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Historical Perspectives on the Federal Income Tax

Allison Giles, Staff Director February 19, 2001

Committee on Ways and Means

U.S. House of Representatives

1102 Longworth House Office Building

Washington, D.C. 20515

RE: Response to request for written statement concerning President Bush’s tax relief proposal dated February 6, 2001.

Dear Ms. Giles,

The following information in offered in response to the Committee’s request and we would like to have this information included in the record. We do not profess to represent anyone but ourselves, although we probably speak for a great number in voicing our concerns.

We do not protest the taxation of income, in fact we agree with its original purpose. We do however, question the intent of Congress in their application of the Income Tax to "personal living and family expenses". The reason we question their intent is evident by the statement of Judge Hull in his synopsis of the first income tax levied under the 16th Amendment. The synopsis is found in Volume 50, Part 6, of the Congressional Record dated October 16, 1913 and begins on page 5679. There are two major concerns addressed by this synopsis to which the Committee should be enlightened.

First: "The statutory exemption of $3,000 is allowed for personal living and family expenses; however, this and other gross income for which special deductions are allowed by the law must be embraced in the return of gross income…"

It seems to us that this would be the proper place to begin any tax reduction; for the simple reason that it treats every taxpayer the same, regardless of the amount of "income" involved. The Court recognized this principle in 1895 through Justice Harlan’s and Justice Brown’s dissenting opinions in the Pollock Cases 158 U.S. 601 @ 676 and 694:

"The basis upon which such exemptions rest is that the general welfare requires that in taxing incomes, such exemptions should be made as will fairly cover the annual expenses of the average family, and thus prevent the members of the such families becoming a charge upon the public. The statute allows corporations, when making returns of their net profits or income, to deduct actual operating and business expenses. Upon like grounds, as I suppose, Congress exempted incomes under $4,000."

"The exemption of $4,000 is designed, undoubtedly, to cover the actual living expenses of a large majority of families, and the fact that it is not applied to corporations is explained by the fact that corporations have no corresponding expenses. The expenses of earning their profits are, of course, deducted in the same manner, as the corresponding expenses of a private individual are deductible from the earnings of his business. …"

Attorney General Olney, in the 1895 Pollock Cases, also recognized this principle in his statements before the Court, 157 U.S. 427 (pg. 778):

"In the present case there is no lack of uniformity as between corporations and individuals. The exemption of $4,000 a year in the case of individuals or families, as will be shown, is intended as a compensation for the necessarily excessive burden of consumption taxes upon small and moderate incomes.

There is no such situation in the case of a business corporation. Every cent which it expends is allowed it. It is taxed only on its net profits, deducting the wages account; which corresponds to the living expenses of the individual."

Second: "The Treasury regulations soon to be prepared will make it clear to every taxpayer the requirements of the law and its application to income derived from the various kinds of business. To any person who keeps familiar with his business affairs during the year to the extent that at its end he known with reasonable accuracy the amount of his aggregate annual profits, the matter of executing his tax return would be both simple and convenient."

What type of a "business" is the labor for hire employee in, and what "profit" do they acquire from their annual wages? It is evident from the above quotes, and the historical information contained in the Statistical Abstract of the United States, that the average labor for hire employee was not subject to the Federal "Income Tax" until after 1940 (actually the "Individual Income Tax Bill of 1944" [H.R. 4646]). This is especially interesting when you realize that labor for hire employees were earning more than the "single personal exemption of $1,000" allowed as early as 1917. What changed the levy of the "income tax" on net income (business) to include the gross receipts (employee wages) of labor?

Perhaps it is time to look into the "Public Salary Tax Act of 1939" and the "party politics" which endorsed it. The reason we suggest this, to us, is simple. The Congress that passed this legislation intended for it to be challenged. Many of the comments made by the minority Republican Members indicate the possibility that certain provisions of the Act were indeed unconstitutional. Congressman Plumley of Vermont made this statement in reference to the Act:

"So radical a change in our constitutional system as is contemplated and proposed by this act can and should only be made after and by the submission and adoption of a constitutional amendment, which will so extend the power of the Federal Government as to impose such a tax." (Congressional Record of February 9, 1939 page 1308)

His statement follows that of Congressman Buck recorded on page 1305. In addressing the issue of constitutionality Mr. Buck says:

"The value of an affirmative decision by Congress on the question of Federal taxation of officers of States and their subdivisions lies in the fact that the tax would be supported by the presumption of constitutionality attaching to a law passed by Congress and passed by its deliberate judgement after debate."

In this same light Senator Brown, on page 3765, in quotes as saying:

"The Senator from Vermont for himself may certainly make that reservation; but there is no question, under the accepted practice here and in the courts, that the fact that we pass the bill will lend to it the presumption of constitutionality."

Just an observation: The Democratic majority was 2:1, with Roosevelt as President.

