The Constitution, Article I, section 9, clause 4, requires that a “direct tax” must be apportioned among the states by population. Elizabeth Warren has proposed an annual wealth tax, reaching the rate of 3% of wealth for those who have more than a $1 billion of wealth.
Warren’s wealth tax would be constitutional. The defining characteristic of a “direct tax,” according to the Founders, is that it is the kind of tax in which apportionment among the states by population would be appropriate and reasonable. If apportionment among the states by population is not appropriate and reasonable, the tax is not a direct tax.
The original meaning of “direct tax” was a tax directly on states, that is, requisitions. The term “direct tax” expanded, as language often expands, to include the kinds of state taxes that could be used to satisfy state requisitions. But if a tax could not be reasonably and appropriately apportioned among states by population, the tax does not sufficiently resemble a state requisition and so the tax is not direct. Thus, for example a tax on imports was not a direct tax because it could not be known in which state the goods would settle and which state should get credit in its quota under a requisition. Excises, duties and carriage taxes were once considered direct taxes because they were part of the system of requisitions upon the states, but they were excluded from the definition of “direct tax” once it was known that they did not have the necessary reasonable and appropriate apportionability.
Today, apportionment of a wealth tax by population is not reasonable or appropriate. Wealth per capita in poor Mississippi is just over half of wealth per capita in rich Maryland. Apportionment by population would mean that tax rates in Mississippi would have to be almost twice the rates in Maryland. The result has no policy justification, but would simply arise by necessity from the fact that Mississippi is such a poor state that is has so little tax base over which to spread its quota. Because apportionment would not be reasonable, a tax on wealth today would not be viewed as direct using the Framers’ original reasoning.
The direct tax regime was created originally to apportion taxes to reach the relative wealth of the states. Under the Articles of Confederation, the Congress could not tax any individual or transaction. It could raise revenue only by requisitions, direct taxes on the states. The Articles of Confederation determined state quotas according to the value of real estate and improvements within the state. Pennsylvania put in assessments, however, that cut its quota in half. The other states thought that Pennsylvania was cheating, trying to pay less than its fair share.
In 1783, Congress proposed to amend the Articles by using the population of the states to determine state quotas for requisitions. Population was thought at the time to be at least a rough measure of the relative wealth of the states. People move to the cities and fertile farm land where wealth is to be had, so the more people a state had, the wealthier the state would be. In allocating state tax between Philadelphia and the rest of Pennsylvania or between Boston and the rest of Massachusetts, the Framers found, it made no substantial difference whether the state used population or real estate value. Because states could and would cheat on real estate valuations, population was the best estimate the Founders had for relative wealth. The Founders abhorred the idea of a head tax, or an equal amount of tax on each person, as manifestly unjust. The 1783 proposal was not an attempt to require head taxes as a way of raising revenue, but rather to create a system that would reliably reach wealth of the states.
There was a hard fight in 1783 between North and South as to how much slaves contributed to wealth. The South argued that slaves contributed only half as much as free persons did to a state’s wealth, as demonstrated by the fact that wage rates in the South were half of wage rates in the North. The North argued that slaves contributed at least what free persons did to a state’s wealth because free northern farmers did not continue to work following the first freeze and northern women did not work in the fields.
The 1783 proposal compromised by counting slaves at three-fifths of a person, both sides despairing of doing any better. The whole 1783 proposal was ultimately vetoed by New York for an unrelated reason—that the proposal would have also imposed a federal customs duty, called the “impost.” Even so, the 3/5ths ratio was carried over into the Constitution as a measurement of wealth, because it was a settled compromise between North and South over an intensely fought issue—how best to measure state wealth.
The term “direct tax” was coined in these debates over the 1783 proposal to amend the Articles of Confederation. Direct taxes were taxes imposed directly on states, that is, requisitions. The only indirect tax in the 1783 proposal was an impost or custom duty on imports. The Congress viewed the impost as “indirect” because nobody knew in which state the imported goods would settle; hence it could not be determined which state should get credit toward paying its requisition quota.
Over time, the term, “direct tax,” expanded, as flexible language often expands, to include the state taxes (other than their imposts) that could be used by the states to satisfy a requisition upon the state. Commonly “direct tax” referred to all taxes on dry land, that is, everything but the imposts. In 1796, the Treasury made an inventory of “Direct Taxes” to prepare for a proposed requisition; this was just an inventory of the existing state taxes that would be used to satisfy the requisition. In the debates on constitutional ratification, the speakers could not accurately list all the state taxes, even for their home state, but they did know the functional definition that direct taxes were the taxes that were part of the requisition system.
