A Very Brief History of Taxation in America

“100% of what is collected is absorbed solely by interest on the Federal Debt … all individual income tax revenues are gone before one nickel is spent on the services taxpayers expect from government.” ~The Grace Commission Report, 1984

taxslave-213x300As April 15 nears…thought you would find this research on taxation in America timely if not interesting.

No one living before the Constitution of 1787 could have believed the seven ways to Sunday Americans are now taxed. Under the Declaration of Independence and the first American constitution of 1777, The Articles of Confederation and Perpetual Union, association among the confederate states and a state’s interaction with federal authorities was 100% voluntary.

Though paying taxes was a voluntary act, the federal legislature (never referred to as government), did have legitimate operating expenses, and depended on property taxes collected from and given by the states voluntarily in varying amounts. It was this inconsistent funding that historians thereafter have considered the deal-breaker issue for what has been called the “failure” of this first American union.

A Second Constitution Provides New Powers of Taxation

The untold rest of the story? The Framers of the U.S. Constitution of 1787 seriously wanted centralized authority which was non-existent under The Articles. Far from being commoners, the Framers of the 1787 U.S Constitution were either landed gentry of prominent families, or had risen to the strata of aristocratic American society due to intelligence, education and intent, as did Benjamin Franklin, the tenth son of a soap maker. Make no mistake; these men gleaned knowledge about governance and taxation from the British Crown and the Church of England’s system of tithing. The U. S. Government came into existence with the establishment of the U.S. Constitution of 1787.

Not long thereafter, in 1791, Alexander Hamilton lobbied Congress. He wanted an excise tax to accelerate the payment of national debt incurred during the American Revolution. Also known as the Act of March 3, 1791, this tax law enforced government’s new ability to compel performance (force and the power of distraint giving authority to seize personal property for payment.) Unaccustomed to this new form of government and laws of the U.S. Constitution, some of the earliest Americans took offense. Hamilton’s excise tax incited them to rebel in the 1794 Western Pennsylvania Whiskey Rebellion. An excise tax laid on the manufacture of alcohol had not lawfully applied to them. Those who then lived in Pennsylvania, an original state established under The Articles, were called “free inhabitants” and lawfully remained so.

Here’s why.

According to the law definition of territorial jurisdiction, only those living on land owned by said government are also subject to its laws. As of 1791 U.S. Government federal lands consisted of the Northwest Territory but excluded the original thirteen states of The Articles. Even so, President Washington sent in troops to silence the tax protestors of the Whiskey Rebellion.

In 1798, the Fries’ Rebellion led by John Fries of Pennsylvania, opposed the enforcement of a direct federal property tax. Even though the Whiskey and Fries’ Rebellions had not been waged on lands subject to U.S. Government territorial jurisdiction, the federal government captured and convicted rebel members for the supposed act of treason. John Fries was pardoned by President Adams after his conviction. Fries had been a “turn-coat” infiltrator for the government militia against those of the Fries’ Rebellion.

Theft of Private Property

“[E]very Man has a Property in his own Person. This no Body has any Right to but himself. The Labour of his Body, and the Work of his Hands, we may say, are properly his. The great and chief end therefore, of Mens uniting into Commonwealths, and putting themselves under Government, is the Preservation of their Property.” ~John Locke, English philosopher and political theorist, 1632-1704

Taxation on labor (income tax) was an unimaginable, unheard of kind of tax until the latter half of the nineteenth century. Labor was one’s personal property, the bread of life of natural and common law. To tax labor was considered direct theft, an outright assault against property rights of the individual.

The first income tax act Congress passed was the Tax Act of 1861. The Act stated the territorial jurisdiction of which and to whom the tax would apply:  “every person residing in the U.S.” Yet, this tax was never enacted.

Soon to follow, Congress passed the Revenue Act of 1862 which led to the creation and opening of the Bureau of Internal Revenue (BIR) to collect the new income tax. For the first time, a tax on one’s labor was imposed on the people of the United States. Its purpose was to defray the many costs incurred by a Civil War already underway.

