Along with some good decisions, Supreme Court justices made some mistakes in the term just ended. One mistake involved taxes—and it is likely to bedevil the court in future cases.
Moore v. United States posed the question of whether Congress could tax corporate shareholders for revenue received by their corporation but not yet distributed to them. The issue was a close one, so I won’t fault the court for answering “yes.”
But you can fault most of the justices for labeling the income tax as an “indirect tax.” Apparently, they thought the Constitution’s 16th amendment dictated this conclusion. But it does not.
Under the Constitution, the income tax is and always has been “direct.” The 16th amendment changed a rule governing how the income tax is treated. But it didn’t alter the levy’s direct nature—a point Justices Clarence Thomas and Neil Gorsuch recognized in their dissent.
What the Constitution Says
In the years leading up to the American Revolution, the colonists recognized a distinction between (1) financial charges designed mostly to regulate human behavior and (2) financial charges primarily designed to raise revenue. Americans called the latter category “taxes.”
The Constitution incorporates the same distinction.
In addition, the Constitution divides “taxes” into those that are indirect and those that are direct. The Constitution treats each category differently: Indirect tax rates must be uniform throughout the country. Direct tax rates must be adjusted so that each state pays the same per capita amount. (All the 16th amendment did was remove the latter requirement from the income tax.)
The Founders adopted this “apportionment” rule for direct taxes to prevent Congress from looting some states for the benefit of others.
Direct and Indirect Taxes
Which taxes are direct? Which are indirect?
Generally speaking, there is no need for doubt on that subject. Indeed, during the debates over the Constitution’s ratification, both Oliver Ellsworth (a future Chief Justice) and John Marshall (another future Chief Justice) said the difference between direct and indirect levies was well-understood.
We can recover the difference from Founding-era writings on the subject, and particularly from the tax laws of the time. Here’s what those sources tell us:
During the 18th century, legislatures generally enacted direct taxes through wide-ranging statutes that imposed rates on assessed values. These statutes sometimes were called “land tax” laws, but they covered far more than land. They included levies on:
Persons (head taxes), often adjusted for the person’s wealth, age, sex, or status;
real and personal property—in fact, wealth generally;
income from investments, occupations, wages, and other sources; and
businesses and occupations (which often were called “faculties”).
Legislatures generally imposed indirect taxes through more targeted laws. Indirect taxes were those on:
Consumption;
imports and exports:
border crossings; and
certain other transactions, such as legal conveyances.
Americans often referred to indirect taxes as “duties.” “Customs” were duties on imports (which the Constitution calls “imposts”) or cargoes (which the Constitution calls “tonnage” or exports).
The direct/indirect distinction wasn’t always economic. Morality also played a role. Direct taxes were disfavored because they burdened living and productivity. The Founders generally favored indirect taxes, particularly those imposed on luxurious consumption or vice.
The Course of Confusion
Thus, the sources are clear. But as often happens in legal “scholarship,” writers eager to promote their ideas or political predilections don’t bother to study the sources. Law professors and other commentators have written a great deal of nonsense on the direct/indirect distinction.
Even the Supreme Court has contributed to the confusion. A 1796 case considered a tax on carriages, which was one of those rare instances where you could classify the tax either as direct (as on property) or indirect (as on consumption). Justice Samuel Chase suggested that the only direct taxes were head taxes and levies on property. But he also implicitly admitted he hadn’t studied the issue.
Then in 1937, the Supreme Court absurdly called a tax on wages an “excise.” And in the 2012 Obamacare case, the Supreme Court classified a mandate that citizens buy health insurance as a “tax”—although it was designed primarily to affect behavior rather than to raise revenue. The court compounded the error by labeling it “indirect”—although if it was a tax at all it was a head tax.
In her concurring opinion in Moore v. United States, Justice Ketanji Brown Jackson relied on Justice Chase’s ill-informed comment to conclude that direct taxes originally encompassed only land and head taxes. Justice Kavanaugh wrote that direct taxes were those imposed on persons or property while indirect taxes were those imposed on transactions and activities. This is closer to the truth than the Chase-Brown claim, but still not right.
Conclusion
In 1896, the justices ruled that income taxes were direct. This case has been subject to a lot of ill-informed criticism, but it was one of the few times the Supreme Court got this issue right. The justices need to get it right more often, because the direct/indirect tax distinction is critical to the Constitution’s design.
For a deep dive into this subject, see my research article, “What the Constitution Means by ‘Duties, Imposts, and Excises’ and ‘Taxes’ (Direct or Otherwise.”
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