Constitutional Taxation

Today, millions of taxpayers hand over large portions of their income directly to the national government without considering the founders had never intended it to be this way. Instead, Americans are distracted by a debate waged between two political parties. One party is fighting to reduce taxes while the other wants to raise them to pay for social welfare spending in society. The essence of the debate is governmental distribution of income, which was never an intended purpose for taxation.[1] But before entering into such a debate, everyone should ask, “Is there a better way to fund our national government?”

From a broad perspective the Constitution only authorizes two types of taxation: indirect and direct. Indirect taxes are taxes on goods and services purchased by consumers and direct taxes are taxes applied directly to individuals like on income, property, or some other possession which is not contingent upon a purchase.

Both indirect and direct taxes were limited by the Constitution in that indirect taxes had to be uniform[2] and direct taxes had to be proportional.[3] This means that indirect taxes had to be the same throughout the nation, such that a tax on a product in one State had to be the same as the tax on an identical product in another State. Direct taxes had to be apportioned according to the population of the State, where the intention was for the Federal government to submit a tax bill to the State legislatures who would in turn raise the required revenue. The implications of proportional direct taxation are subtle, but vitally important in understanding the Constitutional vision for funding the Federal government and the limits the Federal government had in taxation.

The majority of the powers delegated to Congress are listed in Article I Section 8. The first clause of that section addresses taxes and their defined purpose, “To lay and collect taxes, duties, imposts, and excises, to pay the debts and provide for the common defense and general welfare of the United States.” Of the four types of taxation listed in this clause, three of them are indirect taxes (duties, imposts, and excises) and the first, ‘taxes,’ is a general term describing both direct and indirect taxation. By this inference the constitutional delegates implied that indirect taxation was the primary method to fund the government, but did not exclude direct taxation if it was necessary.

The inference is supported by Hamilton’s Federalist Papers. In Federalist Paper No. 21, Hamilton states indirect taxation “must for a long time constitute the chief part of the revenue raised in this country.” In Federalist Paper No. 30 he argued for the Federal Government to posses the power of direct taxation, because the Anti-Federalists, who were canvassing for non-ratification of the Constitution, were concerned the government would abuse the power of direct taxation if they were given it. Hamilton went on to say the government needed the power of direct taxation in case of a national emergency such as war, in which indirect methods of taxation would not raise the necessary revenue to pay for the increased expenditures.

Collectively, Hamilton’s Federalist Papers describe how the Federal tax system was intended to work. Indirect taxes were the primary method, because as Hamilton explained they are self leveling. Direct taxes were divisive and potentially oppressive to the Republic, so it was only to be used for a national emergency, such as war. In other words, the founders intended to fund the Federal government through indirect taxes unless a national emergency required them to collect taxes directly. Fundamental to Hamilton’s argument is the constitutional restriction on using anything but gold or silver as tender in payment of debts, which meant the Federal government could not and did not print money to pay their debts.[4]

Hamilton explained indirect taxation was a check and balance to keep the Federal government operating within its means. There is a limit to the amount any government can raise rates on indirect taxes before people intuitively decide not to buy the product and the government’s revenue declines. In this way, the Federal government was limited on revenue expansion without requiring vigilance of the citizens to ensure they stayed within their constitutional boundaries.

The Federal government was also restricted from burdening the people directly except in an emergency and even then their contact with American citizens was through the legislatures of each State. In paying for a national emergency, the government would total the amount of revenue required and then divide it among the States according to the population of each State. The State legislatures would then decide how best to raise the revenue in their State.

By requiring the Federal government to go through State legislatures to levy direct taxes, the Constitution protected citizens from the national government voting money directly out of their pockets. State legislators better represent the interests of the people living in each State and collectively they are more accountable to the people of their State, so they are better qualified to decide how to raise the revenue for a national emergency. Additionally, this method did not violate the division of power between the people, the States and the Federal government.

This method of direct taxation also was a check and balance on potential census fraud. Inflating census numbers would give a State more representation in Congress, but it would also potentially cost those States more in taxes and as a result States were less likely to attempt to tamper with census numbers to increase their representation.

Historical evidence supporting this constitutional revenue system can be seen in that the first taxes authorized, after the ratification of the Constitution, were all indirect taxes on distilled spirits, tobacco, snuff, refined sugar, carriages, property sold at auctions, and various legal documents. The first direct taxes were levied under the Federalist Party to pay for the Quasi War with France in the late 1790s, but repealed by Jefferson in 1802. For ten years after 1802 the Democratic Party held the Presidency and even when financing the War of 1812 only imposed internal indirect taxes. In 1817, Congress repealed the added internal indirect taxes used to pay for the War of 1812 and for 44 years after that, only collected indirect taxes on imports, but raised additional revenue through the sale of public land. It is important to note, during this 44 year span, Congress balanced its budget with the lowest amount of debt our nation has ever had.

This is a sharp contrast to America’s current situation in which the debt is the largest it has ever been, in real terms and per capita, in our nation’s history. Additionally, there is virtually no hope of even balancing our budget on a yearly basis, much less having a surplus to pay down the debt. Debt and taxes are two sides of the same coin, the government incurs debt as part of its normal operation and taxes are used to pay the debt similar to when a person uses a company’s credit card to make business purchases and pays off the incurred debt from the money received after submitting an expense report. Abuse of a company’s credit card to make purchases not authorized by the company rightly should have negative consequences. When the national government exceeds it authority to spend the nation’s money, it is unconstitutional spending and therefore illegal. The taxes levied to pay for illegal spending are an abuse of power and therefore illegal as well. It is past time for Americans to hold the national government accountable for their abuse of power.

As the fiscal cliff looms large in everyone’s mind, many do not clearly understand how our nation arrived at this point. Regardless if a compromise is reached to prevent the presumed impending economic disaster, the fact still remains America’s tax system is largely out of the citizens’ control and is being used to pay for unconstitutional spending. Americans lost their control through the 16th Amendment when the public allowed the Federal government to circumvent constitutional restrictions that naturally bounded their revenue expansion power and kept their spending habits within reason.

Fortunately, America can restore the constitutional revenue system, but it will require the nation to cut all spending at the national level that is not specifically authorized in Article 1 Section 8, pay off the debt, restore a non-inflationary currency system, and repeal the 16th Amendment. This solution is easier said than done, because it requires painful policy changes that will abolish programs to which people believe they are entitled. Unfortunately, our current system is unsustainable and sooner or later those entitlements will go away of their own accord. Americans have a choice, but the longer we delay appropriate corrective action the more draconian the solution will become.

[1] American Founding Principles, Who is General Welfare?, October 15, 2012.

[2] Article I Section 8.

[3] Article I Sections 2.

[4] US Constitution Article 1 Sections 8 and 10.


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