Again, in 1864, Congress authorized an additional income tax to augment the payment of war debt. This 1864 additional tax required Americans 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 then to two and one-half percent. With the purpose of the income tax to pay off Civil War debt, the Revenue Act of 1862 was repealed and ended in 1872.

Until 1913, for forty-one years, no substantial effort was 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, during that same period, the Supreme Court focused on several tax cases.

Supreme Court Tax Cases

An 1883 Supreme Court decision, Butchers’ Union Co. v. Crescent City Co., 111 U.S. 746, cited that one’s labor was, in fact, one’s property. Then, in another case, Pollock v. Farmers’ Loan & Trust Co, 1895, the very same Supreme Court that had 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 to be a direct-tax scheme and therefore unconstitutional. Given that taxation of real estate (personal property) was lawfully 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 exempt from the explicit tax powers of Congress granted in a portion of Article I, Sections 2 and 9 of the U.S. 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.”

Decisions of the United States Supreme Court were to be bound to the written law of the U.S. Constitution, the professed law of the land.

“This Constitution, and the laws of the United States which shall be made in pursuance thereof; and all treaties made, or which shall be made, under the authority of the United States, shall be the supreme law of the land; and the judges in every state shall be bound thereby, anything in the Constitution or laws of any State to the contrary notwithstanding.” Article VI, U.S. Constitution

Yet in 1913, the government overturned the 1895 Pollock v. Farmers’ Loan & Trust Co. decision. What happened? The U.S. Government laid a claim. It said that a 1913 Sixteenth Amendment to the Constitution gave them the authorization to levy an income tax on the people without the constitutional requirement of apportionment confirmed by the Supreme Court.

However, another Supreme Court case challenged government plans to renew income taxation. This was the 1916 Stanton v. Baltic Mining Co. 240 US 103 case. It decided that the U.S. Constitution clearly stated that direct taxation of the people must be apportioned to a State by a certain percentage of a State’s representation. In other words, this Supreme Court decision established 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

Given Supreme Court rulings are bound to the Constitution, one would rightly assume apportionment as regarded direct taxation would be reinstated. Wrong. “Justified” by the Sixteenth Amendment, the U.S. Government reinstated its powers of income taxation. The BIR increased their staff and operating systems to capture the coming new big wave of government funding.

The Rest is History

Most Americans in 1913 paid no income tax. The average annual earnings of a middle-class family were approximately $800 and 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. 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.

In 2016, those married under 65 filing jointly need to file if they make more than the filing threshold requirement for W-2 income of $20,300. This actually ends up as a much lower dollar amount(inflation –adjusted) than the $3000 original threshold requirement of 1913:  In 2016 inflation-adjusted dollars for $3000 in 1913 is $71,851, which, if using the same $3000 threshold amount, would mean only those today making $71,851, or more, would need to file income tax.

Perhaps needless to say, many questions arise from the chronology of these facts and events.

“You are among the millions of Americans who comply with the tax law voluntarily.” Form 1040 Tax Instruction Booklet, 1992

6 Responses to “A Very Brief History of Taxation in America”

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  1. Susan says:

    Thank you for the exchange and for your information….whomever you are. I do appreciate it. I thought you might find this of interest.

    In June, 1957, the government of the United States published a work entitled Jurisdiction Over Federal Areas Within The States: Report of the Interdepartmental Committee for the Study of Jurisdiction Over Federal Areas Within the States, Part II. The Committee stated at pg. 45 :

    “It scarcely needs to be said that unless there has been a transfer of jurisdiction pursuant to clause 17 by a Federal acquisition of land with State consent, or by cession from the State to the Federal Government, or unless the Federal Government has reserved jurisdiction upon admission of the State, the Federal Government possesses no legislative jurisdiction over any area within a State, such jurisdiction being for exercise by the State, subject to non-interference by the State with Federal functions…”

    “The consent requirement of Article I, section 8, clause 17 was intended by the framers of the Constitution to preserve the State’s jurisdictional integrity against federal encroachment. The Federal Government cannot, by unilateral action on its part, acquire legislative jurisdiction over any area within the exterior boundaries of a State,” Id., at 46.

