrous proposition, and if this court had the power of the highest courts in Great Britain, you would have said such a provision in the Constitution was void as against natural law. But I believe it is now understood by this court, and everybody in this land, that the principle and the substantial application of the provisions of theFourteenthAmendment are just as binding upon Congress as they are upon the States, and as Congress was and is a body of delegated powers, that it was not necessary to say that Congress is not to deny to anybody the equal protection of the laws, because no power was delegated to them to do such monstrous things. It is true that the attainment of perfect equality in taxation is a baseless dream, as has been said. But it does not follow that the legislative power can lawfully and purposely go to the other extreme and impose taxes broadly designed to be unequal, and by false and arbitrary classification set one great body of citizens in conflict with another.
If theFourteenthAmendment applies to this case, is the taxing of this small minority — two per cent of the people of the United States — imposing upon them this burden, and denying to them the protection that the ninety-eight per cent have, and granting a privilege to the ninety-eight per cent to pay nothing, and imposing a duty on the two per cent to pay much or little as Congress may declare (for if it has the right to impose a two per cent tax, it can compel twenty or fifty or one hundred) warranted by the clause of equal protection? If such discrimination is to be upheld, then we have taken the first great step toward the destruction of all free government.
I believe I have said, in reference to the framers of this Constitution, that they must have been learned in the law, and that they must have understood clearly the meaning of the plain phrases and paragraphs which they used — I am sure I am right about that. All their writings, all their discussions in the conventions and in the Federalist and in other publications show that they were acquainted with the whole history of civilization in detail, from the Egyptian, and the Greek, andPage 499the Roman governments, where the tyranny of taxation produced so much misery, down through all the performances of the French feudal times and British times, and the British administration at that time. Everything was before them. The past was present and the distant near. And now we are to be told that these gentlemen did not know what they were talking about, and that they did not mean what all the literature, all the lexicons, and the legislation, and all the law books of the time plainly imputed to those words; and all this for the purpose of allowing the majority to levy a tax upon the minority.
It appears to me, therefore, that it is the grand mission of this court of last resort, independent and supreme, to bring the Congress back to a true sense of the limitations of its powers. Hamilton in one of his letters stated the great truth, that "In framing a government which is to be administered by men over men, the great difficulty lies in this — you must first enable the government to control the governed; and, in the next place,oblige it to control itself. A dependence on the people is, no doubt, a primary control on the government; but experience has taught mankind to insist on auxiliary precautions." Of these, he said the chief is "in the distribution of the supreme powers of the State."
In the exercise of its clear jurisdiction it is the right of this court, and we hope it will find it to be its glad duty, to see that this fundamental principle of equality in taxation is not disregarded. If the Constitution has been invaded, and if recognition by the courts has been mistakenly given to that invasion heretofore, now is the time, before we depart wider and wider from that true line of equal justice and equal rights which cannot exist without equality of burdens, to return to the true paths of the Constitution.Mr. Attorney General, by leave of court, for the United States in all the cases.
The chief interest of the government in the present litigations relates to the constitutional questions which the severalPage 500plaintiffs allege to be involved. Whether they are really involved or not, or whether the suits should and must be disposed of on different grounds, is a matter upon which I do not care to be heard. For present purposes, I am willing to assume that the plaintiffs are right in their claim, and that the constitutional issues they desire to have settled are so presented by these litigations that the court either must, or properly may, consider and determine them.
An examination of the plaintiffs' bills and briefs and arguments seems to show quite satisfactorily that many of the alleged objections to the validity of the income tax law are simply perfunctory in character. They are taken pro forma, by way of precaution, because of the possibility of a point developing in some unexpected connection, just as a good equity pleader, be his knowledge of his case and of the pertinent remedies ever so thorough, never fails to wind up his bill with the general prayer for other and further relief. There is nothing to criticise, of course, in the plaintiffs pursuing that plan. It only makes it proper to sift out at the outset the exact propositions upon which alone the plaintiffs can and do place any real reliance. For example, no time need be spent, I take it, in discussing the averments that the income-tax law is an invasion of vested rights, or takes property without due process of law. These propositions are pure generalities, glittering or otherwise, and if there is anything in them it is because they comprehend others which are more specific and which are the only real subjects of profitable discussion. Again, suppose it to be true that the income-tax law undertakes to ascertain the incomes of citizens by methods which are not only disagreeable, but are infringements of personal rights. The consequence is, not that the law is void, but that the hotly denounced inquisitorial methods which are merely ancillary to its operation cannot be resorted to. The like considerations apply to the objection that the law is to be pronounced void because taxing the agencies and instrumentalities of the governments of the several States.
I will not undertake to repeat the able and satisfactory argument of my associate on that point. There seems to bePage 501no good reason why the income of state and municipal securities should not be taxable by the United States when it is assessed as part of the total income of the respective owners under a law assessing income generally and not discriminating between those securities and others of like character. In making that suggestion I do not overlook the able and elaborate opinion of the supreme court of the District, holding, largely on the ground of want of power in the United States, that this income-tax law properly construed has no application to the income from state and municipal securities. But suppose the contrary — suppose that the statute must be interpreted as taxing and unlawfully taxing state agencies and instrumentalities. The result is, not that the law is bad in toto, but that it is bad only as to the income of state and municipal securities. The plaintiffs seek to meet this view by alleging in their bill that the income from state and municipal securities throughout the country amounts to $65,000,000. Having made that allegation, they then declare that it was the intent of Congress and is necessary to accomplish the general purpose of the law, that this $65,000,000 should be taxed. But the declaration is mere assertion without evidence in its support either in the statute or outside of it. The plaintiffs do not even attempt to give the assertion an air of probability by comparing this $65,000,000 of income which the law cannot reach with the other and remaining income which the law does reach. Yet they certainly would have made the attempt if the comparison would show that this $65,000,000 of non-taxable income is so large a proportion of the entire income of all the people of the country as to make it inconceivable or even highly improbable that Congress could mean to tax income at all unless this $65,000,000 were included as part of it.
If I am right in these observations, the constitutional contention of the plaintiffs simmers down to two points. One is that an income tax is a direct tax and must be imposed according to the rule of apportionment. I do not stop to discuss the question what the constitutional rule of apportionment is. I do not think I ought to delay the court for any considerablePage 502time with the question whether an income tax is direct or indirect. Scientifically, economically, practically, it may be either the one or the other without the result of the present cases being in the slightest degree affected. In them, the only material point is, is an income tax "direct" or otherwise in the sense in which the term "direct" is used in the Constitution? The answer is that it is not a "direct" tax within the meaning of the Constitution unless at least five concurring judicial expressions of opinion by this court, the earliest in 1796, when three leading spirits of the constitutional convention were on the bench, and the last in 1880, have all been erroneous and ought now to be reversed. But, whether or not they be erroneous is, when all is said, matter of the gravest doubt, and, were it ever so certain, no idea of reversing them ought now to be seriously considered. A constitutional exposition practically coeval with the Constitution itself, that has been acted upon ever since as occasion required by every department of the government, that is not irrational in itself nor vicious in its workings, and that indeed during a stress and strain such as that of the civil war was found of the greatest value to the Republic, deserves to be considered as immutable as if incorporated into the text of the Constitution itself. To reject it after a century's duration is to set a hurtful precedent and would go far to prove that government by written constitution is not a thing of stable principles, but of the fluctuating views and wishes of the particular period and the particular judges when and from whom its interpretation happens to be called for. In this connection, therefore, there is but one suggestion which I desire to very briefly notice. A part of the income taxable under the law is rents of land, and a tax upon rents is claimed to be a tax upon the land, and so to be a "direct" tax within the meaning of the Constitution. But the suggestion is by no means novel, and certainly is not to be accepted as sound. There is a practical commercial sense in which a tax upon rents is always a tax upon land. It affects the value of land; land, the income from which is subject to a tax, must sell for less in the market than land the income of which is not so subject. But, except in that view, a tax upon rents is not necessarily aPage 503tax upon land, but may be a tax upon a wholly distinct subject-matter. Instead of being upon realty, it may be upon so much personalty wholly dissociated from the land. It is, of course, competent for the government to tax upon either plan — to tax rents under a scheme of taxation of personalty as personal property, or to tax them under a scheme of taxation as realty and as representing and measuring the value of real estate. The only question is of the intent — an intent to be looked for and found only in the statute imposing the tax. That test being applied, what is the purpose of Congress in the present income-tax law? Is it to tax land — rents being used as a ready mode of valuation — or is it to tax rents as so much personal property irrespective of its origin? It is difficult to see how that question can be answered except in one way. No land tax is aimed at or attempted by the statute — there is no lien on land for its payment — and the whole scope and tenor of the statute show the subject of the contemplated tax to be personal property and nothing else. It is well nigh conclusive on this point that there is no provision for the valuation and taxation of unproductive land — a provision that would almost certainly have been found if the object had been to make a real-estate tax. It may be suggested, however, that it may be the purpose to tax land but only such land as yields rent. But there is no sign or symptom of such an intent in any specific provision of the statute, while its general provisions, as already observed, contemplate nothing but a tax on personal estate. It may also be suggested that if a tax reaches rents in point of fact, it is a tax upon land no matter what the intent of the taxing statute may be. But that position is wholly untenable, because rents in the pocket of the owner are not intrinsically and of themselves land. They are money, like any other. If for the purpose of a tax they are to have any artificial character as the representative of land, it is a character impressed upon them from some source and can come from no other source than the taxing statute itself. I submit, therefore, with great confidence, that while a tax upon rents may under some circumstances be held to be in truth and in fact a tax upon land, it cannot be held to be such under aPage 504statute like the present which taxes rents without regard to land and merely as one of the constituents of income.
This brings me to the only remaining point — totheconstitutional objection which, notwithstanding all that has been so earnestly and forcibly said on the direct tax part of this controversy, is, I am satisfied, the plaintiffs' main reliance. The point is that the income tax imposed by the statute under consideration is not uniform. But what does the Constitution mean by "uniform" as applied to a tax? But for the strong pressure upon the plaintiffs' counsel to find objections to this statute there would be no controversy as to the meaning. It is clearly shown by the debates in the constitutional convention and by the repeated and unequivocal utterances of the framers of the Constitution themselves. It is set forth by the writers on constitutional law, who are unanimous in their interpretation. It is judicially expounded by this court in the well-known judgments in the so-calledHead Money cases. The uniformity of tax prescribed by the Constitution is a territorial uniformity. A Federal tax, which is not a poll tax nor a tax on land, must be the same in all parts of the country. It cannot be one thing in Maine and another thing in Florida. The law providing for such a tax must be like a bankruptcy law or a naturalization law. It must have the same operation everywhere, wholly irrespective of state lines.
It is manifestly impossible for the plaintiffs to assent to this settled construction of the word "uniform," and they do not assent to it. They are compelled to insist that a tax, to be "uniform" within the meaning of the Constitution, must be uniform, not only geographically but as between taxpayers. In other words, they make it prescribe the nature and quality of a tax as well as its local application. I submit that their contention is hopeless and may fairly be regarded as already decided against them. Let it be, however, for present purposes that the adjective "uniform" describes and regulates the properties of a tax. I then beg leave to submit that the plaintiffs gain nothing by the concession, and that, so far as the validity of this income-tax law or any other tax law is concerned, the word "uniform" might as well be out of thePage 505Constitution as in it. The word is surplusage. It simply designates and describes an essential element of every tax — an element which is inherent in every valid tax and the absence of which would be sufficient to annul any attempted exercise of the taxing power.
