Income Tax Case, 1895

Sources

Taxes in History. The Constitution forbade Congress to tax land or people unless the taxes were apportioned according to the population of each state. Before 1913 all federal revenue came from tariffs on imports, excise taxes, or selling of public land. In the 1790s Congress had taxed carriages, but the Supreme Court ruled that it was not a direct tax, but an excise tax. During the Civil War, the United States government needed to raise money and taxed the incomes of professionals, such as lawyers, who earned over $1,000 each year. This tax lasted until 1872, and in 1881 the Supreme Court ruled that it had been constitutional.

Changing Circumstances. In the 1870s and 1880s agitation grew for a new tax on incomes. In the 1780s most Americans lived on farms and could not measure annual income in dollars. One hundred years later the economy had changed. The disparities of wealth between the rich and poor had grown, and it became obvious to some that while land had been the real source of wealth in the 1780s, by the 1880s wealth was measured in other ways, for instance in stocks or bonds. In 1894, with the nation’s economy ruined by a depression, Congress passed the Wilson-Gorman Tariff, which placed a 2 percent tax on incomes from stocks, bonds, and rents of more than $4,000.

Proponents of the Tax. The Populist Party made an income tax central to its platform. Sen. William Wilson sponsored such a tax after the sugar trust blocked his proposal to lower the tariff on sugar. Wilson was dismayed that his fellow senators speculated in sugar • company stocks while they debated the sugar tariff, and he argued that “the question is now, whether this is a government by the American people for the American people, or a government of the sugar trust for the benefit of the sugar trust.” Alabama congressman Milford Howard denounced this kind of corruption and warned of a coming war between large capitalists and the people. ; “If constitutional methods will not avail, this continent will be shaken by a mighty revolution . . . The spirit of avarice is devouring the heart of this nation.”

Arguments Against the Tax. On the one side, proponents of the tax saw it as a weapon against concentrated wealth. On the other side, opponents saw it as the first step toward communism. President Grover Cleveland, who thought a small tax on corporate investments might not be harmful, did not want to associate himself with this tax and so let the Wilson-Gorman Act become law without signing it. Almost immediately opponents of the tax challenged the law. Charles Pollock, a Massachusetts investor, sued the Farmers’ Loan & Trust Company, claiming that the company should not have paid the tax out of money he had invested in it. Joseph Choate, a leading constitutional lawyer, joined former senator George Edmunds in arguing against the tax, claiming that it was “communistic in its purposes and tendencies.” Their main arguments were:

1. The tax was actually a land tax because it taxed income from real estate. Therefore it could not be levied unless it was apportioned among the states;
2. It was not a uniform tax because it was only on incomes above $4,000;
3. The taxing of income from state and municipal bonds was the same as the federal government taxing states or towns.

Counterarguments. In response, Attorney General Richard Olney and lawyer James C. Carter argued that the tax had not been levied on land, and so was not a land tax, though it was a tax on income from real estate. It was no different from the tax on carriages that the Court had affirmed in 1796. The tax did not destroy wealth but was an attempt by the majority to get wealthier people to pay their fair share. The 2 percent of the people being taxed derived about 50 percent of the income. The tax was not an assault on them but merely an attempt by 98 percent of the people to stop the minority’s assault on them.

The Two Decisions. The Supreme Court handed down two decisions in Pollock v. Farmers’ Loan & Trust Company. Justice Howell Jackson had been too ill to listen to the arguments or participate in the decision in April 1895, when six justices found the real estate portion of the tax unconstitutional and two found it constitutional. The eight members of the Court could not reach an agreement on the taxes on personal property. Jackson recovered enough to listen to arguments, and the Court heard the case again in May. This time, five judges found all aspects of the tax unconstitutional. Chief Justice Melville Fuller spoke for the majority in both cases. Fuller hoped to avoid the political question of whether an income tax was desirable and merely focus on the constitutional question of whether Congress could levy such a tax. Fuller thought the answer to each question was “no,” but he tried to make clear he was only answering the second question. Other justices were not so careful to separate their political views from their constitutional interpretations. “Where is the course of usurpation to end?” Justice Stephen Field asked. “The present assault upon capital is but the beginning. It will be but the steppingstone to others, larger and more sweeping, till our political contests will become a war of the poor against the rich.”

The Dissenters. No member of the court was in favor of a class war pitting the poor against the rich. But four members dissented from the majority’s decision. Justice John Harlan warned that the majority’s decision threw the country back to its condition in the 1780s, before the Constitution was adopted, when the federal government relied on the goodwill of the states for its revenue. “I cannot assent to an interpretation of the Constitution that impairs and cripples the just powers of the national government in the essential matter of taxation, and at the same time discriminates against the greater part of the people of our country.” Justice Jackson called the decision “the most disastrous blow ever struck at the constitutional power of Congress.” Justice Edward White deplored the decision as a return of “a long repudiated and rejected theory of the Constitution” that deprived the government of its necessary power to tax. Justice Henry Brown said that the charges of socialism raised by the tax’s opponents were a smokescreen, since socialism would not be established by taxing “people in proportion to their ability to pay.” Seeing the case “fraught with immeasurable danger to the future of the country,” White concluded, “I hope it may not prove the first step toward the submergence of the liberty of the people in a sordid despotism of wealth.” Congress continued to rely on tariffs for revenue until 1913, when the Sixteenth Amendment to the Constitution was

ratified, giving Congress the power to levy taxes on incomes.

Sources

James W. Ely Jr., The Chief Justiceship of Melville W. Fuller, 1888-1910 (Columbia: University of South Carolina Press, 1995);

Lawrence M. Friedman, A History of American Law (New York: Simon & Schuster, 1985);

Tinsley E. Yarbrough, Judicial Enigma: The First Justice Harlan (New York: Oxford University Press, 1995).