"The power to tax involves the power to destroy."
– John Marshall (1819)
The
subject of this article mainly focuses on the power granted to the US Congress
to impose federal taxes. However, the problem that the author is trying to
answer is the lack of a clear standard for determining the controls of this
power, in addition to the lack of stability in the US Supreme Court’s
interpretation of this Congressional power. This led to a conflict in the
rulings of the US tax courts, even though it is common law system. Believing
that they are applying the taxation clauses that were settled by the US Supreme
Court, however, they were actually adopting new jurisprudence and viewpoints
far from the true vision of the Supreme Court, which led many of such cases to
be reviewed by the Supreme Court. In fact, this was expected since the taxation
clauses are deficient and do not include all cases of tax imposition that
Congress has under the powers granted to it by the Constitution.
The
importance of this article comes from the fact that the author analyzed the
rulings of the Supreme Court in interpreting taxation clauses, trying to deduce
the court’s policy in this regard, in order to help researchers’ legal
understanding in those clauses, because trying to understand these
constitutional provisions without knowing the Supreme Court’s policy in considering
tax cases and linking them to those clauses will be an incomplete and unclear
interpretation of future cases that may be presented to the Supreme Court.
The
government formed under the Articles of Confederation was not strong enough to
govern the new country. For example, it lacked an executive authority and a
court system that governs the entire country. It could not regulate interstate
commerce or tax states or state citizens. In addition, other countries were
always reluctant to trade with the Thirteen States because of the lack of a
unified tax system for all of them and the ambiguity of the trade and tax
powers of the Confederation.
However,
when the federal constitution was ratified, framers wanted to avoid all of
these problems, especially the trade and tax ones. They wanted to create a
clear tax system that would encourage other countries to trade with the United
States. Therefore, they granted Congress the power to impose taxes.
Article
I, Section 8, Clause 1 of the Constitution, which provides the basis for
constitutional authorization of the Congress to tax, states that: “The Congress
shall have Power To lay and Collect Taxes, Duties, Imposts and Excises, to pay
the Debts and provide for the common Defense and general Welfare of the United
States; but all Duties, Imposts and Excises shall be uniform throughout the
United States.” In this provision, framers determined the power of Congress to
impose and collect taxes, the ways in which taxes would be spent, and the
philosophy of tax collection. The first part of this clause is referred as
“Taxing and Spending Clause,” the second part, which describes expenditure
fields, is known as “General Welfare Clause,” and finally, the last part which
requires uniformity on imposing taxes, is known as “Uniformity Clause.”
In
addition to this clause, there is another constitutional provision which
controls congressional taxing power, which is the “Export Clause,” found in
Article I, Section 9, Clause 5. Noting that this clause is
distinct from the “Import-Export Clause” described in Article I, Section 10,
Clause 2, which restricts states’ taxing
power in favor of the federal government.
Executive
branch draws the foreign policy of the United States during both the state of
war and peace, it is a settled ruling in many Supreme Court decisions. Moreover, in some cases, the
Supreme Court provided immunization from judicial review for some executive decisions when the political question
doctrine applies. It is true that Congress has checks and balances instruments
in some matters of foreign affairs that limit President’s power in such
matters, such as “advice and consent” requirement, but President still holds the most
significant power in foreign affairs.
However,
the question here, is to what extent Congress has the power over imposing
taxes? And whether the Executive Branch has any power concerning that?
There
are four major limits on congressional powers over imposing taxes, these limits
will be discussed in details in Part III of this paper. Also, Article I
restricts Congress’s authority in spending, as gaining revenue is the major goal
of imposing taxes, such revenue must be spent to achieve definite goals, which
is paying the government’s debts, defending the U.S., and achieve general
welfare for the people.
Government
needs revenue to spend for its responsibilities, and the Constitution did not
provide enough clear words about the “welfare” that government should seek,
this makes sense because it is not in the functions of the constitution to do
so.
Issues
of applying Taxing Clause could arise when Congress passes a law with an
unconstitutional answer to the question of “why this subject is being taxed?”
Answer to this question is unconstitutional when Congress did not intend to
“pay the Debts and provide for the common Defense and general Welfare of the
United States” when imposing such taxes. The Supreme Court dealt with many
cases to interpret congressional intent of imposing taxes in definite subjects.
