William H. Taft
With the passing of TAX DAY 2015, I decided to delve into some background of how & why the 16th Amendment, and the creation of the IRS, came to pass. I started my search by seeing what was available on the arguments, and the development of the Senate Joint Resolution 40 — S.J.R. 40 is what was sent to the states for ratification. We already know that only 4 states properly ratified S.J.R. 40.
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Below, I will go into some detail on what President W.H. Taft had asked of the congress and the meanings and intent of the 16th Amendment.
CONGRESSIONAL RECORD – SENATE – JUNE 16, 1909
[From Pages 3344 – 3345]
The Secretary read as follows:
To the Senate and House of Representatives:
It is the constitutional duty of the President from time to time to recommend to the consideration of Congress such measures, as he shall judge necessary and expedient. In my inaugural address, immediately preceding this present extraordinary session of Congress, I invited attention to the necessity for a revision of the tariff at this session, and stated the principles upon which I thought the revision should be affected. I referred to the then rapidly increasing deficit and pointed out the obligation on the part of the framers of the tariff bill to arrange the duty so as to secure an adequate income, and suggested that if it was not possible to do so by import duties, new kinds of taxation must be adopted, and among them I recommended a graduated inheritance tax as correct in principle and as certain and easy of collection.
The House of Representatives has adopted the suggestion, and has provided in the bill it passed for the collection of such a tax. In the Senate the action of its Finance Committee and the course of the debate indicate that it may not agree to this provision, and it is now proposed to make up the deficit by the imposition of a general income tax, in form and substance of almost exactly the same character as, that which in the case of Pollock v. Farmer’s Loan and Trust Company (157 U.S., 429) was held by the Supreme Court to be a direct tax, and therefore not within the power of the Federal Government to Impose unless apportioned among the several States according to population. [Emphasis added] This new proposal, which I did not discuss in my inaugural address or in my message at the opening of the present session, makes it appropriate for me to submit to the Congress certain additional recommendations.
Again, it is clear that by the enactment of the proposed law the Congress will not be bringing money into the Treasury to meet the present deficiency. The decision of the Supreme Court in the income-tax cases deprived the National Government of a power which, by reason of previous decisions of the court, it was generally supposed that government had. It is undoubtedly a power the National Government ought to have. It might be indispensable to the Nation’s life in great crises. Although I have not considered a constitutional amendment as necessary to the exercise of certain phases of this power, a mature consideration has satisfied me that an amendment is the only proper course for its establishment to its full extent.
I therefore recommend to the Congress that both Houses, by a two-thirds vote, shall propose an amendment to the Constitution conferring the power to levy an income tax upon the National Government without apportionment among the States in proportion to population.
This course is much to be preferred to the one proposed of reenacting a law once judicially declared to be unconstitutional. For the Congress to assume that the court will reverse itself, and to enact legislation on such an assumption, will not strengthen popular confidence in the stability of judicial construction of the Constitution. It is much wiser policy to accept the decision and remedy the defect by amendment in due and regular course.
Again, it is clear that by the enactment of the proposed law the Congress will not be bringing money into the Treasury to meet the present deficiency, but by putting on the statute book a law already there and never repealed will simply be suggesting to the executive officers of the Government their possible duty to invoke litigation.
If the court should maintain its former view, no tax would be collected at all. If it should ultimately reverse itself, still no taxes would have been collected until after protracted delay.
It is said the difficulty and delay in securing the approval of three-fourths of the States will destroy all chance of adopting the amendment. Of course, no one can speak with certainty upon this point, but I have become convinced that a great majority of the people of this country are in favor of investing the National Government with power to levy an income tax, and that they will secure the adoption of the amendment in the States, if proposed to them.
Second, the decision in the Pollock case left power in the National Government to levy an excise tax, which accomplishes the same purpose as a corporation income tax and is free from certain objections urged to the proposed income tax measure.
I therefore recommend an amendment to the tariff bill Imposing upon all corporations and joint stock companies for profit, except national banks (otherwise taxed), savings banks, and building and loan associations, an excise tax measured by 2 per cent on the net income of such corporations. This is an excise tax upon the privilege of doing business as an artificial entity and of freedom from a general partnership liability enjoyed by those who own the stock. [Emphasis added] I am informed that a 2 per cent tax of this character would bring into the Treasury of the United States not less than $25,000,000.
The decision of the Supreme Court in the case of Spreckels Sugar Refining Company against McClain (192 U.S., 397), seems clearly to establish the principle that such a tax as this is an excise tax upon privilege and not a direct tax on property, and is within the federal power without apportionment according to population. The tax on net income is preferable to one proportionate to a percentage of the gross receipts, because it is a tax upon success and not failure. It imposes a burden at the source of the income at a time when the corporation is well able to pay and when collection is easy.
Another merit of this tax is the federal supervision, which must be exercised in order to make the law effective over the annual accounts and business transactions of all corporations. While the faculty of assuming a corporate form has been of the utmost utility in the business world, it is also true that substantially all of the abuses and all of the evils which have aroused the public to the necessity of reform were made possible by the use of this very faculty. If now, by a perfectly legitimate and effective system of taxation, we are incidentally able to possess the Government and the stockholders and the public of the knowledge of the real business transactions and the gains and profits of every corporation in the country, we have made a long step toward that supervisory control of corporations which may prevent a further abuse of power.