    According to the April, 1956, report (Part I), pages 41-47 of the Interdepartmental Committee “Study Of Jurisdiction Over Federal Areas Within The States,” the court has recognized three methods by which the federal government may acquire exclusive legislative jurisdiction over a physical area:

    1. Constitutional consent.–Other than the District of Columbia, the Constitution gives express recognition to but one means of Federal acquisition of legislative jurisdiction– purchase with State consent under article I, section 8, clause 17.

    …”and to exercise like authority over all places purchased by the consent of the legislature of the state in which the same shall be, for the creation of forts, magazines, arsenals, dockyards and other needful buildings….”

    “The debates in the Constitutional Convention and State ratifying conventions leave little doubt that both the opponents and proponents of Federal exercise of exclusive legislature jurisdiction over the seat of government were of the view that a constitutional provision such as clause 17 was essential if the Federal government was to have such jurisdiction…. While, as has been indicated in the preceding chapter, little attention was given in the course of the debates to Federal exercise of exclusive legislative jurisdiction over areas other than the seat of government, it is reasonable to assume that it was the general view that a special constitution provision was essential to enable the United States to acquire exclusive legislative jurisdiction over any area…”

    According to the 1956 report, pages 7-8, “… the provision of the second portion, for transfer of like jurisdiction [as the District of Columbia] to the Federal Government over other areas acquired for Federal purposes, was not uniformly exercised during the first 50 years of the existence of the United States. It was exercised with respect to most, but not all, lighthouse sites, with respect to various forts and arsenals, and with respect to a number of other individual properties. But search of appropriate records indicates that during this period it was often the practice of the Government merely to purchase the lands upon which its installations were to be placed and to enter into occupancy for the purposes intended, without also acquiring legislative jurisdiction over the lands.”

    2. “Federal reservation.–In Fort Leavenworth R.R. v. Lowe, 114 U.S. 525 (1885), the Supreme Court approved a method not specified in the Constitution of securing legislative jurisdiction in the United States. Although the matter was not in issue in the case, the Supreme Court said (p. 526):

    “The land constituting the Reservation was part of the territory acquired in 1803 by cession from France, and until the formation of the State of Kansas, and her admission into the Union, the United States possessed the rights of a proprietor, and had political dominion and sovereignty over it. For many years before that admission it had been reserved from sale by the proper authorities of the United States for military purposes, and occupied by them as a military post. The jurisdiction of the United States over it during this time was necessarily paramount. But in 1861 Kansas was admitted into the Union upon an equal footing with the original States, that is, with the same rights of political dominion and sovereignty, subject like them only to the Constitution of the United States. Congress might undoubtedly, upon such admission, have stipulated for retention of the political authority, dominion and legislative power of the United States over the Reservation so long as it should be used for military purposes by the government; that is, it could have excepted the place from the jurisdiction of Kansas, as one needed for the uses of the general government. But from some cause, inadvertence perhaps, or over-confidence that a recession of such jurisdiction could be had whenever desired, no such stipulation or exception was made.”(See also United States v. Gratoit concerning post-statehood reservation of mines, salt licks, salt springs, and mill seats in the (former) Eastern ceded territories.)

