Q: "I'm saying let's have a flat tax instead of one that allows the rich to pay less in proportion to their net worth than the middle class pay. Yes, you heard me - let's get rid of income tax - and have a FLAT TAX on NET WORTH. No tax increase, JUST A FLAT FAIR TAX on NET WORTH instead of the backward one we have. No deductions, no loopholes."
The Constitution would have to be amended in order
for the federal government to do that which you propose. The Sixteenth
Amendment only permits the taxation of income. The federal government is
prevented from taxing land and, by extension, wealth. The
Constitution's Article I, Section VIII, gave the federal government
power to levy taxes, duties, imports and excises, as “indirect” taxes,
requiring only that the duties, imposts and excises be “uniform
throughout the United States.” The 16th Amendment authorized a “direct”
tax on “incomes, from whatever source derived.” The intent of
the Founding Fathers—almost all large landholders—was to prevent the new
federal government from using land as a tax base. The
Sixteenth Amendment exempted income taxes from the constitutional
requirements regarding direct taxes, after income taxes on rents,
dividends, and interest were ruled to be direct taxes in Pollock v.
Farmers' Loan & Trust Co., 157 U.S. 429 (1895).
In
the United States, Article I, Section 9 of the Constitution requires
that direct taxes imposed by the national government be apportioned
among the states on the basis of population. The direct tax provisions appear in Article I of the Constitution. Section 2, clause 3 provides that “direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers.” U.S. Const., art. I, § 2, cl. 3. In section 9, clause 4, the Constitution elaborates on the direct tax requirements, explaining that “[n]o Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.” Id. art. I, § 9, cl. 4. The Constitution treats excise taxes differently, stating that “Duties, Imposts and Excises shall be uniform throughout the United States.” Id. art. I, § 8, cl. 1. Neither the record of the constitutional convention nor the state ratification debates defines with any clarity the meaning of the term “direct tax” in the context of personal property. See Bruce Ackerman, Taxation & the Constitution, 99 Colum. L. Rev. 1, 9-11 (1999); see also 2 The Records of the Federal Convention of 1787, at 350 (Max Farrand ed., Yale Univ. Press, 1966) (Aug. 20, 1787) (“Mr. King [a delegate to the constitutional convention] asked what was the precise meaning of direct taxation? No one answ[ere]d.”). Over the years, litigants have frequently challenged specific taxes as unapportioned direct taxes in violation of Article I, sections 2 and 9.
The Constitution’s contrast of direct taxes with excise taxes has generally provided the framework for constitutional analysis in this area. The term direct tax generally means a tax paid directly to the government by the persons on whom it is imposed. An excise tax is an indirect tax, meaning that the producer or seller who pays the tax to the government is expected to try to recover the tax by raising the price paid by the buyer (that is, to shift or pass on the tax). Excises are typically imposed in addition to another indirect tax such as a sales tax or VAT.
The Constitution’s contrast of direct taxes with excise taxes has generally provided the framework for constitutional analysis in this area. The term direct tax generally means a tax paid directly to the government by the persons on whom it is imposed. An excise tax is an indirect tax, meaning that the producer or seller who pays the tax to the government is expected to try to recover the tax by raising the price paid by the buyer (that is, to shift or pass on the tax). Excises are typically imposed in addition to another indirect tax such as a sales tax or VAT.
The federal Constitution prohibits a direct tax on individuals. Article I, Section 9 reads: "No Capitation, or other direct, Tax shall be laid, unless in proportion to the Census." It took the 16th Amendment to authorize a DIRECT INCOME TAX. Seemingly, therefore, Congress cannot directly tax individuals based on their wealth. (The estate tax was upheld by the courts on the grounds that the government was not taxing a person's wealth as such but focusing on a specific event, namely the death of the individual, as the basis for the tax. It is an indirect tax.)
Traditionally, a direct tax in the constitutional sense means a tax on property "by reason of its ownership" (such as an ordinary real estate property tax imposed on the person owning the property as of January 1st of each year) as well as a capitation (a "head tax").