I recommend, then, first, the adoption of a joint resolution by two-thirds of both Houses, proposing to the States an amendment to the Constitution granting to the Federal Government the right to levy and collect an income tax without apportionment among the several States according to population; and, second, the enactment, as part of the pending revenue measure, either as a substitute for, or in addition to, the inheritance tax, of an excise tax upon all corporations, measured by 2 percent of their net income.
Wm. H. Taft
Some more info from the above linked source
After we look at what our President proposed, the next thing we must look at to discern legislative intent are the Congressional debates on the Sixteenth Amendment in 1909. Three different written versions of the Sixteenth Amendment were proposed before the one we have now was approved by Congress and sent to the states for ratification. Below is a summary of each in written form:
Table 3-2: Versions of Proposed Sixteenth Amendment prior to approval.
2 SJR’s Rejected and SJR 40 passed. Click to enlarge the image
It can’t be any more clear. The 16th Amendment does not provide authority for a direct tax on incomes, but only authority for an indirect tax on incomes. A direct tax on incomes is a tax that diminishes the source of the income. An indirect tax on income is a tax on unearned income or profit; such a tax leaves the source of the income undiminished. Twice during the debates on the 16th Amendment (S.J.R. No. 25 and S.J.R. No. 39), Congress rejected the idea of bringing direct taxes within the authority of the 16th Amendment. Then twice more, on July 5, 1909, Congress rejected the idea by direct vote of the Senate. Despite this congressional hostility to the idea, the IRS and the lower courts admit they are collecting a direct tax. At a minimum this is scandalous. In reality it is probably criminal.
“Acts of Congress are to be construed and applied in Harmony with and not to thwart the purpose of the Constitution.” [Phelps v. U.S., 274 U.S. 341, 344 (1927)]
“Courts should construe laws in Harmony with the legislative intent and seek to carry out legislative purpose. With respect to the tax provisions under consideration, there is no uncertainty as to the legislative purpose to tax post-1913 corporate earnings. We must not give effect to any contrivance which would defeat a tax Congress plainly intended to impose.” [Foster v. U.S., 303 U.S. 118, 120-1 (1938)]
Just as the intent of the Congress should be followed when constructing a statute, so must the intent of the People, in their sovereign capacity, be followed when construing an amendment to the Constitution.
The construction of the 21st Amendment to the U.S. Constitution absolutely proves our argument. It was necessary for the 21st Amendment to repeal the 18th Amendment before the 21st Amendment could have any effect. Both Amendments related to “intoxicating liquors.” The 18th Amendment prohibited the manufacture, sale, or transportation or importation and use of them. Section 1 of the 21st Amendment reads “The eighteenth article of amendment to the Constitution of the United States is hereby repealed.” The 21st Amendment would not have been in Harmony with the totality of the Constitution unless the 18th Amendment was first repealed. Similarly, had it been the intention of Congress to offer to the people an income tax amendment which would give Congress the power to impose a direct tax on the source of income without apportionment, the 16th Amendment would have provided for such power only by modifying the direct taxing clauses of the Constitution found at Article 1, Section 2, Clause 3 and Article 1, Section 9, Clause 4. The 16th Amendment did not do this.
Section 2 of the 18th Amendment included an enforcement clause which read “The Congress and the several States shall have the concurrent power to enforce this article by appropriate legislation.” The 21st Amendment did not include such an enforcement clause as the 21st Amendment was not conveying a new power to Congress, but in fact was adding a limitation on the power of Congress. Nor does the 16th Amendment have an enforcement clause, as it does not convey a new power to Congress, but only clarifies a theory of taxation. That theory was the basis for the Pollock Decision. The Pollock Decision was overturned by the 16th Amendment.
Congress did not modify the direct taxation clauses of the Constitution by the construction of the 16th Amendment. Therefore, the 16th Amendment does not provide authority for a direct tax on sources of income which enjoy constitutional protection. (Some sources of income do not enjoy constitutional protection, like income derived from sources without (outside) the several States of the Union.) Therefore, there is no authority for Congress to tax one of the several States of the Union, unless that tax is apportioned.
Here is a link to a 200 plus page PDF file that contains the actual Congressional Record — The arguments and debate on this issue. Below I’ve pulled out, and created a couple of screengrabs, for your reading enjoyment.
The images below came from PAGE 36 of the PDF file linked above:
This image is from the SCOTUS (Justice Edward D. White’s Dissent) of the Pollock Case heard in 1895. In 1909, this was cited in the Senate during debate on the 16th Amendment. Click to enlarge the image.
Click to enlarge the image.
If you want some MORE great info on Income Taxes, the 16th Amendment, Might I suggest you check out this video.
More info on Pollock v. Farmers’ Loan & Trust Co. 157 U.S. 429 (1895)
From Wiki, the case results — “The unapportioned income taxes on interest, dividends and rents imposed by the Income Tax Act of 1894 were, in effect, direct taxes, and were unconstitutional because they violated the rule that direct taxes be apportioned.”
Respectfully submitted by SilenceDogood2010 this Sixteenth Day of April in the Year of our Lord, Two Thousand and Fifteen.