    3. “State cession.–In the same case, ( Fort Leavenworth R.R. v. Lowe,) the United States Supreme Court sustained the validity of an act of Kansas ceding to the United States legislative jurisdiction over the Fort Leavenworth military reservation, but reserving to itself the right to serve criminal and civil process in the reservation and the right to tax railroad, bridge, and other corporations, and their franchises and property on the reservation. In the course of its opinion sustaining the cession of legislative jurisdiction , the Supreme Court said (p. 540):

    “… Though the jurisdiction and authority of the general government are essentially different form those of the State, they are not those of a different country; and the two, the State and general government, may deal with each other in any way they may deem best to carry out the purposes of the Constitution. It is for the protection and interests of the States, their people and property, as well as for the protection and interests of the people generally of the United States, that forts, arsenals, and other buildings for public uses are constructed within the States. As instrumentalities for the execution of the powers of the general government, they are, as already said, exempt from such control of the States as would defeat or impair their use for those purposes; and if, to their more effective use, a cession of legislative authority and political jurisdiction by the State would be desirable, we do not perceive any objection to its grant by the Legislature of the State. Such cession is really as much for the benefit of the State as it is for the benefit of the United States.”

    • mertensv16 says:

      That’s all well and good, but it doesn’t have anything to do with the federal taxation power, which is not based on I.8.17. That clause deals with exclusive legislative jurisdiction, while the power to tax comes from I.8.1. The authority to tax is an example of concurrent legislative jurisdiction — that is, both the federal government and a State have the legislative authority to tax people and things within a State.

  2. Susan says:

    territorial jurisdiction: The geographical area over which a government or governmental subdivision has power. —Webster’s New World Law Dictionary, 2010

    U.S. Constitution Article I. Section 8. Clause 17

    “The Congress shall have power:
    To exercise exclusive legislation in all cases whatsoever, over such district (not exceeding ten square miles) as may, by cession of particular States, and the acceptance of Congress, become the seat of government of the United States, and to exercise like authority over all places purchased by the consent of the legislature of the state in which the same shall be, for the erection of forts, magazines, arsenals, dock yards, and other needful buildings.”

    “It is clear that Congress, as a legislative body, exercise two species of legislative power: the one, limited as to its objects, but extending all over the Union: the other, an absolute, exclusive legislative power over the District of Columbia. The preliminary inquiry in the case now before the Court, is, by virtue of which of these authorities was the law in question passed?” — [Cohens v. Virginia, 19 U.S. 264, 6 Wheat. 265; 5 L.Ed. 257 (1821)]

    Hooven & Allison Co. v. Evatt, April 9, 1945 defined the United States three ways:

    1. “It may be merely the name of a sovereign occupying the position analogous to that of other sovereigns in the family of nations.

    2. “It may designate the territory over which the sovereignty of the United States extends, or

    3. It may be the collective name of the states which are united by and under the Constitution.”

    28 U.S.C. 1603 ‘United States:
    (c) The “United States” includes all territory and waters, continental or insular, subject to the jurisdiction of the United States.

    28 USC § 3002 (15)(A):
    (15) “United States” means –
    (A) a Federal corporation
    (B) an agency, department, commission, board, or other entity of the United States or
    (C) an instrumentality of the United States

    • mertensv16 says:

      Your quote from Cohens proves my point. There are certain powers set forth in Article I, Section 8 of the Constitution that may be exercised throughout the United States. Included among these is the power of taxation, which is not (as you claimed) restricted to land that the federal government owns. This was made plain by Chief Justice John Marshall (who also wrote the Cohens opinion) in an earlier case:

      “The 8th section of the 1st article gives to Congress the “power to lay and collect taxes, duties, imposts and excises,” for the purposes thereinafter mentioned. This grant is general, without limitation as to place. It, consequently, extends to all places over which the government extends. If this could be doubted, the doubt is removed by the subsequent words which modify the grant. These words are, “but all duties, imposts, and excises, shall be uniform throughout the United States.” It will not be contended, that the modification of the power extends to places to which the power itself does not extend. The power then to lay and collect duties, imposts, and excises, may be exercised, and must be exercised throughout the United States. Does this term designate the whole, or any particular portion of the American empire? Certainly this question can admit of but one answer. It is the name given to our great republic, which is composed of States and territories.
      Loughborogh v. Blake, 18 U.S. 317, 318-319 (1820)

  3. Robert says:

    Hmm. I wonder if the “voluntary” caveat from the cover of the 1992 1040 is still there. “Yes, there is a gun at your head, but compliance is voluntary.”