In these debates, however, “direct tax,” never included taxes that could not be reasonably apportioned among the states. The whole point of a direct tax was that it was useful for a requisition. The first example of a tax that could not easily be apportioned by state was the impost tax, but, the idea of a indirect tax was consistently employed to refer to all taxes that were effectively non-apportionable.
Take the example of carriage taxes at issue in the 1796 Supreme Court case of Hylton v. United States. Under Hamilton’s hypothetical, New York had 10-times as many carriages per capita as Virginia. Virginia rates on carriages under a rule of apportionment by population therefore would have to be 10-times higher than N.Y. rates because Virginia had too few carriages. Carriage taxes were a common colonial luxury tax—and they had been listed as a direct tax on the Treasury inventory. But requiring apportionment in this case, and imposing 10-times higher taxes in Virginia was absurd. The carriage tax would have made no sense if it had to be apportioned by state population.
Hylton shows that the idea of a direct tax was about functionality, not formalism. It was generally agreed that apportionment would be unworkable. Did this mean that the tax was therefore unconstitutional because it was not apportioned? No—it meant only that the tax was not direct! As Justice Chase’s opinion put it, “the Constitution evidently contemplated no taxes as direct taxes but only such as Congress could lay in proportion to the census. The rule of apportionment is only to be adopted in such cases where it can reasonably apply.” (emphasis added). As Justice Iredell put it, “[a]s all direct taxes must be apportioned, it is evident that the Constitution contemplated none as direct but such as could be apportioned.” The Hylton rationale with the most "cogency and force," as Justice Joseph Story put it, was that "no tax could be a direct one, in the sense of the Constitution, which was not capable of apportionment according to the rule laid down in the Constitution." Because a tax on carriages could not be reasonably apportioned, that meant that it was not a direct tax as a matter of law.
Each of the Justices in Hylton had participated actively in the originating debates on apportionment and each contributed at least a few paragraphs to the historical record. They were the Founders, still walking upon this Earth. They knew the history.
Perhaps even more powerful than the Supreme Court in defining “direct tax,” is that the good sense reflected in the plain English language enforced apportionability as the defining characteristic of direct tax.
Early in the ratification debates, important speakers like Brutus and the Federal Farmer used “excises” and “duties” as examples of a direct tax — they would be used by the states to satisfy requisitions and they were not indirect imposts. John Taylor of Caroline argued before the Supreme Court in Hylton that the carriage tax was a direct excise tax.
But treating excises and duties as apportionable was impossible, once the Constitution was adopted. The Constitution clearly states that excises and duties must have uniform rates across all states. One cannot simultaneously comply with uniform rates in all states and also apportion the tax by state by population (counting slaves at three-fifths). The task is impossible, and would mean that there could never be a constitutional excise or duty! One should not interpret the plain language of the Constitution to demand an impossible result. Hence excises and duties could not be “direct” taxes. Excises and duties ceased to be referred to as direct taxes once the ordinary speaker of the English language realized they could not be apportioned.
In 1783, of course, many speakers assumed that taxes on real estate or wealth could be reasonably apportioned. In the 1783 proposal, population was used as a substitute for real estate values as a measure of the relative wealth of the states. Since state population was used as a measure of state wealth in the proposal, the assumption was that wealth per capita would be equal among the different states.
The Constitutional Convention in Philadelphia debated whether votes in the House should be apportioned by wealth or by population. There was a large but minority contingent at the Convention who believed that apportionment should be by wealth, first because wealth would contribute to war, and second, because those who owned the country should run it. The dispute between those who believed that the House should represent wealth and that the House should represent people was settled on the assumption that the wealth and population of states would always be the true measure of each other. For this reason, it is fairly common for debaters to speak of taxes on real estate or wealth tax as direct because it was generally assumed that the value of real estate or total wealth would be proportionate to population in the various states.
This seems strange to us today, but there is good reason to think that it was once a reasonable assumption, especially during the Founding period. Under that assumption, any federal wealth or real estate tax would obtain revenues from each state roughly proportional to that state’s population (as measured by the 3/5ths formula). To be sure, the South and North would disagree about the formula. The South would insist that 3/5ths rule overcounted, while the North would insist that it undercounted wealth But if the population and slave count were sufficiently correct, state requisitions would produce the same result as a federal real estate tax.