For the basis and the truth of this position it is only necessary to refer for a moment to the nature of the taxing power. The power to tax is wholly legislative, and in its essence is the power to raise moneyfromthe publicforthe public. That the object of a tax must be public is undeniable. To force money from the pockets of the people at large to enrich a private individual is so clear an abuse of the taxing power that every court would so declare on general principles without the aid of any express constitutional prohibition. Conversely, to take the property of a single individual for public uses is not to exercise the power to tax but the power of eminent domain, and can be done only on the condition of rendering the individual full indemnity. These inherent limitations of the taxing power necessarily enter into and control every scheme of taxation and determine the mode and extent of its operation upon private persons and estates. Theoretically, a tax for the benefit of the public should fall equally upon all persons composing the public; should, as text writers and judges often express it, be ratable and proportional, and be so adjusted that every member of the community shall contribute his just and equal share toward the common defence and the general welfare. Moreover, under theoretical and ideal conditions such as can be conceived of, these general maxims would be actually and exactly applicable. If, for example, every individual in a community were like every other in respect of property, of the ability to bear taxation, and of the benefit to accrue from taxation, the question how he should be taxed could receive but one answer. Nothing would have to be done but to apply the rule of three, and any other rule would be inadmissible for obvious reasons. To make one man pay a higher rate of tax than another when all the conditions in both cases are exactly alike would, to the extent of the excess be a taking of private property for public uses without making that special compensation which alone can justify such a taking.Page 506
Taxation, however, is an uncommonly practical affair. The power to tax is for practical use and is necessarily to be adapted to the practical conditions of human life. These are never the same for any two persons, and for any community, however small, are infinitely diversified. Regard being paid to them, nothing is more evident, nothing has been oftener declared by courts and jurists, than that absolute equality of taxation is impossible — is, as characterized in an opinion of this court, only "a baseless dream." No system has been or can be devised that will produce any such result. Suppose, for instance, manhood taxation were resorted to, as a sort of offset to manhood suffrage, and that the public exchequer were sought to be filled by a tax levied on adult males at so much per head — the inequity and impolicy of such a tax would be universally recognized and universally denounced. But if such would be the fate of a capitation tax employed as the sole source of public revenue, hardly less objection lies to an ad valorem property tax which should make every owner, without exception or discrimination of any sort, pay in exact proportion to the value of his estate. Logically and theoretically, no criticism could be made on such a tax. But practically it loses sight of a most important element, to wit, the ability to bear taxation, and ignores the fact that exacting $5 from a man whose annual income is $500 puts upon him an infinitely greater burden than the exaction of $500 from one whose annual income is $50,000. There is at first blush plausibility in the suggestion that the rule should be that every person should contribute to a tax ratably to the benefits derived from it. But nothing could be more objectionable or would be more certainly objected to than an attempt to collect the public revenue on any such plan. The principal beneficiaries of almost all taxes, of the taxes for highways and schools and sewers, and almost all other objects of state and municipal expenditure, are the poorer classes of the community. To impose taxes solely upon the principle of the ensuing advantages realized would in effect largely exempt the more fortunate and wealthy classes and place the greater part of the burden upon those least able to bear it.Page 507
These considerations serve to show the nature of the taxing power; that it offers little, if any, opportunity for the exploitation of theories or for experiment with abstract generalizations; that it calls for the highest practical wisdom to be applied to the actual and infinitely varied affairs of a particular community and people; and that in its exercise, in the selection of the subjects of taxation, in taxing some persons and estates and in exempting others, the legislature is vested with the largest and widest discretion. It by no means follows that the power to tax is without any limits. They are, so to speak, self-imposed, that is, as already observed, they result from the very nature of the power itself. No country, for example, no State of this Union, ever adopted a plan of taxation that did not except some portions of the community from a burden that was imposed upon others. The power to do so is unquestioned and is universally exercised. Nevertheless, the power to exempt has bounds. It cannot be used without regard to the end in view, nor to gratify a mere whim or caprice. A law, for instance, providing for a tax to be paid by the light-complexioned members of the community and exempting the dark, would be unhesitatingly pronounced void as being not a use but an abuse of the taxing power. It would be an abuse because the discrimination made by it could not be traced to any line of public policy. So, having classified the community for the purpose of a tax, the legislature cannot then proceed by arbitrary selection to take individuals out of the class to which they belong. That is the rule of uniformity — that is what "uniform" means as applied to a tax — and that is its whole meaning as used in the Federal Constitution, even when it is conceded that it prescribes the nature of a tax, not merely as between localities, but as between taxpayers. The rule of uniformity places no restrictions upon any division of the community into classes for taxable purposes which the legislature may deem wise. It merely declares that, the classes being formed, the members of each shall be on the same footing, and shall be taxed alike or be exempted alike without arbitrary discriminations in individual cases. Uniformity between members of a classPage 508created for taxable purposes is required upon the same grounds which prevent a purely senseless and capricious division into classes. The classification must be such that it can be referred to some view of public policy. Being made and justified only on that principle, any exemption of particular members of a class is void because necessarily in conflict with the principle and preventing its operation.
For these reasons I maintain that the term "uniform" in the Constitution, even if it describes the properties of a tax, puts no limitations upon the taxing power of Congress that are not inherent in the very nature of the power. It is a power to enforce money from the public for public uses. Could it be exercised so as to produce equality of taxation, it could be exercised in no other manner. That not being feasible in the nature of things, it is for Congress and Congress alone to decide how the taxing power shall be applied so as best to approximate that result. In making that application, Congress is of course bound to keep in view the fundamental purpose of the power and to aim at its accomplishment. Hence, in taxing this class or exempting that, Congress must proceed upon considerations of public policy, and cannot adopt a classification which has no relation to the end to be attained and is founded only in whim or caprice. Hence, and on the same ground, classes for the purpose of taxation being constituted, the rule of taxation or exemption must be uniform between members of the class. But, these limitations upon its taxing power being granted, the right of Congress to determine who shall be taxed and what shall be taxed and all the ways and means of assessment and collection, is practically uncontrolled. It is quite beside the issue to argue in this or any other case that Congress has mistaken what public policy requires. On that point Congress is the sole and final authority, and its decision once made controls every other department of the government.
These familiar principles, so well established that any citation of authorities and decisions is, I think, quite unnecessary, effectually dispose, I submit, of the plaintiffs' contention in the present cases. What do they complain of? It is not thatPage 509Congress has determined to tax and has taxed income generally. It is that Congress has made exemptions in favor of certain classes, and the plaintiffs' contention, if pushed to its logical conclusion, means that Congress cannot tax income at all without taxing ratably the income of every man, woman, and child in the country. The preposterously harsh and impolitic operation of any such tax as that it is not necessary to descant upon. Congress has rightfully repudiated any such plan. While taxing incomes generally, it had full power to make such exemptions as its views of public policy required, and the only real question now and here is, has it abused or exceeded that power of exemption? The tests already stated are applicable, and being applied render but one answer to the question possible. The statute makes no exemption in favor of a class that is not based on some obvious line of public policy, and, the class being established, one uniform rule is applicable to its members. Take, for example, the principal classification of all — the grand division by which the entire population of the country is separated into people with incomes of $4000 and under who are non-taxable, and people with incomes of over $4000 who are taxable. It is manifest that in this distinction Congress was proceeding upon definite views of public policy and was aiming at accomplishing a great public object. It was seeking to adjust the load of taxation to the shoulders of the community in the manner that would make it most easily borne and most lightly felt. Having so much revenue to raise, it might have got it by a proportional tax upon the entire income of all the people of the country. But it bore in mind the fact that a small sum taken from a small income is an infinitely greater deprivation than a large sum taken from a large income; that in the one case the very means of decent support might be impaired, while in the other the power to command all the luxuries of life would hardly be affected. Acting upon these considerations or considerations such as these, Congress undertook to exempt moderate incomes from the tax altogether. It had to draw the line somewhere, and it drew it at $4000. The same objections in point of principle would have existed if it had drawnPage 510the line at $400, or at any other figure. But no objection in truth lies at all, because it is entirely evident that, as well in exempting incomes of $4000 and under as in taxing incomes of over $4000, Congress has been governed by what it deemed sound public policy. Take another illustration — an example of a class formed by way of exception to a larger class. The statutory general rule is that every taxpayer is entitled to a fixed deduction of $4000 before taxable income is reached. In the case, however, of a family consisting of husband and wife, or parent and a minor child or children, there is but one $4000 deduction from the aggregate income of all the members of the family. Here is a differentiation of a special class whose members may be taxed higher than others having incomes of the same amount. But the discrimination is not arbitrary nor senseless, but is founded on obvious views of equity and policy. It assumes — what is undoubtedly true — that as a rule there is but one income and one breadwinner to one family, but, recognizing the fact that the rule has many exceptions, it makes the existence of several incomes to a family the just and proper basis of a somewhat higher rate of tax. It is an attempt, in short, to tax with some regard to the capacity of the taxpayer to bear it. Take another illustration — that of a class which the plaintiffs' counsel dwell upon at great length and with exceeding unction — the class, namely, of business corporations. Their net incomes are taxed at the standard rate of two per cent undiminished by the standard deduction of $4000. The result is that a man in business as a member of a corporation is taxable at a little higher rate than a man in the same business by himself or as a copartner. Here, it is claimed, is a distinction without a difference, is the establishment of a special class without special reasons of equity and policy to justify it. But I venture to submit that that is not so, and that the higher statutory rate of tax for corporate incomes is founded upon and vindicated by essential differences in the conditions under which corporations and individuals respectively carry on business. The advantages acquired by doing business as a corporation, rather than as individuals or partners, are plain and are notorious. ThePage 511interest of a corporator is in distinct and tangible shape, is marketable at any moment, and is unaffected by the insolvency or decease of other corporators. It is an interest attended with a definite and limited liability for debts. It is an interest through which the corporator ratably participates in all the benefits arising from the transaction of business on a large scale. These and other like commercial advantages of incorporation are wholly dependent upon legislative grant, which is the only fountain of corporate franchises. But so pronounced and so general has been the appreciation of these advantages that there is hardly a State of the Union which does not facilitate the formation of business corporations by a general corporation law, and that the great and ever-growing multitude and variety of such corporations is one of the striking phenomena of modern times. It is common knowledge, indeed, that corporations are so successful an agency for the conduct of business and the accumulation of wealth that a large section of the community views them with intense disfavor as malicious and cunningly devised inventions for making rich people richer and poor people poorer. When, then, this income-tax law takes a special class of business corporations and taxes their incomes at a higher rate than that applied to the incomes of persons not incorporated, it simply recognizes existing social facts and conditions which it would be the height of folly to ignore. It but classifies and discriminates upon the plainest basis of equity and public policy, upon a superiority of business conditions both enabling those enjoying them to pay a special and higher rate of tax and making it just and equitable that they should pay it. Other like exemptions of the statute, covering religious, educational, charitable and semi-charitable companies, and embracing institutions where wage-earners lodge their scanty earnings and by which persons of small means are enabled to coöperate in various ways for mutual security and benefits, these exemptions rest firmly upon the same legal footing of a wise and humane public policy. It would be tedious and cannot be necessary to consider each in detail. Suffice it to say that the statute lays down a rule for the taxation of incomes generally,Page 512and then adds qualifications, exceptions, and exemptions, as to no one of which can it be fairly said that it does not represent an honest attempt of Congress to make the operation of the tax just and equitable, and that it does not reflect the honest views of Congress respecting the requirements of true public policy. That being so, it avails nothing for the plaintiffs to point out instances in which the law taxes property twice over or produces other inequalities and incongruities in the way of taxation. Nothing else could be expected and nothing different, it is safe to predict, would result from any other law, even if the plaintiffs had the drawing of it. It avails nothing, also, for the learned counsel to convince themselves, and perhaps the court also, that Congress's views of public policy are quite mistaken. When they have done that, what have they accomplished? They have gone through an intellectual exercise which from the character of counsel is bound to be both interesting and brilliant. But they have accomplished nothing else because, be Congress's views of public policy ever so mistaken, this court cannot avoid ruling that it is absolutely bound by them.