In
United States v. Butler, the Court found that Congress was trying to
control agricultural production by imposing tax on such activities, therefore,
the accepted spending categories does not exist. The Court did not ignore
Congress’s power on imposing tax, but it went through its intention to check
the “Spending Clause.” The court said that: “The Act invades the reserved
rights of the states. It is a statutory plan to regulate and control
agricultural production, a matter beyond the powers delegated to the federal
government. The tax, the appropriation of the funds raised, and the direction
for their disbursement, are but parts of the plan. They are but means to an
unconstitutional end.” When the Court made sure that such
tax was aimed for a different-unconstitutional goal, it declared its
unconstitutionality, which means that Taxing and Spending Clause checked by
courts was not just for making sure that the branch imposing tax is the
Legislative Branch, but rather, and properly most importantly, to confirm
Congress’s intention of such taxing.
Thus,
what did the framers meant by “general welfare”? The Court in Butler
never determined the scope of this phrase, indeed, it refused to do so by
stating that: “We are not now required to ascertain the scope of the phrase
‘general welfare of the United States’ or to determine whether an appropriation
in aid of agriculture falls within it,” instead, the Court adopted Justice
Story’s philosophy in his book “Commentaries on the Constitution of the
United States,” in which he adopted Alexander Hamilton’s position on such
matters in The Federalist; that the “power of Congress to authorize
expenditure of public money for public purposes is not limited by the direct
grants of legislative power found in the Constitution,” which leads that “general welfare”
is not limited to government’s duties as long as it satisfies welfare of the
United States. Also, the Court found that the general welfare is a
qualification to impose tax.
Thus,
the Court expanded the meaning of “welfare” without clearly identifying it. We
would never know why the Court in Butler did not mention categories of
the welfare to make it clear. Though the Court preserved to its authority of
judicial review, it threw the “task” of identifying welfare to Congress in each
coming Act, and satisfied in reviewing it to determine whether it was
constitutional or not.
Should
we go further on that? Could Congress have other motives by imposing taxes? Or
this should not be questionable because the Constitution provides unclear
phrase, and the Court never clearly interpreted welfare categories, thus, its
presumably that Congress imposes taxes just to achieve welfare for the United
States?
James
Madison answered “no” for the last question, he believes that taxing and
spending powers could be a governmental tool to “aid one religion over another
or to aid religion in general,” if the First Amendment was not existing. We can infer from this, that
Madison did not deny the possibility that the government may intend to achieve
private goals, and these goals in one way or another may not be aimed at
achieving the constitutional meaning of welfare.
Despite
Court’s judicial review power on reviewing each tax Act to confirm welfare requirement,
government could still use tax to affect activities that it cannot influence
using other constitutional ways. Focusing on Court’s decision in Butler,
we easily can notice that the Court adopted the theory that Constitution
granted Congress a broad authority to tax and spend for the general welfare by not identifying welfare
categories. However, that does not mean that spending power is unlimited, as mentioned above, the Court did
not deny its authority of reviewing Congressional taxing and spending purposes,
as Congress’s tax power is limited with the welfare scope, even the Court did
not intend to provide a lifelong meaning of this phrase.
In
1937, after one year of Butler, the Court decided in Sonzinsky v.
U.S., that the annual license tax imposed on dealers in firearms is
constitutional, because the court will not analyze Congress’s motives for
imposing such tax. In this decision, the Court
confirmed the rationale that it has established in Butler, and it did
not permit any type of control over Congress’s determinations of the general
welfare.
Moreover,
in South Dakota v. Dole, the Court held that Congress acted
constitutionally according to Welfare Clause when enacted legislation to
withhold 5% of the federal highway funds from the states did not adopt the Act
that prohibited people under 21 from drinking alcohol. Dole could be a logical
result of Butler, but more importantly, Dole is a recognizing of the
economic and political approaches that Congress may reach with its taxing and
spending power, as when Congress failed to achieve its goal directly, it used
its taxing power to force the states to follow its policy indirectly.
It
is surprising that despite the complexity of the U.S. tax code which is described
as a well-advanced code, the constitutional matters of taxes had not been
argued enough in the Supreme Court, this may be due to the fact that
the legislative policy, itself, now is differed from what it was in 1791
regarding imposing taxes, World War I and the ghost of World War II which
became true, made Congress to reconsider that the U.S. is in continuous need of
funding.
