September 2, 2013
Once upon a time, a long, long time ago, the fruits of one’s labor were considered one’s personal property. As Labor Day 2013 rolls around, it occurs to me just how much the fruits of labor for the majority of American workers today have been compromised. Families not only live from paycheck to paycheck but also often need to use credit to make ends meet. Yet seventeenth century philosopher, John Locke said, “All wealth is the product of labor.”
What labor gives, income taxation takes away.
Early Americans would be rolling over in their graves if they realized America’s topsy-turvy departure from the hard-won freedoms, liberties and financial autonomy granted them by the Articles of Confederation and Perpetual Union, the first constitution after the American Revolution. These former colonists had grown taxation on their labor. For them, paying their “fair share” would have been wealth extraction by a rogue third party.
Until more than half-way through the nineteenth century taxation on labor (income tax) was a type of tax virtually unheard of in America. By law, labor was one’s personal property, the bread of life of natural and common law. To tax labor was direct theft, an outright assault against property rights of the individual.
The first income tax act passed by Congress was the Tax Act of 1861. The Act identified the territorial jurisdiction where and to whom the tax applied: “every person residing in the U.S.” However, this tax was never actually imposed on the people.
“There shall be levied, collected, and paid, upon annual income of every person residing in the U.S. whether derived from any kind of property, or from any professional trade, employment, or vocation carried on in the United States or elsewhere, or from any source whatever.” (emphasis added)
In 1862, Congress passed the Revenue Act of 1862 and the Bureau of Internal Revenue (BIR) came into existence for the purpose of collecting income taxes. This Act imposed income tax on the people of the United States for the very first time. Its stated purpose was to defray the costs incurred by a Civil War already underway. Then in 1864 Congress authorized an additional income tax to augment war-debt repayment.
This 1864 income tax required Americans to pay five percent when earning between $600 and $5,000, seven and one-half percent if between $5,001 and $10,000 and ten percent on anything above $10,000. After the Civil War, the rate modified to a flat rate of five percent and eventually was lowered to two and one-half percent.
Since the income tax had been for the purpose of paying war debt, the Revenue Act of 1862 was repealed in 1872 once the Civil War was over. For forty-one years thereafter, until 1913, no substantial effort was ever made towards the reinstatement of the 1862 income tax law. Prosperity in America reigned supreme during that period; the only tax funding the government was a tariff tax on imported goods. However, the Supreme Court did hear several income tax-related cases during this 41-year period.
In an 1883 decision, Butchers’ Union Co. v. Crescent City Co., 111 U.S. 746, the court stood by natural and common law of the past, citing one’s labor was, in fact, one’s property. Soon thereafter in another case, Pollock v. Farmers’ Loan & Trust Co, 1895, the very same Supreme Court that supported the passage of the Tax Act of 1864, did an about-face and decided against a proposed Income Tax Act of 1894.
The Pollock v. Farmers’ Loan & Trust Co.1895 Supreme Court decision against the Tax Act of 1894 determined it was a direct-tax scheme and therefore unconstitutional. Given that taxation of real estate (personal property) was a direct tax, so also would be the taxation of any and all personal property, including money earned from one’s labor. Therefore, a tax on labor was entirely counter to the explicit tax powers of Congress as provided in a portion of Article I, Sections 2 and 9 of the Constitution.
Article I. Sections 2 and 9
“Direct taxes shall be apportioned among the several 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.”
All decisions of the United States Supreme Court were by law to be bound to the written law of the Constitution, and the Constitution was professed as the law of the land. But the U.S. Government had a mind of its own. In 1913, it eventually found a way to overturn the Pollock v. Farmers’ Loan & Trust Co.1895 decision.
The U.S. Government laid claim that a 1913 Sixteenth Amendment to the Constitution authorized the levy of an income tax without the constitutional requirement of apportionment. All systems were go and the BIR beefed up their staff in preparation for new business. However, another Supreme Court case was brewing in challenge of the government’s plans to expand income taxation.
This new case was the 1916 Stanton v. Baltic Mining Co. 240 US 103. It decided that the Constitution clearly states that direct taxation of the people must be apportioned to a State by a certain percentage of that State’s representation. In other words, the decision was that the Sixteenth Amendment had not altered, added, or removed any words from the Constitution.
“…[the 16th Amendment] conferred no new power of taxation…[and]…prohibited the…power of income taxation possessed by Congress from the beginning from being taken out of the category of indirect taxation to which it inherently belonged….” –Stanton v. Baltic Mining Co. 240 US 103
Therefore and given that Supreme Court rulings are bound to the Constitution, one would rightly assume apportionment as regarded direct taxation would be reinstated. But this is not how it turned out. “Justified” by the Sixteenth Amendment, the U.S. Government entity accelerated its new-found powers of taxation.
Even so, most Americans still paid zero income tax. The average annual earnings of a middle-class family in 1913 were approximately $800. Only people earning $3,000 or more annually were requested to voluntarily comply by filing a 1040 form to pay a one percent in taxes. When calculating the filing threshold amount of $3000 in 1913 in 2012 inflation-adjusted dollars, it translates to a 2012 amount of $69,764.
A one percent income tax rate ninety-nine years ago has morphed to a graduated tax-rate of fifteen to thirty-five percent depending on one’s yearly earnings. The actual 2012 filing threshold requirement of $8500 ends up to be a much, much lower (inflation-adjusted) dollar amount than the $69,764 inflation-adjusted $3000 of 1913. Unsuspecting Americans, not living on lands owned by the U.S. Government at that time (territorial jurisdiction of the United States) but who met the income tax filing threshold amount, believed they also had to file with BIR.
Fast-forward to the early 1980’s, the Reagan Administration commissioned a top-level group of businessmen, the Grace Commission, to assess the efficiency of government departments and to compile a status report to be shared with the public. When the Grace Report was finally released in 1984, Americans learned that:
“One hundred percent of what is collected is absorbed solely by the interest on the Federal debt and by Federal Government contributions to transfer payments. In other words, all individual income tax revenues are gone before one nickel is spent on the services which taxpayers expect from their Government.” –“The Grace Commission Report,” 1984
For most twenty-first century American workers, their wealth can barely be considered the product of labor or as their personal property alone. Income taxation captures the fruits of productive everyday working people while wealth has become almost the exclusive purview of those operating in the world of FIRE (Finance, Insurance and Real Estate) who make obscene amounts of money without producing anything.
Think outside the box. Live outside the cage.