My endeavor has been to eliminate and discuss such of the legal issues presented as are not already too conclusively settled to admit of discussion, and to do so succinctly, without unnecessary elaboration of details, and without being betrayed into those bypaths of metaphysical and economical and historical inquiry which, however fascinating in themselves, have so little connection with the real business of the case. It would be a mistake — I am aware that the court is in no danger of falling into it — but it would certainly be a mistake to infer that this great array of counsel, this elaborate argumentation, and these many and voluminous treatises miscalled by the name of briefs, indicate anything specially intricate or unique either in the facts before the court or in the rules of law which are applicable to them. An income tax is preëminently a tax upon the rich, and all the circumstances just adverted to prove the immense pecuniary stake which is now played for. It is so large that counsel fees and costs and printers' bills are mere bagatelles. It is so largePage 513and so stimulates the efforts of counsel that no legal or constitutional principle that stands in the way, however venerable or however long and universally acquiesced in, is suffered to pass unchallenged. It is matter of congratulation, indeed, that the existence of the Constitution itself is not impeached, and that we are not threatened with a logical demonstration that we are still living, for all taxable purposes at least, under the régime of the old Articles of Confederation. Seriously speaking, however, I venture to suggest that all this laborious and erudite and formidable demonstration must necessarily be without result on one distinct ground. In its essence and in its last analysis, it is nothing but a call upon the judicial department of the government to supplant the political in the exercise of the taxing power; to substitute its discretion for that of Congress in respect of the subjects of taxation, the plan of taxation, and all the distinctions and discriminations by which taxation is sought to be equitably adjusted to the resources and capacities of the different classes of society. Such an effort, however weightily supported, cannot, I am bound to believe, be successful. It is inevitably predestined to failure unless this court shall, for the first time in its history, overlook and overstep the bounds which separate the judicial from the legislative power — bounds, the scrupulous observance of which it has so often declared to be absolutely essential to the integrity of our constitutional system of government.Mr. Herbert B. Turnerfiled a brief on behalf of The Farmers' Loan and Trust Company, appellee in 893.Mr. William JayandMr. Flamen B. Candlerfiled a brief on behalf of The Continental Trust Company, appellee in 894.Mr. James C. Carterfor the Continental Trust Company, appellee in 894.Mr. William C. Gulliverwas with him on the brief.
I appear here for the Continental Trust Company. This is one of the companies which, it might be supposed, represent interests which would be the especial subjects of income taxation,Page 514and yet I am instructed by it to defend and maintain to the best of my ability the validity of the law. I am glad that there is at least one great corporation subjected to the tax, which avows its readiness to submit itself without controversy or contention to the law of the country, and to discharge the burdens which that law imposes upon it.
It admits by its demurrer to the bill that, unless restrained by the process of injunction, it will, in accordance with the requirements of the law, make the prescribed returns and pay the tax. Outside of this bill it admits, and indeed asserts, this determination; and if those circumstances constitute any reason why a court of equity should take jurisdiction of the case and listen to argument upon the questions which are raised, then there is some support for the equity jurisdiction invoked by the complainant.
Inasmuch as the main position of the other side, upon this branch of the inquiry, is that the taxes imposed by the act are unjust because they violate the true principle of equality in taxation, I shall be obliged to inquire, for a few brief moments, what that principle of equality is; how it has been stated and laid down by statesmen and economists; how far governments in practice adhere to it, and to what extent, and upon what occasions, they depart from it.
We begin, of course, with the admitted truth that governments must exact very large sums from those who live under them for the purposes for which governments are established, and the first principle or rule which, as I believe, is laid down and agreed to by the most approved statesmen and economists, representing, otherwise, every variety of opinion, is that taxes must be laid according to the several and respective abilities of the people upon whom they are imposed to bear them. It will be observed that this rule has regard, principally, to the different members of society considered as individuals, and its purpose is to fairly and justly arrange the public burdens as between them. Government, however, is a complex problem in which many different considerations are involved, and this rule or principle of equality is, in practice, in all countries, departed from in a variety of ways.Page 515
In the first place, the rule is departed from in most countries in favor of the very poor, and by various exemptions, either partial or total, and the effort is made to mitigate the burden which would otherwise fall upon them.
In the next place the expense of collecting taxes is an important item for consideration. To collect taxes with exact equality might require a very large expenditure and involve otherwise many difficulties. It is important that the revenues of a government should be cheaply and certainly and easily collected, and modes are, therefore, contrived with this end in view.
Again, moral purposes are taken into view. There are some consumable articles, such as intoxicating drinks, indulgence in which it is the policy of some States to endeavor to repress, and they seek and carry out this object by imposing duties upon such commodities, and thereby increasing their price and making the use of them more difficult. The wisdom of such enactments is the subject of much dispute.
Again, some forms of taxation, otherwise very desirable because just and equal, are avoided, because of the ease with which they may be evaded. The income tax is supposed to be particularly open to this objection. It is, however, not so much to be objected to on this account as the personal property tax in large communities. Notwithstanding this objection, however, it may be said that the income tax is at the present day everywhere among civilized States a part of the system of taxation.
There is another form of taxation which society adopts which flagrantly disregards the principle of equality, indeed, pays no regard to it whatever; but which is recommended to statesmen and public administrators by some especial qualities which it possesses. This is the tax on consumable goods, whether foreign or domestic. It is said, with truth, that this mode of collecting the taxes saves great expense, and it is also said with truth, that it is a very desirable thing for the good of society, as a whole, to establish and maintain in every nation all the important industries upon which society depends for its convenience and its comfort. It is, indeed, a tax which,Page 516when imposed for this purpose, is particularly liable to abuse, and the controversy concerning it turns for the most part upon the real or supposed abuses of it.
But there is another cause tending to introduce inequality in the burdens of taxation of far greater effect than all the instances of departure from the rule of equality which I have just mentioned; and this is a cause which does not arise from any consideration of the public good whatever, but from the inherent selfishness of men. In every community those who feel the burdens of taxation are naturally prone to relieve themselves from them if they can; and the extent of the effort which they make to relieve themselves is, in general, proportionate to the extent of the burden which they suppose has been laid upon them. One class struggles to throw the burden off its own shoulders. If they succeed, of course it must fall upon others. They also, in their turn, labor to get rid of it, and finally the load falls upon those who will not, or cannot, make a successful effort for relief. This is, in general, a one-sided struggle, in which the rich only engage, and it is a struggle in which the poor always go to the wall.
This struggle on the part of the wealthy and highly organized classes of society constantly, unceasingly exerted, must necessarily succeed, either completely or partially, and it does everywhere succeed. The consequence is that in every country and in every age the principal burdens of taxation have been borne by the poor. This fact is so universal that it furnishes no inconsiderable argument in support of the view that it ought to be so.
Now let me pass from this general view of the grounds, reasons and motives by which the systems of taxation are fashioned and shaped, to the conditions in which we in the United States stood at the period immediately preceding the enactment of the law before us. We were collecting annually for governmental expenditure $500,000,000; and the striking and impressive fact to which I call the attention of the court is that no one dollar of this amount was collected in accordance with that first and fundamental principle of taxation to which I have alluded, namely, that it should be proportionedPage 517according to the ability to bear the burden. The whole of this $500,000,000 was collected upon a rule which is a confessed departure from that principle, and which does not regard it in the slightest degree. It was collected by duties upon consumable commodities; duties which went into and increased the price of the articles upon which they were imposed and were thus paid by every purchaser of them who purchased them for consumption.
It is alleged by the counsel for the appellant that the income tax — and this they consider its most monstrous form of injustice — falls upon two per cent only of the population of the United States; but what must we think of the fact that this two per cent have been paying but a trifle more than two per cent of the $500,000,000, while of the annual income of the nation, after deducting what would be sufficient to furnish a living for the people, they have been receiving probably more than fifty per cent? At the same time another impressive and startling fact, not adverted to by them, has also been receiving more and more of the attention of the people of the country — I mean the growing concentration of large masses of wealth in an ever diminishing number of persons.
It was impossible to avoid the suggestion that there was some connection between these striking facts, and it was also impossible that they should not form the point of conflict around which political contentions would gather. They did finally succeed in dividing the two great political parties of the country. At last the party complaining of these things gained an ascendency in the legislative counsels, and efforts were made to devise a remedy. This income tax is a part of that remedy.
The view taken by the Congress which passed the tax law in question is plain upon its face. The object was to redress in some degree the flagrant inequality by which the great mass of the people were made to furnish nearly all the revenue, and leave the very wealthy classes to furnish very little of it in comparison with their means. Of course, nothing, therefore, was to be taken from the wages of labor, or fromPage 518very small incomes proceeding from other sources than labor. How much further the exemption should be carried was a question upon which great difference of opinion existed, and there was much contest.
Upon the passage of the law it was very naturally greeted by those upon whom the principal burden was imposed with much dissatisfaction. Efforts on the part of those who can afford to make such efforts to throw off the burdens of taxation were made, not only before the passage of the law, but they were resumed in another form after the law was passed. These suits are the result.
Some general criticisms made by way of objection to the law, and supposed to be sufficient to condemn it, are wholly lacking in merit: they amount to clamor only. It is said to be class legislation, and to make a distinction between the rich and the poor. It certainly does. It certainly is class legislation in that sense. That was its very object and purpose. This is a distinction which should always be looked to in the business of taxation. Unfortunately heretofore it has been observed in the wrong direction, as I have already pointed out, and the poorer class prodigiously over-burdened.
It is said also to be sectional legislation, and that too is true. It is so, not in terms, but in operation and effect; but it is so only because wealth has become sectional. If either of the two objections alluded to could be allowed to prevail, it would be forever impossible for this country to lay any income tax whatever. Such features belong to the very nature of an income tax.