The
Sixteenth Amendment, which is known as the “income tax
amendment,” made it enough clear that tax on income is constitutional; in fact,
it expanded Congress’s taxing power. This Amendment passed by Congress
on July 2, 1909, and ratified on February 3, 1913, was important for the federal
government to lay income tax, as it overruled the Court’s decision in Pollock
v. Farmers' Loan & Trust Co., which recognized the right of individual
states to levy direct taxes, including income tax, in favor of the federal
government, which means that the federal government has to proportion its
income tax with the states’ government taxes.
Article
I of the Constitution stated that: “Representatives and direct Taxes shall be
apportioned among the several States which may be included within this Union,” in which the Court interpreted to
mean that federal government has no power to levy direct tax. Surprisingly, the Court ignored
the history of Articles of Confederation which did not vest upon the federal
government the power to impose taxes, and the need of the federal government to
solve this issue at first. Thus, the Sixteenth Amendment was literally the
constitutional tool that allows Congress to impose income tax.
After
the Sixteenth Amendment, the Court philosophy has been moved over to upheld tax
Acts unless there is a clear violation to the Constitution. Despite its holding
in Pollock, the author strongly believes that the Supreme Court was
looking for a constitutional provision like the Sixteenth Amendment to adopt
such rationale.
In
1916, Congress enacted the federal estate tax under the Revenue Act, and the
Court upheld this Act in New York Trust Co. v. Eisner, when the Court
recognized estate tax as a “duty or excise,” not as a direct tax under Article
I. Eight years later, in 1924, Congress enacted the federal gift tax in a way
to prevent individuals from avoiding estate tax.
It
is settled in Courts’ decisions that direct taxes should be apportioned among
the states and the federal government has nothing to do with it, but
incredibly, the Court recognized gift tax as “supplementary to the estate tax.”
Since
1916, it seems that the government has begun to sense the importance of funding
for military preparations for world wars. If business owners make profits from
their businesses, the government that has provided the business environment
conducive to such profits must have a share in these profits. Therefore,
legislators were certain that income taxes are the best source of public
revenue, especially since the federal government has provided a suitable
environment for capital owners to make these investments, and has clearly
created an ideal market by adopting commercial legislations that support the
system of economic liberalization.
We
cannot discuss congressional authority on imposing taxes without discussing tax
policies, which always have economic and political backgrounds. For example,
when President Trump administration was in charge and the Republicans had the
majority of the Senate, the Tax Cuts and Jobs Act (TCJA) were passed with the
highest deductions for business and a low tax rate for
corporations.
Another
example, the Court in National Federation of Independent Business v.
Sebelius held that “Congress may attach
appropriate conditions to federal taxing and spending programs to preserve its
control over the use of federal funds.” As in this decision, Court
declared that Taxing and Spending Clause empowers Congress to legislate the
individual mandate, but the Act was unconstitutional because it threaten the
states to “loss of their existing Medicaid funding if they decline to comply
with the [Act].” The Court believes that Congress
violated the Spending Clause by this. Although the majority thinks that the
reasons of passing the Act itself is constitutional.
The
administration of President Obama tried, through this Act that was passed by
Congress, to draw up a new social policy in the United States, but it failed in
making its implementation comply with the Constitution.
Most
recently, President Biden’s administration is trying to include minimum tax
rates on high wealthy taxpayers in budget proposal, “The tax would require that
American households worth more than $100 million pay at least 20 percent on
their full income, as well as unrealized gains in the value of liquid assets
like stocks.” President Biden wants to reduce
the national deficit after the increase in prices when the U.S. determined to
stop the commerce and business transactions with Russia because of its invasion
of Ukraine. Although one of the best methods to reduce the public deficit is to
reduce spending by reducing taxes not increasing it.
Taxes
have always been a tool for the federal government to draw the United States
policy, either when it comes to economy, politics, or even social issues,
Congress has an extraordinary power to affect all of such approaches just by
using taxes, although it is restricted with “general welfare of the United
States” objective in the Spending Clause.
As
a result, Congress’s main goal of imposing taxes is to gain revenue for the
federal government, but also Congress uses this power to regulate the private
conduct and influence private behavior. For example, aiming to reduce the
number of smokers by imposing a high sales tax on goods that contain nicotine.