Madison told Hamilton when Hamilton was appointed as the first Secretary of the Treasury that we needed a federal real estate tax before “preoccupancy by the states became an impediment.” Hamilton did not take up the suggestion, but the Constitution allowed it if he had.
But at some point in history, real estate and wealth taxes ceased to be direct taxes because they could not reasonably and appropriately reflect apportionment by population. Mississippi now would have tax rates, under apportionment, that would be twice the rate in Maryland because Mississippi is roughly half as rich and that is not appropriate or reasonable. Without the characteristic of reasonable and appropriate apportionability, wealth and real estate taxes cannot be direct.
The point of the Constitution was not to make taxes impossible, but to make them functional and easy to collect. The Constitution was adopted to replace the Articles of Confederation because states had ignored their supposedly mandatory calls for requisitions. The Founders were desperate. In the next and inevitable war, the Congress would need to borrow again. It had to maintain payments on the war debts. No fatal restrictions on tax revenue could be appropriate, as Hamilton argued, because emergencies calling for more tax revenue “cannot be fixed or bounded, even in imagination.” The idea that Congress wanted to prevent itself from raising federal taxes when it needed them badly misunderstands what the Constitution is about.
To be sure, the Anti-Federalists opposed a federal direct tax—by which they meant a dry land or internal tax other than the impost. In fact, opposition to a federal direct tax was the topic most popular to the opposition. Future President and anti-Federalist James Monroe declared that to render the Constitution safe and proper, he would take away one power only – “I mean that of direct tax.” But Anti-Federalist opposition to direct taxes had no influence on the Federalists—or on the constitutional text. The Federalists were not about to limit the taxing power by getting rid of the possibility of levying direct taxes. As Washington explained to Jefferson in far-off Paris, if the new Congress was not to have the direct tax, how was it to repay the war debts and redeem the Congressional honor? If it did not have the direct tax, the country might as well revert to the confederation form.
Over the next hundred years after Hylton, the Supreme Court held that a tax on wealth, on income, and on the principal and income of insurance companies were constitutional because apportionment of those taxes by state population was not reasonable. Treating reasonable and appropriate apportionability as the defining characteristic of direct tax was settled doctrine, and, moreover, it had strong roots in the Founders’ understandings.
If you know nothing about the history or original function of direct tax, then it is easy to misinterpret Article I, section 9, clause 4’s requirement of apportionment by population. One might conclude that taxes must collect the same amount of tax per person in each state (and originally only 3/5ths of that amount from slaves). That ignorant misreading makes it sound like the direct tax is protecting wealth from an assault by tax. That was not the Framers’ purpose. By the Gilded Age, however, protecting wealth from taxation seemed like a good idea for the 5 justices in the 5-4 majority in Pollock v. Farmer’s Trust in 1895. The majority held that the 1894 income tax was unconstitutional.
We now have access to better history than Pollock had. Apportionment is a system to reach wealth, not to protect it. It is not an individual right against taxation but a means of collecting taxes on wealth that were originally collected through state requisitions. The rules regarding direct taxation were never intended as an impediment on the taxing power of the United States.
Pollock is also a condemnation of close reading of the text as a sufficient ground for constitutional adjudication. Every reading of the text, ripped from its historical rationale, infuses more of the concerns of the reader a century or more away and less and less of the original system. To the Pollock majority of 5, the income tax was an assault on wealth that the requirement of apportionment would protect us from. In fact, once you understand the history, apportionment was adopted to reach the wealth of the states, not to protect wealth from taxation. Constitutional interpretation requires a careful excavation of the original program and how it functions, which destroys the Pollock interpretation.
In any case, Pollock is now confined to the dustbin of history. The Supreme Court itself thereafter creatively distinguished Pollock for every tax that came before it, including taxes that were obviously aimed at wealth. The 16th Amendment, endorsed by two thirds of the Congress and three quarters of the states, put the final nail in Pollock’s coffin.
The Founders believed in the wealth tax. Apportionment was designed to reach wealth by taxing states according to a proxy for relative wealth, using the best measurement of wealth that was then available. To turn a requirement designed to make it easier to tax wealth into a rule exempting wealth from taxation is to turn the Founders’ meaning upside down.
Calvin H. Johnson is John T. Kipp Chair at the University of Texas Law School. You can reach him by e-mail at CJohnson at law.utexas.edu