There are two principal objections urged against the law. First, it is said that the income tax is a direct tax, and therefore an infraction of the constitutional requirement that such taxes should be apportioned among the States according to population, and in the next place it is said that if it is not a direct tax it must be a duty, impost, or excise, and then invalid because not uniform throughout the United States. There is, besides, a third objection applying to income drawn from a particular description of property, namely, state and municipal bonds, which objection insists that that form of propertyPage 519is a subject withdrawn from jurisdiction of the Federal government.
As to the first of these questions, whether the taxes are direct or not, I begin by saying that it is not open to debate in this court. If it is possible to put a question at rest by solemn judicial decision, acquiesced in and undisturbed for a long series of years, this should be regarded as beyond the reach of further agitation. I am not one of those who make a fetich of the doctrine ofstare decisis. Even this tribunal, as it has often told us, is liable to err, and it has on numerous occasions revised its decisions and corrected them for supposed error.
The question arose a very few years after the Constitution went into operation. It arose upon a dispute as to whether a carriage tax was a direct tax within the meaning of the Constitution. As is freely admitted by the counsel upon the other side, according to their interpretation, such a tax is a direct tax, and ought therefore to be apportioned. A supreme court, three of whose members had participated in the deliberations of the convention at Philadelphia, decided, without dissent, that such a tax was not, within the contemplation of the Constitution, a direct tax. The case was argued by the most eminent lawyers of the time. It was considered with the greatest deliberation. It is for these reasons entitled to the highest regard; but it has an authority far beyond that which these reasons would furnish. It was the decision of men who had themselves had a hand in the framing of these very provisions of the Constitution, who had participated in the debates which preceded their adoption, and who had qualifications, therefore, for construing its meaning far superior than any which have ever since been, or can now be, found.
The question has since that time, and after the passage of the internal revenue laws during and subsequent to the period of the war, in several distinct cases, come before this tribunal. In every instance the views which the learned counsel for the appellant have urged here have been rejected; and the views announced by the Supreme Court in theHylton case, have been considered and adopted. When a court undertakes to review and correct the opinions of its predecessors it does soPage 520upon the assumption that it occupies a superior position and enjoys better lights and assistances for the ascertainment of truth than those which were possessed and enjoyed at the time the decision was made. Will this court think that, after the lapse of a hundred years, the Constitution can be construed upon a disputed point better than at the time when the instrument itself was framed?
And then what good is to be gained by a reconsideration? Has it been found that the operation of the law as declared inHyltonv.United Stateshas been productive of injustice which demands a remedy? And what is the new mode of laying a tax like this which the learned counsel for the appellant propose to substitute in place of the one required by the doctrine hitherto established? Simply this: they demand that the tax shall be an apportioned tax among the States according to population, when the very subject of taxation may not be found at all in some States, and in others found only to a very slight extent, and in others found in overwhelming measure. And all this to prevent a slight burden being lifted from the shoulders of the poor, who have borne it so long, and placed upon the shoulders of the rich who have been comparatively exempt!
It is said that the term "direct tax" had a distinct and well-understood meaning at the time of the adoption of the Constitution, and that such meaning should therefore be accepted. But upon looking into the literature of the time we find that this is far from being the truth, at least so far as any use of the term is concerned with which American statesmen and legislators may be supposed to have been acquainted. We find that the economists of that day were divided, as they have been from that time to this, in their views as to the incidence of taxation. Some faint support for the appellants may be found in the writings of Turgot, the celebrated French economist, but his book was not translated at the time, and we can hardly suppose it to have been known beyond a very select few of the members of the convention. And as to Adam Smith, also referred to, there was doubtless a very considerable acquaintance among the mostPage 521prominent of American statesmen of the constitutional period with the works of that illustrious writer. But does he make any such distinction as that insisted upon? Does he draw any line of division between taxes as being direct or indirect? None whatever. He evidently considered the distinction of no value, and it certainly is of no value until economists have become so agreed upon the subject of the incidence of taxation that it can be made to import something far more definite than it has hitherto done.
In the convention which framed the Constitution the question was asked without being answered: "What is a direct tax?" No such definition, no such distinction, as the learned counsel for the appellants now insist upon is anywhere to be found in the constitutional debates of the time, or, if there is any, their eager research has failed to disclose it. In short, in place of a distinct and determinate meaning of the term we find nothing but doubt and obscurity. Is this the sort of clear signification of words which the law justifies us in assuming to have been intended wherever the words are found?
What is the true pathway which the law follows in such cases? When it cannot find any clear ordinary meaning of words sufficient to furnish a correct guide to determine the real thoughts of men, it carefully scrutinizes the instrument itself which is to be interpreted, and seeks to inform itself of the principal objects and purposes which the framers of it had in view, and puts such a meaning upon the language employed as will best carry out those things and purposes. Acting upon this sound principle we at once gain light. We observe, in the first place, that the injunction of the Constitution is that all direct taxes shall be apportioned among the States according to population, and therefore such taxes as could not, with some reasonable approach to justice and equality as between the States, be thus apportioned, could not have been regarded by the framers of the Constitution as direct taxes, even if, according to the preponderating opinion, or understanding, of the time among economists, such taxes would more properly be classed under the denomination of direct.Page 522
At that time, the ordinary method of collecting taxes known and in use in this country, other than capitation taxes, was the tax on land. The principal revenues of the States were everywhere collected in this manner. The tax upon personal estate may have had some feeble operation in some quarters, but no considerable amount of revenue, I think, was anywhere derived from it; and, in most parts of the country, it amounted to nothing at all. There was another tax which was resorted to as a partial tax designed to reach a class of persons who were able to pay a tax, and yet were not landholders. That was a tax upon particular trades, occupations and callings, such as lawyers, physicians, mechanics and traders. This has been called an income tax. In some respects it partakes of that character, but really is so no more than all taxes partake of that character. All taxes are eventually paid out of incomes, except where a nation makes such ruinous imposts as to encroach upon capital, but they are not for that reason income taxes. The true income tax is a tax which disregards the matter of occupations and callings, personal property, land, or any source from which the income comes; nor is it laid upon gross receipts, but upon the net receipts after the payment of expenses. Now, it is the characteristic of these taxes, other than the general form of taxation then in use, that is land taxes and capitation taxes, that they are partial. They rest upon particular subjects of taxation, and are the incidental and supplementary methods of raising the revenue designed to complete a system. In this respect they resemble imposts, duties and excises. They are laid upon particular things, or upon particular sources of revenue. A tax upon persons engaged in the sale of intoxicating liquors may indeed in one aspect be regarded as a direct tax; but in the minds of men it is more naturally viewed as an excise. Certainly it could not have been intended by the framers of the Constitution, that these partial and supplementary taxes, in use in some places and not in others, which fall upon particular subjects, which might, or might not, be found distributed in some degree proportionately to the population, should be apportioned, and such were not therefore within their contemplationPage 523direct taxes. They certainly did not intend to limit the power of Congress to raise revenue, either in this, or in any other form of taxation. The broad power of taxation, in whatever form, was granted to Congress, and we cannot limit it by any implications. What, therefore, in their minds could not be apportioned, cannot be regarded as direct within the meaning of that word as employed by them. This is the precise reasoning which was adopted by the learned judges inHyltonv.United States.
Let me now call attention to a consideration which I do not think has as yet been adverted to, and which I do not find in any of the briefs. It is perfectly well known from the history of the time that the question of taxation was one which greatly excited local and state jealousies and apprehensions. A principal source of revenue, then as since, had been derived from duties on imports. That the States should still preserve this means of defraying their expenses was a lost hope. That concern, together with all others which touch the common interest, had necessarily to be surrendered to the new government. In surrendering it one care was taken, namely, that the power should not be used, so as to make distinctions between State and State, but should be exercised with uniformity throughout the United States. But how should these taxes be so imposed as to bear equally upon the different members of the new government? Apprehensions upon this point were very natural and they were very strong. One good general test would be to apportion and distribute them according to the wealth of the country. But how could the wealth of the country be ascertained by any reasonably correct assessment? This was an insuperable obstacle in the way of adopting that criterion. The next best criterion as between different communities is of course relative numbers.
But here a difficult question arose, and that was whether slaves should be treated as property, or as persons, and thus the subject of taxation became involved with the subject of representation. The Southern States preferred that in taking the population for the purposes of taxation the slaves should not be counted. The North did not wish to impose an injusticePage 524upon the South, but it was determined that the slaves should not be counted for the purposes of representation, and left out for the purposes of taxation. The South felt that it was taking an additional burden if it allowed the slaves to be counted, but it preferred to assume it rather than lose the dearly prized representation. The same rule therefore was adopted as was provided for representation, and a compromise effected upon that.
Now in all this we perceive that while the minds of the members of the convention were intensely engaged upon the subject of how taxation should fall upon the States, they did not very much — indeed they did not apparently at all — consider how it was going to fall upon and affect different classes of individuals in the States themselves. I cannot find anywhere any proof that this subject even engaged their attention, and yet it was a most important one. I cannot help thinking that this omission to give attention to this consideration arose, not wholly from the fact that the minds of the members of the convention were chiefly bent upon securing their respective States from undue burdens, but also from the fact that by the term direct taxes they looked only to those general methods of raising revenue which prevailed at the time, and that in their minds the words embraced only those general and universal taxes laid upon subjects which were necessarily found wherever population was found, namely, capitation taxes, and taxes upon land.
I now pass to the other principal objection against the tax, and that is that if it be an impost, duty, or excise, it is invalid because not uniform throughout the United States. It is insisted by our adversaries that "uniform throughout the United States" means two things. First, that the tax itself should have a certain character; and, second, that when that character has once been impressed upon it, it should operate precisely the same throughout the country. We say, on the other hand, that in making this grant of power no limit was imposed by Congress as to the character of the tax itself, but that, whatever plan or method should be adopted for laying it, the same plan and method should operate alike in all thePage 525States. Whatever subject is taxed anywhere, the same subject must be taxed everywhere, and at the same rate. This construction is demanded by the plain meaning of the phrase on its face.
It is, moreover, reinforced and strengthened by the consideration to which I have already alluded, namely, that while the convention gave the most studied attention to the matter of securing fairness and equality as between States, it did not give the like attention to securing equality of operation as between the individual citizens of each State. The notion of our adversaries is, that it was the design of this provision of the Constitution to secure equality between individuals upon whom the tax was imposed and upon whom the burden really rests — an equality which consists in exacting from one set of men under certain circumstances just the same sum and no more than that which is exacted from another set of men who are in the same circumstances. We must see that this could not have been the intention when we consider that this word "uniformity" is applied to the case of duties, imposts and excises alone.
The true interpretation to give to this constitutional requirement is, that it was designed to secure territorial uniformity in the operation of the taxation. This is what the plain meaning of the words requires on their face, and the real error of our opponents is that they read out of the provision the words "throughout the United States."