  4. mertensv16 says:

    You misrepresented the Grace Commission Report. See here for an discussion of what the Report really said: http://docs.law.gwu.edu/facweb/jsiegel/Personal/taxes/debt.htm

    The claim that “only those living on land owned by said government are also subject to its laws” is not the law. Article I, Section 8, Clause 1 of the Constitution provides that excises, imposts, and duties must be uniform “throughout the United States”. This clause would be meaningless if federal taxation applied only in federal territories. (Incidentally, uniformity in this sense means only geographical uniformity, so that the tax rate applied in New York must be the same as the rate applied in Georgia.) The applicability of federal tax law within the States is demonstrated by the Supreme Court’s upholding the Carriage Tax of 1794 as applied to a citizen of Virginia. See Hylton v. U.S., 3 U.S. 171 (1796).

    “Taxation on labor (income tax) was an unimaginable, unheard of kind of tax until the latter half of the nineteenth century.” Wrong. Britain had income taxes as early as 1799, and even before the Constitution 7 out of the 13 States imposed some form of income tax.

    “An 1883 Supreme Court decision, Butchers’ Union Co. v. Crescent City Co., 111 U.S. 746, cited that one’s labor was, in fact, one’s property.” Not quite. This case was an antitrust case having nothing to do with taxation, and the comment you refer to was the dictum of a single concurring Justice, not a holding of the Court.

    “The Pollock v. Farmers’ Loan & Trust Co.1895 Supreme Court decision against the Tax Act of 1894 determined it to be a direct-tax scheme and therefore unconstitutional. Given that taxation of real estate (personal property) was lawfully 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 exempt from the explicit tax powers of Congress granted in a portion of Article I, Sections 2 and 9 of the U.S. Constitution.” Completely wrong. The Pollock case recognized that a tax on pay-for-work was valid. The reason it struck down the 1894 Act was because (a) it felt that a tax on investment income was a direct tax that had to be apportioned, and (b) given the invalidity of a tax on such income Congress wouldn’t have intended for the tax burden to be borne by wage earners. Accordingly, the entire Act was invalidated.

    You misunderstand the Stanton case. That decision upheld the 1913 income tax as applied to the mining company. The portion you quoted is woefully incomplete and misleading. What the Court really said was that the 16th Amendment “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, and being placed in the category of direct taxation subject to apportionment by a consideration of the sources from which the income was derived,-that is, by testing the tax not by what it was, a tax on income, but by a mistaken theory deduced from the origin or source of the income taxed.” In other words, the 16th Amendment rejected the erroneous reasoning of the Pollock case, which had looked to the source of the income to determine whether the tax was a direct tax. Under the explicit language of the 16th, it doesn’t matter what the source of the income is – an income tax needn’t be apportioned.

    As far as the “no new power” dicta is concerned, the Stanton case is partially right, because Congress already had the power to impose an income tax: “The Sixteenth Amendment declares that Congress shall have power to levy and collect taxes on income, ‘from whatever source derived’ without apportionment among the several states, and without regard to any census or enumeration.’ It was not the purpose or the effect of that amendment to bring any new subject within the taxing power. Congress already had the power to tax all incomes. But taxes on incomes from some sources had been held to be ‘direct taxes’ within the meaning of the constitutional requirement as to apportionment. [cites omitted] The Amendment relieved from that requirement and obliterated the distinction in that respect between taxes on income that are direct taxes and those that are not, and so put on the same basis all incomes ‘from whatever source derived.’” Bowers, Collector v. Kerbaugh-Empire Co., 271 U.S. 170, 173-174 (1926).

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