The reason for our concern is a statement made by Congressman Disney on page 1313 where he says:

"The bill provided for a direct tax upon the State employee…"

Direct taxes levied upon employees are commonly referred to as "poll taxes", or "capitation" taxes requiring apportionment. At least they were in the opinion of the Judges in office prior to 1937. ("Taxing the Exercise of Natural Rights" by John MacArthur Maguire, Harvard Legal Essays 1934 pp. 273-322 [cited by Justice Cardozo in Steward Mach. Co. v. Davis 301 U.S. 548 @ 581]).

Final point: The Sixteenth Amendment provides for the taxation of incomes, from whatever source derived, without apportionment. It is clear from that Amendment that taxation of the source was not included or permitted without apportionment. So what is the meaning of the word source?

That may sound like a silly question, but think about it. Immediately after the ratification of the Amendment the Court took up the question of what the term "income" meant. No one considered that a silly question, although the answer was universally known. They, however, defined it in light of the 16 Amendment as; "the gain derived from capital, from labor or from both combined". How many "sources" did they list, only two. Why? Because, "income" belongs to the person owning the capital or providing the labor and has nothing to do with "who" paid for it. This all changed in 1939 with the "Public Salary Tax Act" and the Court’s decision in the Graves v. New York Case [306 U.S. 466].

The above case deals with the question of sovereign immunity in the taxation of governmental entities. The question presented to the court was:

"We are asked to decide whether the imposition by the State of New York of an income tax on the salary of an employee of the Home Owners’ Loan Corporation places an unconstitutional burden upon the federal government."

The answer the court gave is found on page 480, it reads:

"The present tax is a nondiscriminatory tax on income applied to salaries at a specific rate. It is not in form or substance a tax upon the Home Owners’ Loan Corporation or its property or income, nor is it paid by the corporation or the government from their funds. It is measured by income which becomes the property of the taxpayer when received as compensation for his services; and the tax laid upon the privilege of receiving it is paid from his private funds and not from the funds of the government, either directly or indirectly. The theory, which once won a qualified approval, that a tax on income is legally or economically a tax on its source, is no longer tenable."

What about the employee’s labor, isn’t that the real "source" of the employee’s income (salary or wage), and if that happens to be his only income, is that not a tax upon the "source" unless compensated for by the allowance of the personal exemption?

What is meant by "nondiscriminatory"? The tax levied upon corporations is levied only upon their "net-profits". The tax levied upon business, professions and the dealings in real and personal property is levied only upon net income, the gain derived from such things. The employee, however, is required to pay the "income" tax on the basis of their annual gross receipts. Yet, all three are classified as "persons", subject to the tax law?

In a recent case the Supreme Court took up the question of an "occupation" tax levied by Jefferson County, Alabama. The court recognized the fact that the County did not have the authority to levy an "income tax", but did have the authority to levy a "license or privilege" tax. They then upheld the tax based upon the "Public Salary Tax Act". (No. 98-10. Argued March 29, 1999—Decided June 21, 1999, Jefferson County, Alabama v. Acker, Senior Judge)

In 1903 the Federal District Court of Arkansas ruled upon a 13th and 14th Amendment issue [125 F 322]. In making that decision the court refers to the "unalienable" rights of "Life, Liberty and the Pursuit of Happiness". In doing so, Judge Trieber seems to reduce those rights to their most basic form. He starts out with a question:

"Can there be any doubt that the right to purchase, lease, and cultivate lands, or to perform honest labor for wages with which to support himself and family, is among these rights thus declared to be "inherent and inalienable"?

And ends with the statement:

"That the rights to lease lands and to accept employment as a laborer for hire are fundamental rights, inherent in every free citizen, is indisputable;"

Is it possible to have the inalienable right to labor for others and yet the receipt of wages earned by that labor be taxable as a "privilege"?

We do not object to a reasonable income tax, so long as the basis of that tax allows for a reasonable standard of living. It is well known that the higher one’s income is, the less impact the "income tax" has upon living expenses. The question then is what "standard" of living is reasonable? Isn’t the attainment of a basic standard of living the driving force behind labor, and are not the wages earned by hired labor in direct relation to the cost of providing that basic standard of living? Raising the "Personal Exemption" is fair to all, it treats everyone the same whether rich or poor. Why should you take the basic necessities away from the poor and not take the luxuries away from the wealthy, yet that is what our current system does. The current "personal" exemption is less than $3,000 a year, hardly enough to buy groceries let alone pay rent and utilities.

Raising the "Personal Exemption" is also the fastest way of putting money back into the economy, it simply lowers the amount withheld from wages and reduces the quarterly tax payments. Other than that, there are no other changes required in the Tax Law. The money thus injected into the lower brackets ultimately will end up in the higher brackets through increased consumer spending. A side benefit will be the decrease in the number of tax returns filed, thereby reducing the cost of processing those returns.

Respectfully submitted,


John Gary Given Sr.


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