I admit, however, that, quite aside from this requirement of the Constitution, Congress is bound to observe, in laying duties, imposts and excises, a certain rule or principle, extremely ill expressed by the word "uniformity," and yet having some of the elements indicated by that word. This principle is one which has been declared many times by this court, and that is, that under our system of government, whether national or state, there is no room for the exercise of what is called arbitrary power. All the powers of government are, in a certain sense, given and held in trust that they will be exercised for public objects and on public grounds and reasons. What is arbitrary power? It is power exercised,Page 526not as a trust, but as if it were the private and personal possession of those who exercise it. It is a power exercised in disregard of the idea that those who exercise it are morally accountable to those from whom it proceeds. It is, in short, a power exercised upon other than public grounds and public reasons. The business of determining what particular burdens of taxation shall fall upon particular classes of people, and how the classes shall be made and arranged, is the province of the legislature, and of the legislature alone, and the judicial tribunals have absolutely nothing to do with it except where there is some constitutional provision imposing a limit, or imposing a method, upon the exercise of the power of taxation. Whenever the legislature creates a class for the purpose of taxation, and differentiates that class by grounds and reasons which are public in their nature, and which, whether right or wrong, wise or unwise, are grounds and reasons upon which intelligent legislators might honestly act, it is within its province; it is not exercising arbitrary power; it is proceeding upon public grounds, and its action cannot be reviewed by the judicial tribunals. Applying this rule to the provisions exempting incomes to the amount of $4000, and to the exemptions of successions to realties, we say that it is a matter entirely within legislative discretion.
Then there are objections to certain exemptions of a quite different character. I mean those exemptions examples of which are savings banks. Indulgence to these is, in many forms, everywhere, and under all systems of taxation, extended, and such exemptions have many times received the approval of judicial tribunals, the practice of the making of small savings as a provision against old age, sickness, and disability, which is effected through the instrumentality of savings banks, is one of those practices and tendencies which every State ought to encourage. It raises the condition of every individual who engages in it. It makes him a property holder, and therefore makes him a friend instead of an enemy to the institution of property, an institution which lies at the very basis of our civilization, and which ought to be encouraged in every possible manner, and particularly to be encouraged byPage 527those who have large interests and who are so apprehensive of the future. Moreover, it indirectly furnishes a great relief to the whole community in the general burden of taxation, for by means of it individuals make provision for themselves for their support in old age and disability, without which provision they would become a direct burden upon the State. All statesmen and economists are agreed that here is a most useful field for the exercise of legislative discretion — that here is a particular in which exemption from the burden of taxation may be made to bring the most solid and most general public advantages.
Another objection is against the exemption in favor of companies doing business on the mutual plan whilst stock companies doing the same business are not exempted. Here it is strenuously urged is a distinction without a difference; but there is a very palpable difference, and one which furnishes a clear public ground which may properly engage the attention of legislators when employed in laying the burdens of taxation. So far as respects life insurance companies doing business on the mutual plan, there are some distinct reasons in favor of exemption. The business of life insurance performs a similar function in the State to that which is performed by savings banks. It is a mode, not the same in its details, but very similar in principle, by which individuals are induced to save from time to time small sums from their incomes for the purpose of making provision, sometimes for themselves, sometimes for their children or those who are dependent upon them, in the cases of old age, disability, and death. All this is in the highest degree a matter of public importance and of public interest. It is a disposition which should be favored. It is a disposition which, if indulged, leads men to look forward to the acquisition of property, even though it may be a small property. It makes them friends to the institution instead of enemies. It secures to them the blessings and enjoyments of private property. Much ado is made on the other side about the enormous accumulations of these life insurance companies. They are said to amount to a sum in the case of a single company of $200,000,000, and the intimation is that it is a grossPage 528departure from reason to leave such an immense amount of property exempted from taxation. But those who exhibit these pictures to the court of enormous accumulations of property did not at the same time state the vast number of people who are interested in that property, and to whom in a just sense it belongs, and among whom its benefits are distributable. If the accumulated reserve of the life insurance company referred to exceeds $200,000,000, it is probable that the number of persons interested in it and to whom it equitably belongs, and among whom it will from time to time be distributed, amounts probably to half a million.
But it is insisted that the distinction made between mutual and stock companies of other kinds, such as those engaged in the ordinary business of insurance, has not these considerations to support it, nor, indeed, any consideration at all; that it is a distinction without a difference; but this is not so. There is a well-founded distinction between these classes of corporations. Take, for instance, the case of the business of marine insurance which is conducted by both stock and mutual companies. What is its nature when conducted by a stock company? Its general nature, whether conducted by a stock or a mutual company, is the prevention of serious loss and, perhaps, ruin to a single individual by the occurrence of a peril insured against, when, if the same loss were distributed among a large number it would not be sensibly felt. Private underwriters, whether incorporated or unincorporated, when they engage in such a business take from the other callings of life, and from productive employments, a certain amount of capital and put it aside as a sum from which to pay losses which may from time to time arise from particular perils. They insure against such perils, charge a price for such insurance, and make a profit for themselves upon which they live. The object of a mutual company is to enable those who require this insurance to dispense with the necessity of employing this outside capital and paying interest on it, by organizing themselves together and, their number being very large, creating a fund by small contributions of money and notes in the form of premiums, and thus become the insurersPage 529of each other; in other words, by distributing a loss which falls, in the first instance, upon a particular one, upon a great number. Accordingly those who participate in mutual insurance pay their premiums, in cash, or partly in cash and partly in the shape of notes, and thus create a fund upon which an immediate draft can be made, in case of a particular loss, sufficient to furnish an indemnity against it, and if, at the end of the year, the whole amount paid in is not exhausted in paying losses, the residue is distributed, and paid back. They do not make a dollar of profit themselves in any instance.
Then it is said that there is a wholly inexcusable exemption in favor of individuals and against corporations generally, in that corporations are not allowed a deduction of $4000 from their incomes, although individuals engaged in precisely the same business enjoy it. I undertake to say that this discrimination is not only founded upon public considerations, but that it is entirely and indisputably right.
The case of building and loan companies has been alluded to, and it is said some of them have large accumulations of property. What is a building and loan company? It is a contrivance by which a large number of people of small means may unite together, and by their small contributions made from time to time, mainly from the savings of labor, get together a large fund which may be used in the purchase of property and its improvement by the building of houses for the occupation of the members, and which becomes their property when they shall have completed the requisite payments for it. It is an institution of the same character with savings banks and life insurance companies and calculated to perform the same useful services to the public. I wonder that large property holders should ever look with jealousy upon the extension of indulgence as to such enterprises as this. They are the most efficient agencies which can possibly be employed to induce the great mass of the community to make savings which will end eventually in their becoming private property holders, and thus attach them to the institution and make them ready at any time to defend it against all enemies.
There are other exemptions to which exception has beenPage 530taken, but what I have already said will sufficiently dispose of them. It will be obvious when they come to be considered that there is nothing arbitrary in any of them. They all of them stand upon public grounds and public reasons, and the aim of all of them is to extend benefits — very small benefits indeed — but still benefits which have a powerful tendency to encourage the disposition to make savings, to encourage the ambition and desire to become owners of property, and thus to strengthen at its foundation the basis upon which the prosperity and even the existence of states depends. So much for the question of uniformity.
There is another objection made to a distinct feature of this law, resting, not upon grounds of a failure to observe uniformity, but upon the allegation that the subject-matter upon the income of which the tax is imposed has been withdrawn from the field of federal authority and cannot be touched directly or indirectly. This is the case of state and municipal bonds, the income of which, it is said, is taxed under this law without authority. I do not doubt that it was the intention of the law to tax this income. It would be extremely unfortunate and unwise if, upon any view, this species of property were withdrawn from the sphere of federal taxation. The reasons upon which the claim to exemption is put are drawn from a series of decisions by this court upon the question of the right of a state to tax the agencies and instrumentalities of the Federal government, such, for instance, as United States bonds, and the United States banks.
I think the objection is untenable, first, because if the tax is a tax upon any state agency, it is a tax upon the borrowing power, and this is not necessary to municipalities, or even to States, in any such sense or degree, as it is necessary to the United States. The great exigency of war, which is the principal case calling for an exercise of the borrowing power, if not the only one in which loans are absolutely necessary, does not rest upon the States. Their existence with all their functions can be maintained by means of revenue derived from taxation, and perhaps it would be better if no other means had ever been resorted to by them. In the next place this courtPage 531has held what must undoubtedly be true, that each State has the right to tax the municipal and state bonds of every other State, and shall it be said that the United States do not have the power to tax a species of property which every other State in the Union has the power of taxing?
A few words in conclusion upon the general aspects of this case, and, especially, as they relate to the question of uniformity.
I am not one of those who believe in what is called a latitudinary construction of the powers of Congress, and who seek to circumscribe within the narrowest limits the power of this tribunal to sit in judgment upon the validity of congressional action. Ours is a government of delegated and limited powers, and I hope the day will never come when this court will hesitate to declare that the limit has been passed, when it is clearly convinced of the fact. But I also hope that it will forever decline the office of judgment in cases where the question does not assume a purely judicial form; and that it will especially refrain when there is mingled with the question any element of legislative discretion which cannot be separated from it. The powers of this court are limited as well as those of Congress, and those limits are already transgressed when it finds itself even considering whether this or that view of a question of political economy, or of the wisdom of taxation, is a sound one.
These suggestions are all the more weighty and important in those controversies which, like the present are calculated to arouse the interests, the feelings — almost the passions — of the people, form the subject of public discussion, array class against class, and become the turning points in our general elections. Upon such subjects every freeman believes that he has a right to form his own opinion, and to give effect to that opinion by his vote. Nothing could be more unwise and dangerous — nothing more foreign to the spirit of the Constitution — than an attempt to baffle and defeat a popular determination by a judgment in a lawsuit. When the opposing forces of sixty millions of people have become arrayed in hostile political ranks upon a question which all men feel isPage 532not a question of law, but of legislation, the only path of safety is to accept the voice of the majority as final. The American people can be trusted not to commit permanent injustice; nor has history yet recorded an instance in which governments have been destroyed by attempts of the many to lay undue burdens of taxation on the few. The teachings of history have all been in the other direction.Mr. Joseph H. Choatefor Pollock, appellant in 893, and for Hyde, appellant in 894.Mr. Charles F. Southmaydwas on his brief.
I look upon this case with very different eyes from those of either the Attorney General or his associate who has just closed. I believe there are private rights of property here to be protected; that we have a right to come to this court and ask for their protection, and that this court has a right, without asking leave of the Attorney General or of any counsel, to hear our plea. The act of Congress which we are impugning before you is communistic in its purposes and tendencies, and is defended here upon principles as communistic, socialistic — what shall I call them — populistic as ever have been addressed to any political assembly in the world.
Now, what is this law? My friend, Mr. Carter, has said that in the convention which created the Constitution there was one ever-present fear. There was; I agree with him as to that. It was that by a combination of States an unjust tax might be put upon a single State or upon a small group of States. Let us see about this act which, exempting all incomes under $4000 of individuals, but denying the exemption to corporations and to persons drawing their income from corporations, seeks to raise a sum, as has been stated here, of from $30,000,000 to $50,000,000. There are sources of information as to how such a law will strike, to which I wish to direct the attention of the court.