The first direct tax case to come before the Supreme Court was Hylton v. United States, 3 U.S. 171 (1796), which upheld an unapportioned tax on carriages. 3 U.S. (3 Dall.) at 171. The statute at issue in Hylton, Act of June 5, 1794, ch. 45, 1 Stat. 373 (repealed 1796), imposed a tax “upon all carriages for the conveyance of persons, which shall be kept by or for any person, for his or her own use, or to be let out to hire, or for the conveying of passengers.” The Court rejected the plaintiff’s challenge to the carriage tax as an unapportioned direct tax, holding that the carriage tax was indirect.
The Court again made clear that its reasoning reached only general taxes on personal property. In Union Electric Company v. EPA 427 U.S. 246 (1976), the Court approvingly quoted Alexander Hamilton’s definition of direct taxes, which he championed in his successful litigation of Hylton:
"The following are presumed to be the only direct taxes. Capitation or poll taxes. Taxes on lands and buildings. GENERAL ASSESSMENTS, WHETHER ON THE WHOLE OF INDIVIDUALS, OR ON THEIR WHOLE REAL OR PERSONAL ESTATE; all else must of necessity be considered as indirect taxes."
The Court has never overruled Hylton. In fact, in the years since Hylton, the Court has repeatedly cited Hylton with approval in rejecting direct tax challenges. See, e.g., Fernandez v. Wiener, 326 U.S. 340, 353 (1945); Bromley v. McCaughn, 280 U.S. 124, 136 (1929); Thomas v. United States, 192 U.S. 363, 370 (1904); Springer v. United States, 102 U.S. 586, 599-601 (1881).
What does Hylton portend for a wealth tax?:
1) Taxes on land and buildings are unconstitutional direct taxes. (That would knock out real property in a wealth tax).
2) General assessments on personal property are unconstitutional. (That knocks out stock, bonds, jewelry, art, etc.).
In the late 1800s, the federal courts also began to treat an income tax on income from property, such as rental payments, as a direct tax. In constitutional law, an "indirect tax" or "excise" is an "event" tax, an overt act must occur such as the sale of a product subject to a VAT tax. In this sense, a transfer tax (such as gift tax and estate tax) is an indirect tax. Income taxes on income from personal services such as wages are also indirect taxes in this sense.
After the 1895 Pollock
ruling (essentially, that taxes on income from property should be
treated as direct taxes), this provision made it difficult for Congress
to impose a national income tax that applied to all forms of income
until the 16th Amendment was ratified in 1913. After the Sixteenth
Amendment, no Federal income taxes are required to be apportioned,
regardless of whether they are direct taxes (taxes on income from
property) or indirect taxes (all other income taxes).
The Sixteenth Amendment: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."
Although the Eisner v. Macomber, 252 U.S. 189 (1920), Court acknowledged the power of the Federal Government to tax income under the Sixteenth Amendment, the Court essentially said this did not give Congress the power to tax — as income — anything other than income, i.e., that Congress did not have the power to re-define the term income as it appeared in the Constitution:
“Throughout the argument of the Government, in a variety of forms, runs the fundamental error already mentioned—a failure to appraise correctly the force of the term "income" as used in the Sixteenth Amendment, or at least to give practical effect to it. Thus, the Government contends that the tax "is levied on income derived from corporate earnings," when in truth the stockholder has "derived" nothing except paper certificates which, so far as they have any effect, deny him [or "her" — in this case, Mrs. Macomber] present participation in such earnings. It [the government] contends that the tax may be laid when earnings "are received by the stockholder," whereas [s]he has received none; that the profits are "distributed by means of a stock dividend," although a stock dividend distributes no profits; that under the Act of 1916 "the tax is on the stockholder's share in corporate earnings," when in truth a stockholder has no such share, and receives none in a stock dividend; that "the profits are segregated from his [her] former capital, and [s]he has a separate certificate representing his [her] invested profits or gains," whereas there has been no segregation of profits, nor has [s]he any separate certificate representing a personal gain, since the certificates, new and old, are alike in what they represent—a capital interest in the entire concerns of the corporation.”
