Pollock v. Farmers' Loan & Trust Co.

In order to help pay for its war effort in the American Civil War, Congress imposed the first federal income tax in U.S. history through passage of the Revenue Act of 1861.[1] The act created a flat tax of three percent on incomes above $800 ($22,800 in current dollar terms). This taxation of income reflected the increasing amount of wealth held in stocks and bonds rather than property, which the federal government had taxed in the past.[2] Congress later further raised taxes, and by the end of the war, the income tax constituted about one-fifth of the revenue of the federal government.[3] The federal income tax remained in effect until its repeal in 1872.[4] The constitutionality of the federal income tax was later upheld by the Supreme Court in the 1881 case of Springer v. United States.

The Socialist Labor Party advocated a graduated income tax in 1887.[5] The Populist Party "demanded a graduated income tax" in its 1892 platform.[6]

After winning control of Congress and the presidency in the 1892 elections, the Democratic Party made tariff reduction a key priority.[7] President Grover Cleveland and his congressional allies proposed a bill that affected moderate downward revisions in the tariff, especially on raw materials.[8] The shortfall in revenue was to be made up by an income tax of two percent on income above $4,000,[8] equivalent to $114,000 today.[9] Corporate profits, gifts, and inheritances would also be taxed at a two percent rate.[10] The bill would restore the federal income tax for the first time since the 1870s; supporters of the income tax believed that it would help reduce income inequality and shift the burden of taxation to the wealthy.[11]

The Cleveland administration were ambivalent about the income tax, but it was included in the proposed bill due in large part to the efforts of Congressmen William Jennings Bryan and Benton McMillin.[12] Despite strong conservative opposition to the income tax in the Senate, it remained a component of the final tariff bill, partly because many members of Congress believed that the Supreme Court would eventually declare the tax to be unconstitutional.[13] In August 1894, the bill became law as the Wilson–Gorman Tariff Act.

Justices John Marshall Harlan, Howell Edmunds Jackson, Edward Douglass White, and Henry Billings Brown dissented from the majority opinion. Justice White argued:

It is, I submit, greatly to be deplored that after more than 100 years of our national existence, after the government has withstood the strain of foreign wars and the dread ordeal of civil strife, and its people have become united and powerful, this court should consider itself compelled to go back to a long repudiated and rejected theory of the constitution, by which the government is deprived of an inherent attribute of its being—a necessary power of taxation.[16]

In his dissent, Justice Brown wrote:

The decision involves nothing less than the surrender of the taxing power to the moneyed class. By resuscitating an argument that was exploded in the Hylton Case, and has lain practically dormant for a hundred years, it is made to do duty in nullifying, not this law alone, but every similar law that is not based upon an impossible theory of apportionment. Even the spectre of socialism is conjured up to frighten Congress from laying taxes upon the people in proportion to their ability to pay them.[17]

Nebraska Republican Senator Norris Brown publicly decried the Court's decision in Pollock, and proposed a constitutional amendment to remove the requirement that certain income taxes to be apportioned among the states by population. Brown's proposal would be ratified in 1913 as the Sixteenth Amendment.[21][22] The Sixteenth Amendment removed the requirement for those income taxes deemed to be direct in substance (such as taxes on income from property) to be apportioned among the states according to population. Thus, the effect of the Pollock decision has indeed been overturned by the Sixteenth Amendment.[21][23][24][25][26] The Revenue Act of 1913, which greatly lowered tariffs and implemented a federal income tax, was enacted shortly after the Sixteenth Amendment was ratified.[27]

Three years after ratification of the Sixteenth Amendment, the United States Supreme Court rendered its decision in the case of Brushaber v. Union Pacific Railroad. In Brushaber, the Court reviewed the history of the dichotomy between excises (indirect taxes) and direct taxes. The Brushaber Court noted that the 1913 Income Tax Act was written as an indirect tax and did not violate the rule of uniformity and so it was not written as a direct tax and thus was not subject to the rule of apportionment. The Court summarized what it had decided in Pollock and then went on to state the effect of the Sixteenth Amendment with respect to income taxes:

[T]he command of the amendment that all income taxes shall not be subject to the rule of apportionment by a consideration of the source from which the taxed income may be derived forbids the application to such taxes of the rule applied in the Pollock case by which alone such taxes were removed from the great class of excises, duties, and imposts subject to the rule of uniformity and were placed under the other or direct class.[28]

The Court in Brushaber also noted that before Pollock, taxes on income from professions, trades, employments, or vocations were excises. They were indirect in both form and substance and therefore had never been apportioned and so they were entitled to be so enforced afterwards.[29]

By contrast, with respect to taxes on income from property, the Pollock decision had disregarded form and considered substance alone. Justice White's decision in Brushaber shows how the Sixteenth Amendment was written to prevent consideration of the direct effects of any income tax laid by Congress.

The Supreme Court, in Stanton v. Baltic Mining Co., added that the "Sixteenth Amendment conferred no new power of taxation but simply prohibited the previous complete and plenary 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." 240 U.S. 112 (1916).[30]

This effect was reaffirmed in Bowers v. Kerbaugh-Empire Co., 271 U.S. 170 (1926), in which the Supreme Court reviewed Pollock, the Corporation Excise Tax Act of 1909, and the Sixteenth Amendment. It concluded, "It was not the purpose or effect of that amendment to bring any new subject within the taxing power. Congress already had power to tax all incomes."