The Supreme Court has no issue with that unless it found that Congress aimed to
issue a penalty on special group of people. In Bailey v. Drexel Furniture
Co., known as “Child Labor Tax Case,” the Court found that “the
so-called tax is imposed to stop the employment of children within the age
limits prescribed.”
We
now know that Congress imposes taxes under the constitutional provisions of
Article I and the Sixteenth Amendment, as such power should achieve welfare and
will be controlled under Taxing and Spending Clause. However, does the
Executive Branch has any role in imposing taxes? And if it does, will this role
be affecting the separation of power?
Congress
has many limitations on its taxing power, which the author will discuss in next
part, and the Executive Branch headed by the President has the power to
implement laws issued by Congress. In addition, the Executive
agencies may be authorized by Congress to issue regulations to implement the statutes.
It is not negotiable that such regulations should be compatible to the
statutes, and thus the executive power in this matter will be limited. However,
to what limit can the Executive Branch affect taxing decisions?
The
power to veto the bills passed by Congress under Article I is a significant method of checks
and balances for the Executive Branch to prevent a legislation, including tax
Acts, from passing through the Congress, especially when such Act passed at the
first time with a minimum required majority. However, veto is not a powerful
authority when Congress passed the bill with high majority (two-thirds or
more), because it will properly pass it again with the same majority and then
such bill becomes a law despite the President’s objection.
The
Executive Branch is responsible for running country’s projects, and it needs
suitable funds to do so. If the Executive Branch had no authority on funding,
it cannot do its work. Who would know the funding needed better than the branch
that will use it? Accordingly, who would know how should government gain such
funding better than government itself? Moreover, if Congress adopts this
philosophy, it cannot delegate the power of taxing and spending to the
Executive Branch because of nondelegation doctrine. Thus, how could the Executive
Branch play a role here?
The
author’s argument is not that the framers were wrong when authorizing Congress,
the power to tax, but could not find a rationale of not giving the Executive
Branch even a simple role in this whole process. Among the years, and
especially after World War II, Congress has agreed to resolutions authorizing
the use of military force in accordance with War Power Resolution. By such resolution, the Executive
Branch had broad powers regarding military operations. On the other hand, the
Executive Branch does not have similar powers regarding internal affairs, such
as funding, in which it needs.
The
Internal Revenue Code (I.R.C. of 1986) defines taxable income as the gross
income minus the deductions. Section 61 of I.R.C. defines gross
income as: “all income from whatever source derived, including (but not limited
to) the following items: (1) Compensation for services, including fees,
commissions, fringe benefits, and similar items; (2) Gross income derived from
business; (3) Gains derived from dealings in property; (4) Interest; (5) Rents;
(6) Royalties; (7) Dividends; (8) Annuities; (9) Income from life insurance and
endowment contracts; (10) Pensions; (11) Income from discharge of indebtedness;
(12) Distributive share of partnership gross income; (13) Income in respect of
a decedent; and (14) Income from an interest in an estate or trust.”
This
open definition of the gross income makes the Supreme Court role in defining
gross income essential. The Legislature did not, and could not, give a narrow
definition of gross income, and it has to say “not limited to” in the definition, because
taxpayers would find many categories that would not exactly fall in the
definition of Section 61. In fact, the Court decided in many cases to establish
new categories to be included in gross income inclusions, whereby it played the
role of the Legislature in adding them. While the Court decision is to
interpret the law, not making it, the author highly believes that Congress
itself intended to grant the Court such power due to the special circumstances
of business transactions and income related issues, which is described as
evolving and constantly changing.
While
the Constitution granted Congress the legislative power, and the Court’s decisions confirmed
the existence of nondelegation doctrine, could this be a constitutional
question of separation of powers?
U.S.
codes are abundant with sections in which Congress made the text opened and
broad, and this does not mean that Congress intended to delegate its power to
other branches of government including the Judiciary because it cannot. However,
the Court should not interpret the text very broadly violating the principle of
separation of powers at least, if not violating Congress’s intention.
