A tax levied directly on the income earned by individuals or corporations.
In the Constitutional Convention of 1787, the Framers included two clauses relating to taxation: “all duties, imposts, and excises shall be uniform throughout the United States” and “no capitation, or other direct, tax shall be laid, unless in proportion to the census or enumeration herein before directed to be taken.” The latter clause has led to disputes because the word “direct” was not defined in the Constitution or in the debates at the convention. It is clear, however, that this category of tax was to be apportioned among the states according to their population. Taxes that are not direct are presumably categorized as “duties, imposts, and excises,” which need not be apportioned; rather, they need only be uniform. There is no explicit mention of an income tax.
The word “direct” was added almost as an afterthought in the midst of a heated debate regarding how the enumeration of slaves was to affect the apportionment of representation and taxes. In the course of this debate, Governeur Morris moved that “taxation shall be in proportion to representation.” Then, realizing that the rule would be inapplicable with regard to indirect taxes on exports, imports, and consumption, he inserted the word “direct,” and the motion passed.
At the time of the convention, there was only one possible source for the distinction between direct and indirect taxes: Adam Smith’s Wealth of Nations (1776). Smith asserted that the income of individuals ultimately arises from three different sources: rent, profit, and wages, and that every tax must be paid ultimately from one of these three. He goes on to state that on occasion, “the state not knowing how to tax, directly and proportionably, the revenue of its subjects, endeavors to tax it indirectly…by taxing the consumable commodities upon which it is laid out.”
Alexander Hamilton, in The Federalist (1788), No. 21, discussing duties on articles of consumption, describes them as falling “under the denomination of indirect taxes,” while “those of the direct kind, which principally relate to land and buildings, may admit of a rule of apportionment.” His use of the word “principally” rather than “solely” implies the possibility of other taxes in this category. Such taxes as a general tax upon income did not exist in his time.
The Supreme Court narrowed Hamilton’s demarcation in Hylton v. United States
In 1894 Congress levied an income tax that provided for a tax of 2 percent on all income above $4,000, a tax that would affect only the richest 1 percent of the population. The tax was challenged in Pollock v. Farmers’ Loan and Trust Co.
When President William H. Taft assumed office in 1909, he urged the passage of a constitutional amendment to allow the government to levy an income tax. In the interim, he proposed a tax on corporate income, carefully described as an excise tax. The Court approved this tax in Flint v. Stone
Berson, Susan A. Federal Tax Litigation. New York: Law Journal Press, 2004. Biskupic, Joan, and Elder Witt. The Supreme Court and the Powers of the American Government. Washington, D.C.: Congressional Quarterly, 1997. Hamilton, Alexander, James Madison, and John Jay. The Federalist Papers. Reprint. New York: New American Library of World Literature, 1961. Madison, James. Notes of Debates in the Federal Convention of 1787. New York: W. W. Norton, 1966. Schwartz, Bernard. Federal and State Powers. Vol. 1 in The Powers of Government. New York: Macmillan, 1963. Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. Reprint. New York: Random House, 1937. Swindler, William. Court and Constitution in the Twentieth Century: The Modern Interpretation. New York: Bobbs-Merrill, 1974. Yancey, Richard. Confessions of a Tax Collector One Man’s Tour of Duty Inside the IRS. New York: HarpersCollins, 2004.
Fiscal and monetary powers
Hylton v. United States
Pollock v. Farmers’ Loan and Trust Co.
Springer v. United States
Taxing and spending clause