There was formerly an income-tax law, and the last year it was in force was the year 1873. The exemption then was $2000. In that year the collections for that tax were such in the States of New York, Pennsylvania, Massachusetts, andPage 533New Jersey that even then, with that exemption, those four States paid four-fifths of the entire tax. What is their political power? What is their political representation in the lower House of Congress, which only can initiate and secure the passage of revenue bills? Eighty-three out of three hundred and fifty-six, or a little less than one-quarter. Anybody who knows anything about the operation of these income-tax laws and as to the effect of changing the exemption from $2000 to $4000, knows that that inequality of burden will, under the act of 1894, press upon those four States with vastly greater force. This most iniquitous result has been brought about by an express violation of two of the leading restraints of the Constitution.
Did your Honors observe what the learned counsel claimed, namely, that $20,000 might have been made the minimum of exemption of taxation of this law, and there would have been no help for it? If you approve this law, with this exemption of $4000, and this communistic march goes on and five years hence a statute comes to you with an exemption of $20,000 and a tax of 20 per cent upon all having incomes in excess of that amount, how can you meet it in view of the decision which my opponents ask you now to render? There is protection now or never. If it goes out as the edict of this judicial tribunal that a combination of States, however numerous, however unanimous, can unite against the safeguards provided by the Constitution in imposing a tax which is to be paid by the people in four States or in three States or in two States, but of which the combination is to pay almost no part, while in the spending of it they are to have the whole control, it will be impossible to take any backward step. You cannot hereafter exercise any check if you now say that Congress is untrammelled and uncontrollable. My friend says you cannot enforce any limit. He says no matter what Congress does, if in its views of so-called — what did he call it? — sociology, political economy, it establishes a limit of a minimum of $20,000 or a minimum of $100,000, this court will have nothing to say about it. I agree that it will have nothing to say about it if it now lets go its hold upon this law — upon a lawPage 534passed for such a purpose, accomplishing such a result and by such means.
I have thought that one of the fundamental objects of all civilized government was the preservation of the rights of private property. I have thought that it was the very keystone of the arch upon which all civilized government rests, and that this once abandoned, everything was at stake and in danger. That is what Mr. Webster said in 1820, at Plymouth, and I supposed that all educated, civilized men believed in that. According to the doctrines that have been propounded here this morning, even that great fundamental principle has been scattered to the winds.
It is not any part of our mission here to question the power of Congress to raise money by taxation. We believe that Congress has plenary power in the last exigencies of the government to reach every man, every dollar, every inch of ground, to secure the common defence and the general welfare; that it was the purpose of the convention that created the Constitution to give Congress that power, and that it is one of the absolute essentials of a great sovereignty which was to cover a continent and to last for untold ages. There is no doubt about that. We are perfectly aware, too, of the difficulties that lie in our way; that it is necessary for us to show, in the first place, either that the power to pass this act was not conferred upon Congress, or that in passing it Congress has exceeded the power entrusted to it by the Constitution.
One thing is certain, absolutely certain, that although the power was given Congress to tax, no power was given it to confiscate; and that, the Attorney General and his associates all admit. If this is a confiscation under the forms of law, there is no power given to Congress in the Constitution that could by any possibility enable it to validly enact such a law.
I can add nothing to the wealth of argument, the force and power of the claim presented by my two associates, that this tax is wholly void because absolutely in all its parts a direct tax not imposed by the rule of apportionment. But, as we may distrust, in view of the former decisions of this court, the willingness of the court to come to such a conclusion asPage 535that an income tax in all its extent, levied upon all callings, levied upon all earnings as well as upon the rents of land and the income of personal property, is in the meaning of the Constitution a direct tax, I may present the case as to direct taxes upon somewhat narrower grounds, grounds consistent with every case that has yet been decided by this court, and maintained by the uniform course of the Federal government in its legislative capacity for over half a century after the adoption of the Constitution. If you should conclude that it is not possible to condemn this entire tax law as unconstitutional because entirely a direct tax, my purpose is to present, then, the only safe and practicable alternative upon which this court can place, as I believe, any decision, and which is based upon the clear distinction, the distinction which we find in the Constitution itself, between direct taxes upon the one hand, and duties, imposts, and excises upon the other.
Therefore, for the purposes of this argument, I shall assume that it may possibly be decided by this court, as it has so often been decided before, that all duties, all excises, all imposts are shut out from the class of direct taxes by the necessary meaning and effect of the Constitution, and that they are to be administered by the rule of uniformity, as they ought to be in this law and are not. I shall claim, upon the other hand, that at any rate so far as regards the direct, inevitable, necessary income, and outgrowth of real estate and of personal estate, the tax is a direct tax levied upon the proper subject of a direct tax within the meaning of the Constitution, and is therefore invalid.
First, I desire to call attention to the rules regulating the power and the methods of exercising the power of taxation, laid down in the Constitution, which are absolutely imperative upon Congress and from which by no contrivance, by employing no name, can it possibly escape.
Under the provision of section 2 of article I of the Constitution, it had already been declared that representatives and direct taxes should be apportioned among the several States according to the census, according to numbers to be ascertained by an original census, and by a decennial censusPage 536from time to time, as years rolled on. The framers had not yet, so far as concerns the arrangement of sections in the Constitution as it was finally drawn, given to Congress the general power to tax. That first provision was a restraint upon what was intended to be given by a subsequent clause, all of course finally speaking with one voice. Then the framers came to the first clause of the eighth section, which described the power of Congress, and naturally and necessarily gave to Congress plenary power of taxation, which might meet the exigencies, necessities, and demands of the Government at any period and under any stress. I agree with the Attorney General that nothing could be more comprehensive; that no other language could be used to include the entire power of taxation which it was the evident, the obvious, the necessary purpose of the framers to bestow upon the new government. "Congress shall have power to lay and collect taxes, duties, imposts, and excises." They added, however, to that clause, "but all duties, imposts, and excises shall be uniform throughout the United States," which I understand to mean exactly what it says — that all duties, imposts, and excises shall be uniform duties, uniform imposts, uniform excises throughout the United States.
The first question that suggests itself is why these words added in that particular form, especially why the word "taxes" was included in the grant of power and excluded from this particular modification of it. I am not one of those who attribute ignorance or heedlessness or acting in the dark or in a maze to the men who, after sitting four months together, evolved this piece of work. I submit that upon every reasonable rule of construction, in view of the nature and character of those men, in view of the light of the history of the confederation and of English history in which they were acting, they intended by their prescription of methods of exercising the power to cover absolutely the whole subject of taxation, and that the reason why the limitation as to uniformity, the prescription of method as to uniformity, was applied to duties, imposts, and excises was that the framers knew very well that they had already prescribed the measure for all other taxesPage 537under the term of direct taxes. The undoubted reason why the framers of the Constitution limited the provision of the method of uniformity for the measurement of taxes to duties, imposts, and excises was that they understood that they had already provided for the measurement of all other taxes.
In respect to this, what the Attorney General says regarding the uniform conduct of the government from the beginning is entitled to our greatest respect, and I draw from it what appears to me to be a very strong argument and one that I do not remember to have heretofore seen suggested. Your Honors will remember that Mr. Justice Chase in the case ofHyltonv.United Statesthrew out the suggestion that there was some mistake about the word "taxes" in the first clause of the eighth section; that all duties, imposts and excises necessarily were taxes; and he hinted that possibly there might be some kind of a tax of which he could not then think, the nature of which he did not intimate, that might neither upon the one hand be a direct tax, nor upon the other be a duty, an impost, or an excise. That suggestion has lingered in the minds of the profession from about a hundred years ago until now, and you find it reproduced in the brief of the learned Attorney General or of his associate. They say that there may be a tax which on one side is neither a direct tax, nor on the other side a duty, impost, or excise.
Now, for the argument that I draw from it: How about the corpus of personal property? If a tax upon that were such a tax, neither direct upon the one hand nor a duty, impost, or excise on the other, then what would follow? What Mr. Justice Chase suggested, that neither rule prescribed would apply; that it would not have to be rated either according to apportionment or according to uniformity. Would it not have suggested itself to some astute mind connected with the executive or legislative departments of the government at some time since the adoption of the Constitution until now, in all the great exigencies and emergencies of the nation, that there was a tax unlimited in respect to measure, in the meting out of which there was no restraint upon Congress? Under that construction, under that theory or imagination, what has therePage 538been from the beginning to prevent Congress from raising all the money required for the purposes of the government from the corpus of personal property throughout the United States without any rule of apportionment, without any rule of uniformity, laying it exactly as it pleased, and coming to every citizen, saying, "I find you are worth so much personal property; pay me two per cent of that." No; this has never been dreamed of — it has never been suggested to this hour — and why not? It is because everybody who thought for a moment about this subject knew that the judgment I have ascribed to the framers of the Constitution was sound and right, namely, that in providing for direct taxes and that direct taxes should be collected according to apportionment, they covered a tax upon personal property.
The income of all accumulated property, whether it be the rent of lands or the interest of bonds or the immediate outgrowth of any other specific form of personal property, is necessarily, under the Constitution, the subject of a direct tax and of no other.
One thing is absolutely certain in this Constitution, and that is that the difference between the subjects of taxation by apportionment and taxation by the rule of uniformity was considered one of vast importance by the framers of the Constitution. It was no trifling thing. They did not think either branch of this question of taxation inconsiderable or unimportant. My proposition is that real estate itself and the rent of it, the bulk of personal property and the income from it, was what was in their minds under the subject of direct taxation. I ascertain this by comparing and studying these clauses of the Constitution which I have already quoted and the other clauses of the Constitution and the whole scope and purpose of them. The mere talk of this man or that in the convention, mere talk of this man or that upon the bench of any court, unless it was a solemn adjudication upon his oath of office and the decision of a case, is of very little weight. I have found from a careful study of it very little help upon this subject in the debates of the Federal convention, and I think there are two reasons why no conclusive force, as Justice Swayne said in theSpringer case, can be drawn fromPage 539them. In the first place, it was not a legislative body: it was merely a deliberative body, coming voluntarily together at the invitation of Virginia and of Congress, submitting its work to Congress with a suggestion that it finally be submitted for adoption to the conventions of the several States. In the second place, its deliberations were absolutely secret.