Holding:
"A pro rata stock dividend where a shareholder received no actual cash or other property, and retained the same proportionate share of ownership of the corporation as was held prior to the dividend, was not taxable income to the shareholder within the meaning of the Sixteenth Amendment, and that an income tax imposed by the Revenue Act of 1916 on such dividend was unconstitutional, even where the dividend indirectly represented accrued earnings of the corporation."
Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955), was an important income tax case before the United States Supreme Court. The Court held as follows:
"Congress, in enacting income taxation statutes that comprehend "gains or profits and income derived from any source whatever," intended to tax all gain except that which was specifically exempted.
Income is not limited to "the gain derived from capital, from labor, or from both combined."
Although the Court used this characterisation in Eisner v. Macomber, it "was not meant to provide a touchstone to all future gross income questions."
Instead, income is realised whenever there are "instances of
1) undeniable accessions to wealth
2) clearly realised, and
3) over which the taxpayers have complete dominion."
All of the precedent requires that there be a "taxable event" on income "derived from real property" before the federal government can tax. Gift and estate taxes are indirect taxes. Direct taxes are only permissible on taxable events that give rise to income whether through salary, bonus, dividend, capital gain, etc. There is no taxable event on wealth. The appreciation after a sale and income are taxable, but other than that, there is no taxable event. The wealth is stationary.
“Throughout the argument of the Government, in a variety of forms, runs the fundamental error already mentioned—a failure to appraise correctly the force of the term "income" as used in the Sixteenth Amendment, or at least to give practical effect to it. Thus, the Government contends that the tax "is levied on income derived from corporate earnings," when in truth the stockholder has "derived" nothing except paper certificates which, so far as they have any effect, deny him [or "her" — in this case, Mrs. Macomber] present participation in such earnings. It [the government] contends that the tax may be laid when earnings "are received by the stockholder," whereas [s]he has received none; that the profits are "distributed by means of a stock dividend," although a stock dividend distributes no profits; that under the Act of 1916 "the tax is on the stockholder's share in corporate earnings," when in truth a stockholder has no such share, and receives none in a stock dividend; that "the profits are segregated from his [her] former capital, and [s]he has a separate certificate representing his [her] invested profits or gains," whereas there has been no segregation of profits, nor has [s]he any separate certificate representing a personal gain, since the certificates, new and old, are alike in what they represent—a capital interest in the entire concerns of the corporation.”
Holding:
"A pro rata stock dividend where a shareholder received no actual cash or other property, and retained the same proportionate share of ownership of the corporation as was held prior to the dividend, was not taxable income to the shareholder within the meaning of the Sixteenth Amendment, and that an income tax imposed by the Revenue Act of 1916 on such dividend was unconstitutional, even where the dividend indirectly represented accrued earnings of the corporation."
Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955), was an important income tax case before the United States Supreme Court. The Court held as follows:
"Congress, in enacting income taxation statutes that comprehend "gains or profits and income derived from any source whatever," intended to tax all gain except that which was specifically exempted.
Income is not limited to "the gain derived from capital, from labor, or from both combined."
Although the Court used this characterisation in Eisner v. Macomber, it "was not meant to provide a touchstone to all future gross income questions."
Instead, income is realised whenever there are "instances of
1) undeniable accessions to wealth
2) clearly realised, and
3) over which the taxpayers have complete dominion."
All of the precedent requires that there be a "taxable event" on income "derived from real property" before the federal government can tax. Gift and estate taxes are indirect taxes. Direct taxes are only permissible on taxable events that give rise to income whether through salary, bonus, dividend, capital gain, etc. There is no taxable event on wealth. The appreciation after a sale and income are taxable, but other than that, there is no taxable event. The wealth is stationary.
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