The first step which I take as the starting point of my argument in support of the proposition that I am submitting is that, whatever else was or was not included in the term direct tax, real estate was included, real estate in the several States, real estate that was distributed equally everywhere, found everywhere, in every State, although necessarily differing in value and differing in acreage. From the beginning, the power to tax land has not been rested upon theories of distinctions between the increment of land, the improvement of land, and the growth or value of land; but it has been applied, according to such practical construction, to improved and unimproved real estate. There have been three cases of a direct tax, which has never been imposed except in cases of great emergency: First, there was the direct-tax law of 1798, when trouble with France was apprehended; then the land-tax act of 1812, and the direct tax of 1861. All were of one type. They were not taxes on naked land; they were taxes arranged carefully upon improved and upon unimproved property, just as a land tax, if you please to call it so, a direct tax may now be imposed upon rented property and unrented and unproductive property. What did Congress do? Take the first tax as a specimen of them all. It said, first, we will tax the houses. That is improved real property, is it not? That is rented real property, is it not? It taxed them according to their value, from $3000 ranging all the way up to $30,000, at a differing rate. Then we will tax the slaves so much a head. I think it was fifty cents a head. Then we will tax all the rest of the land a dollar for a hundred acres or whatever the rule was. So I say there is an absolute consensus, confirmed by these hundred years of history, that a direct tax upon land was not a purely naked land tax, but it was a tax, as I have said, upon all possible improvements or outgrowth of the property.Page 540
Now, we come to the second proposition, which it seems to me is equally easy to establish, and that is that the rent of real estate issuing from it is indistinguishable from a tax on the real property itself. As to this matter of rent, is a tax on rent distinguishable from a tax on land? I say that a tax on land yielding income by whatever name is in reality, in effect and substance, a tax upon the rental. I speak now, of course, of rented property. I am not foolish enough to argue that a tax on rents is the same thing as a tax on land which nobody rents. I am looking, however, at the nature of the tax; not the form, but the substance. Your Honors will observe that the tax laid by this law is a yearly tax upon the yearly rental. Can that be distinguished from a tax on land? How is a tax on land to be paid, except out of the income? How is it possible? I mean in the common, ordinary, practical business of life which the court is bound to look at. We are living under a constitutional government, are we not? We have regulated the measure of our own taxation by the Constitution. Was it intended that, although Congress could not put an unapportioned tax upon real estate, it could put an unapportioned tax upon rent of real estate and so eat all the real estate up? How can a man pay this five years' annual tax on the rent of real estate? Absolutely only out of the rental. Would any free people, if they had prohibited a land tax, submit to a tax on the rentals?
We are deciding this as a question of law, not of political economy. I say that every time the courts ever passed upon the question of an annual tax on land, by whatever name you call it, whether you call it a real-estate tax or a land tax or an income tax or whatever you please, it has been held to be a tax on the immediate ownership, upon the immediate freehold, and upon the man who was in possession thereof receiving the income. What has been the law from the beginning of the common law? What do the old writers say? "If a man seized of land in fee by his deed granteth to another the profit of those lands to have and to hold to him and his heirs and maketh liverysecundum formam chartœ, the whole land itself doth pass. For what is the land but the profitsPage 541thereof?" That is Coke upon Littleton. That has been law ever since in every court in English Christendom. It is applied now just the same as it was in the time of Coke. It was applied in the State of New York to the matter of a devise. "A devise of the interest or of the rents and profits is a devise of the thing itself, out of which that interest or those rents and profits may issue." That is the law as administered by the Supreme Court of the State of New York when your late associate, Mr. Justice Nelson, was a member of it.
Let me call attention again to what the Attorney General says. He says: "Well, when a man has got the money in his pocket it is no longer rent." One thing I would say about that, is, that if you are going after the rent as money, the tax is on personal property and should be apportioned, as I think I shall demonstrate by and by. But the answer is that the tax does not go after the rent as money in the tax-payer's pocket. The act of 1894 specifies the rents as a cardinal part and element of this income return, and every man who goes up to make his return has to state under oath what rent he got last year. This fiction — this difference between the name and the thing, between the substance and the shadow — urged by the Attorney General is that, though you cannot tax rent, you can tax the money in the owner's pocket received from rent. If there is one factitious argument, one pretence of a reason, one attempt to make a distinction without a difference that this court has uniformly stamped upon with all its might, it is just that. How in principle does the corpus of personal property differ from a piece of real estate? I own a house to-day and sell it to-morrow, and take as its consideration a mortgage on the same property for $10,000, the value of the house. Is a tax upon the house one kind of a tax and a tax upon the proceeds of the house another? It cannot be; it is impossible. There is no real or substantial difference between a general tax on personal and on real property. No such thing has ever been decided; no such thing has ever been hinted at. A tax on personalty has all the elements of a direct tax exactly as a tax upon real estate. It is directly imposed; it is presently paid; it is ultimately borne by thePage 542party owning it. There is no choice for him to escape from the tax but to run away. There is no volition about it, as there is in the case of any consumable commodities upon which excises are laid. Suppose a direct tax be levied upon real and personal property in the States, could a man whose personal property was touched by it appeal to the court with any hope of success and say, "That tax on my personal property is not a direct tax, but is an excise or a duty or impost. I will pay on my real property, but I will not pay and I shall appeal to the Supreme Court to free me from paying the portion of the tax that rests upon my personal property." The court certainly would overrule such a contention. I say there is not the least distinction between such a case and that presented here.
I think you will have no difficulty in coming to the conclusion that the corpus of personal property is included within the subject of a direct tax, and that a tax thereon must be apportioned. How about income derived therefrom? I am not speaking now, of the earnings and income from labor and from any calling, trade, profession, or business. I am talking about the direct income of personal property, as illustrated by the interest on bonds. Thus the United States issues certain bonds and declares that the bond shall not be subject to taxation by any State. I am looking at the question whether a tax on the interest of the bonds is the same in nature as a tax on the bond itself. A State levies a tax. The legislature recognizes that the bond itself is protected and cannot be taxed; but it attempts to circumvent that inhibition by pretending to tax only the income after it has been collected on the plea that it has lost its identity and is part of the personal property of the owner of the bond. Would you say that, although the act of Congress said the bond should not be subject to tax, all the income therefrom and all its value might be eaten out by the State putting a tax upon the income of the bond? Of course, that would be an impossibility, and it is decisive of this question. The substance is what the Constitution provides for. The substance of right is what the court is bound to protect.Page 543
We may proceed now to inquire how the two rules, apportionment and uniformity, were intended by the makers of the Constitution to work in practical application to their respective subjects of taxation. It was then known perfectly well that apportionment was necessarily a rule of inequality. Nobody ever supposed or could contemplate that a tax levied by the rule of apportionment would result in equality of burden as to wealth, or, to state it in other words, that it would be found that the distribution of real and personal property was according to the population of the various States, or that a tax on real and personal property apportioned according to population would not bear more heavily on some than on other States.
You remember that the confederation had no power to tax; that it had been the subject of an intense struggle since 1781, culminating finally in 1786, and that the confederation was then on the point of absolute collapse when the constitutional convention came together. The confederation had demanded the impost, it had demanded the power of taxation in some form or other to save the nation, and the States never would consent. All remember the quarrel about the impost, the getting of the impost and the not getting it, and then came the compromise in the Constitution. It is not necessary to relate the history of the compromise; how it was arrived at.
Accompanying this compromise, came the provisions in regard to the power of taxation to be vested in Congress, which we are here to-day to expound. First, there was a surrender by the States to Congress of the exclusive power to levy taxes on imports. That had been the great source of revenue to all the seaboard States; it was known to be an endless resource for Congress. The States gave it up absolutely, and with it the power to regulate foreign commerce. Then, too, the States surrendered forever afterwards the right that they had had of taxing and regulating commerce between the States. How much of revenue, how much of sources and subjects of taxing power that has amounted to, let your Honors' decisions for the last ten years on interstate commerce questions decide.Page 544That was one part of the compromise. Then came the grant to Congress of power to lay indirect taxes, as we now call them — a grant to Congress of the power to levy, by the rule of uniformity, duties, imposts and excises.
I say that this rule of apportionment was designed to operate exactly as it eventually did. What does it result in? It results, does it not, in a law of protection for the benefit of the holders of such property as was contemplated as the subject of the direct taxes? I own a house in New York. I study the Constitution and I see that it can be made the subject only of an apportioned tax. If that apportioned tax is applied my taxes will be less by half or a quarter or a fifth or a tenth, as the case may be, than if it were a tax applied by the law of uniformity. Is not that an absolute and indefeasible right of the owner in every State just as much as if the Constitution had provided as a part of this compromise that no taxes should be levied by the Federal government upon real estate in any State?
But there is another clause providing that representation and direct taxes shall go hand in hand. What did that mean? Why was it that the framers twice said it in the Constitution? And it is the only thing that they did say twice. They said it in section 2 of article I, when they provided that representatives and direct taxes should be apportioned according to numbers, and they said it in section 9 of the same article when they prescribed that no capitation or other direct tax should be levied except according to the census. They were fresh from the struggles about representation going hand in hand with taxation, and it was for the protection of this property, this accumulated property in the States, as against the inroad of the vote of mere numbers, that they stipulated and insisted upon the guaranty of apportionment — such was the fundamental condition of the States adopting the Constitution.
The purpose was as clear as if it had been written in so many words that when the representatives of any State voted in the House of Representatives, where only a tax could originate, upon a law to impose a direct tax upon the property or the income of property in any State, they should do it under thePage 545restraint that according as they possessed the political power to vote the tax, it should fall upon the citizens of the State that they represented.
What an object lesson this law is as to these subjects of direct tax that I have now spoken of, namely, the rents of land and the income of personal property. Here are the other forty States, all the States representing that region that has come in under the provision that new States might be carved out of the Territories, who have voted to put this direct tax under the pretence of an income tax upon these seaboard States, throwing to the winds the restraint that the Constitution placed upon them, and practically exempting their own States. They have provided that New York, Pennsylvania, Massachusetts and New Jersey shall pay, as I told you in the beginning, five times the amount they would pay if the rule of apportionment guaranteed by the Constitution had not been utterly disregarded.
This question as to a direct tax upon the income of real and personal property has never been decided. Not only that; it has never been considered; it has never been presented to this court. When my learned friends on the other side get up and say there is nothing to debate here, we answer that the question whether a tax on the rents is in real substance and effect different from a tax on the real property itself, and whether a tax on the income of personal property is different from a tax on the corpus of personal property has never been presented here.
My friends say that we are bound to lose our casein totobecause the questions have been adjudicated adversely to our contention. There are five cases upon which they rely.
[Mr. Choate then examined theHylton case; Pacific Ins. Co. v.Soule; Veazie Bankv.Fenno; Scholeyv.Rew;andSpringerv.United States;and contended that the questions in issue here had not been decided there.]
As to the rest of this law and the provisions which operate as an excise or duty upon income derived from business or work of any kind, we contend that there is a gross violation of uniformity, and therefore that the whole law is void.Page 546What is meant in the clause "uniform throughout the United States?" It would seem that that is capable of solution without imputing heedlessness to Washington, Hamilton, Madison, Franklin, and the other men who sat with them in the convention. Clearly the word "uniform" means something and was inserted for some definite purpose.
In our view there is no mistake as to what the meaning of the word "uniform" is, as an essential quality of a duty, impost, or excise. It must operate alike upon the class of things or of persons subject to it. The class may be fixed and bounded by Congress in its discretion. It is for the courts to say whether this rule of uniformity has been applied within and throughout the class.
The contrast or antithesis between the rule of apportionment prescribed for direct taxes and the rule of uniformity prescribed for "duties, imposts, and excises" was designed. The contrast was intended to be complete and perfect between each element of the two rules.
The rule of apportionment was known and intended to be a rule of inequality. This inequality was inevitable and existed in the very nature of the compromise out of which it resulted. This inequality was recognized as certain to increase as one State grew in population faster than another; hence the requirement of a decennial census to correct this inequality, so far as that might do it. But there were features of inequality as between different States which were radical and incurable by any census. There was and there could be no such coincidence between population and wealth as the rule assumed, and the divergence from any approximate coincidence would grow, as it has grown with every census.
The rule of uniformity, on the other hand, as applied to "duties, imposts and excises," was known and intended to be a rule of approximate and reasonable equality among those embraced in the class affected by it — everywhere and at all times — and no changes of population or of wealth any where would or could affect its force and effect.
The constitutions of nearly all the States have adopted from the United States Constitution this rule of uniformity,Page 547and in its practical application the courts of all speak with one voice as to its meaning, that it is exactly that for which we contend.
But there is another cardinal difference between the two rules which is even more radical and far-reaching and compels the construction of the rule of uniformity for which we contend. It must be observed that the first clause of section 8, Article I, taken by itself, gave to Congress the complete and unqualified power of taxation, only limited to national purposes, but wholly unlimited as to place. As it stood alone the power extended to every inch of the territory and to every person and every thing within the dominion of the government created by the Constitution. As it stood alone Congress could have laid and collected taxes of every kind, direct and indirect, for national purposes, without regard to population or wealth or to state boundaries, restrained only by those fundamental limitations inherent in the very power of taxation and indispensable in the government of a free people; but it was no part of the plan of any of them that this power in the new government should be absolute or unqualified, except as to place and persons. As to place and persons it should forever remain unqualified and reach as far and as wide as the territory of the United States and touch every person and every thing therein. And so they proceeded to modify and to qualify this power, except as to its extent in place or space, through the whole territory of the nation, and except as to its hold upon every person and thing by prescribing the different measures by which the burden of the different kinds of taxes, direct and indirect, should be meted out. As to indirect taxes, the modification or qualification was applied by section 8. As to direct taxes, the measure was prescribed by section 2.
Thus the Constitution, in prescribing the rule of measuring direct taxes, deals with the States and with the people therein. It allots to each State its aliquot part of the total amount to be collected according to numbers, and the quota of each is levied and collected from the property of the States, in substance though not in form, as other state taxes are collected.Page 548
But as to taxes not direct — "duties, imposts and excises —" the situation was wholly different. These, which had belonged absolutely to the States and which they had persistently refused to part with, were now surrendered to Congress — the imposts absolutely; the excises and duties on consumable commodities to a great extent — because of the impracticability of any State maintaining them against competition with other and adjoining States, and because of the "commerce" clause and the "immunities" clause in the Federal Constitution which cut them off from all manner of excises upon interstate commerce and upon incomers from other States who could no longer be treated as foreigners.
In dealing with these the Constitution no longer dealt with the States or with the citizens through the States, but directly with the individual citizen — the individual thing to be subjected to the tax. It wiped out all state lines, ignored the States entirely, and went directly for the man or the thing, and whether he or it was found in a State or in the Territories or in the District of Columbia was all one. On all these alike the purpose was to provide for the exercise of the taxing power "throughout the United States" whenever it should be exercised at all. In each and every part of the territory of the United States, the excise or duty laid or imposed must rest and operate.
Our construction of this clause has been acted on by the government from the beginning until now. In no tariff act — and I call especial attention to this — with all the infinite variety of classification of goods which those acts contain, never once has there been a clause in a tariff act which made the rate of duty to be paid dependent upon the person who imported the goods, whether it was a person or a corporation, whether it was a white man or a black man, whether it was a rich man or a poor man.
Rich and poor, old and young, capitalist and laborer, citizen and foreigner, corporation and individual, have been accorded the same right to import the same goods at the same rate, and we do not believe that any departure from this rule of uniformity has ever been suggested in either house of CongressPage 549on the discussion of any tariff bill, and this is the rule of uniformity throughout the United States for which we contend as to all duties, excises, and imposts.
This brings me to say a few words upon a new doctrine which has been presented here by the representatives of the government and strongly urged by my friend Mr. Carter. The Attorney General says in his brief, at page 83, that the rule of uniformity has been practically violated in the act of 1894, but that the law must be regarded not as standing alone, but as a part of our general system of taxation, and that so regarded its effect is to bring about an approximation of equality of taxation. This is, as I understand it, an unequivocal admission that the law in itself is not equal or uniform in its operation, but that we may speculate that perhaps it works out uniformity of tax burden upon some theory or notion of compensation or equivalents. Has such a doctrine ever before been advanced in this court? It amounts to the claim on the part of the government that an act of Congress violating the Constitution and utterly lacking in uniformity may be upheld because some other act or the general tariff laws operate unequally. Is it true that under the Constitution you can compensate for intentional inequality of burden in one set of excises, duties, or imposts by imposing others which are inherently lacking in every essential element of uniformity? Is this court prepared to go that length and to enunciate any such construction of the Constitution? This is a doctrine worthy of a Jacobin club that proposed to govern France; it is worthy of a Czar of Russia proposing to reign with undisputed and absolute power; but it cannot be done under this Constitution.
What are the breaches of uniformity here? I shall treat them briefly in view of the clear and remarkably forcible presentation on the opening by Mr. Guthrie. In the first place, there is this exemption of everybody with an income less than $4000. What does this exemption really amount to? A man living with investments of $133,000 in bonds at 3 per cent is a subject of exemption. I hope that we shall all be able to leave our children each in as good conditionPage 550as that, and not have Congress claim that he or she should be classed among the lower middleclassesbecause his or her income does not exceed $4000. My friend on the other side has made our argument easier because he has said this exemption might just as well have been $20,000, and he said it in earnest. Thus he has conceded that if this classification can stand, a man with $666,000 at 3 per cent or $500,000 at 4 per cent was a fit subject for exemption. It is, therefore, for you to decide whether that is a reasonable exemption.
If you now decline to adjudicate upon the question of reasonableness and hold that it is outside your province, no abuse hereafter when the limit is fixed at $20,000 or more can be checked. The reasonableness of the exemption is essentially a question of law.Reaganv.Farmers' Loan Trust Co.,154 U.S. 362,397-399. The discretion is in Congress, but the abuse of that discretion is not remediless.
One word as to the power of the court to adjudicate upon the reasonableness of an exemption. In theChicago, Milwaukee, c.Railway Companyv.Minnesota,134 U.S. 418, the court said that unquestionably the rate of charge for transportation by a railroad company, involving, as it does, the element of reasonableness both as regards the company and as regards the public, is eminently a question for judicial investigation, requiring due process of law for its determination. I need not refer to the cases there cited or those like theReagan case, which have followed and applied that doctrine. We claim that this court is competent and that it is its duty to judge as to whether this is a reasonable exercise of the power of exemption or whether it is arbitrary and capricious.
The next ground of exemption of which we complain is the denial of the $4000 exemption to corporations simply because they are corporations.
Could this court justify the incorporation of a clause in a tariff act that a given brand of tea, if imported by an individual, should pay a duty of ten cents, but if imported by a corporation, twenty cents, and nothing if imported by a mutual association? I have never heard any suggestion from any livingPage 551man that it could. I believe it must be absolutely conceded by everybody that it cannot. If it cannot do it as to a tariff duty, how can it do it as to an income excise?
Now I come to another ground. It is not necessary for me to dwell very elaborately upon this, because of the very clear and forcible manner in which it was presented in the opening by Mr. Guthrie and appears upon our brief. I say here was a deliberate, arbitrary, capricious (it is entitled to infinitely worse names and epithets than capricious or arbitrary) exclusion of certain great and wealthy corporations from the operation of this law, without justification, without warrant, without any principle of public policy whatever. The Attorney General says in respect of the exemption of these favored companies that there is a humane policy always acted on by civilized states. It is very curious that these civilized states, the United States of America, did not discover it until now. None of these institutions were exempted under the previous income-tax laws. Take Trinity church, for example, in New York, with its hundreds of parcels of real property and stores and houses and millions of property, from which it receives a fabulous income. Is there any public policy in exempting that income at the expense of the poorer sections of the country?
Permit me to repeat a few of the figures: Total number of mutual savings banks exempted, 646; total stock savings banks, 378. They do the same business; they take in the money of depositors for the purpose of investing it and making it bear interest with a profit upon it in the same way, and the 646 are exempted and the 378 are taxed. Total deposits in state banks and trust companies, $1,225,000,000; total deposits of savings banks, $1,748,000,000. That will give you some idea of what this exemption covers? How are those deposits used? Are they kept in the vaults of the banks? No, they are invested like anybody else's earnings, to make interest and to make profit on the money.
Now I come to the question of mutual insurance companies. My friend, Mr. Carter, got up a new idea. He said mutual companies were organized not to save the poor, but for the sole purpose of saving expenses and dividing losses. That isPage 552his argument, and those, I think, were his very words. We had them taken down, at any rate. Here are his very words: "An organization," he said, "to divide the losses." So, I suppose, he thinks they are benevolent and charitable organizations. I should like to have him go to his friend the president of the Mutual Life Insurance Company in New York, whose company has accumulations of property, real and personal, amounting to $204,000,000, and tell him that this was an exemption secured for the purpose of enabling them to divide the losses that came upon them in the transaction of their business. To divide the losses! Where is that phrase he uses? Mr. Carter said: "They carry on the business simply to divide the losses among themselves."
Why, if the court please, the total property exempted of these mutual companies that merely carry on their business to divide the losses among themselves appears by the census reports to be over $2,000,000,000!
Now, is that within the exercise of a reasonable discretion on grounds of public policy, or is it caprice — is it arbitrariness?
I have trespassed altogether too long upon the attention of the court. There is nothing that stands in the way of the decision of this court which we urge. I do not mean to say there are not individual dicta. If you try to drive a case through dicta it is like trying to get yourself through a barbed-wire fence without injury to your garments; but I say there has been no case decided in this court that will in the least interfere. These questions have never been weighed, have never been considered; certainly they have never been decided.
I will say just one word before I conclude about these municipal bonds, briefly to state the grounds on which we say they ought to be exempted, and that is exactly the ground on which United States bonds are exempted from a state tax. It is because it interferes with the sovereign power and the exercise of sovereign power by the States themselves. What is the answer to this? My friends on the other side say, why if you put it in a general income tax it will not be felt. So they said about the rents, if you put them into a general income tax it is not a tax on rents, it is not an unapportionedPage 553tax. What possible difference in principle is there between a tax on the bond and a tax on its income?
But I have more than trespassed upon the kind indulgence of the court. I have felt the responsibility of this case as I have never felt one before and never expect to again. I do not believe that any member of this court ever has sat or ever will sit to hear and decide a case the consequences of which will be so far-reaching as this — not even the venerable member who survives from the early days of the civil war, and has sat upon every question of reconstruction, of national destiny, of state destiny that has come up during the last thirty years. No member of this court will live long enough to hear a case which will involve a question of more importance than this, the preservation of the fundamental rights of private property and equality before the law, and the ability of the people of these United States to rely upon the guaranties of the Constitution. If it be true, as my friend said in closing, that the passions of the people are aroused on this subject, if it be true that a mighty army of sixty million citizens is likely to be incensed by this decision, it is the more vital to the future welfare of this country that this court again resolutely and courageously declare, as Marshall did, that ithasthe power to set aside an act of Congress violative of the Constitution, and that it will not hesitate in executing that power, no matter what the threatened consequences of popular or populistic wrath may be. With the deepest earnestness and confidence we submit that all patriotic Americans must pray that our views shall prevail. We could not magnify the scope of your decision, whatever it may be. No mortal could rise above "the height of this great argument."
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