In
fact, the Legislative Branch did well when passing Section 61 of the I.R.C. in
a “broad” meaning, and the Court never interpreted this section in an extreme
way, as the Court only responded to attempts to circumvent this text
reasonably. For example, in Gitlitz v. C.I.R., the Court stated that:
“excluded discharged debt is indeed an ‘item of income,’ which passes through
to the shareholders and increases their bases in the stock of the S
corporation.” In its decision, the Court based
on reasonable analysis of the I.R.C., more precisely, the Court tried to make
the category of income questioned before it to be fallen in one of Section 61
categories, as it said that: “Section 61(a)(12) states that discharge of
indebtedness generally is included in gross income. Section 108(a)(1) provides
an express exception to this general rule … If discharge of indebtedness of
insolvent entities were not actually ‘income,’ there would be no need to
provide an exception to its inclusion in gross income; quite simply, if discharge
of indebtedness of an insolvent entity were not ‘income,’ it would necessarily
not be included in gross income.”
Focusing
on Section 61 categories, it will be difficult to find a source of income that
has not been included among them. Even further, taxpayer needs to find an
exception in the code that makes such income excluded from her gross income. In Old Colony Trust Co. v.
Commissioner of Internal Revenue, the Court held that the tax paid by the
employer on behalf of her employee is considered an income to the employee, as
the Court said that: “The taxes were paid upon a valuable consideration,
namely, the services rendered by the employee and as part of the compensation
therefor.” As the Court determined that this
kind of income falls into the field of compensations.
In
fact, the Supreme Court made it clear, in Commissioner of Internal Revenue
v. Glenshaw Glass Company, that when Congress defined the gross income as
all sources of income except those excluded explicitly from the gross income. After Glenshaw Glass Company,
taxpayer cannot argue gross income inclusions or exclusions issues if she does
not claim it with a clear provision in the I.R.C. For instance, gross income
does not include the value of gifts and inheritance in which the taxpayer
received, but the income from such
properties is taxable.
Returning
to the basic question in this regard, has the role of Congress become
ineffective when determining gross income before Glenshaw Glass Company?
And if yes, did the Congress returned such power of determination after this
case? In fact, what really differed was the interpretation of the legal text,
which became broader after Glenshaw Glass Company. But as a result, the
power of determining what the taxable income is has shifted from both Congress
and the court’s interpretations to the Congress alone. The author believes that
this holding is a shift in the court’s view of taxes as a source of income, as
after World War II, the United States became the country where every business
dreamed to be established in. As a result, the U.S. needed a shift in its tax
policy, not just for domestic income, but for foreign income as well.
In
addition, among the years, Congress was fighting with the Executive Branch for
domestic and foreign relations powers, even such powers are separated in the
Constitution and interpreted by the Court, Congress needs to protect its high
influence at least inside the U.S., so it used the legislative power granted to
it by Article I to maintain such influence.
As
a result, Congress is the sole branch who determines what to tax; by tax Acts
passed by Congress, it can draw the financial policies of the country, because
the main source of the U.S. financial plan is revenue from taxes. On the other
hand, Court’s role is still important and needed as any other legal question,
because codes are designed to govern the majority of legal rulings, and the author
is satisfied to say that no code can cover every prospective dispute. However, this
is not to say that Courts make laws when there is no provision in the current
code to govern the dispute, courts cannot make laws, their role is to interpret
them, and in the previous prescribed situation, to find the best legal text
that applies, or to make their decisions based on the rationale of the current
code.
It
should not be surprising to state that codes are constantly evolving, and tax
legislation is not an exception, as Congress, of course, follows up on court
rulings and assesses the need for the legislations to be developed accordingly.
This does result in that the courts are affected by Congress’s legislations nor
determinations. Instead, Congress notices and follows the social, economic and
political changes, and accordingly draws its legislative policy.
Thus,
Court’s decisions regarding gross income inclusions could be described as a
policeman who control Congress’s taxing power, but biased towards its
legislative policy in determining whether such income is taxable or not. For
example, in Lyeth v. Hoey, the Court determined that in an inheritance
settlement agreement, the property received by the heir is considered
“inheritance,” even if such agreement violates the decedent’s will.
Last
but not least, when Congress enacted I.R.C. of 1986 (Tax Reform Act), it aimed
to “broaden the tax base,” means to make the majority of
income sources taxable. Thus, taxpayers may hardly argue the exclusion of their
income from gross income. Economically, it does make sense, because Congress
decreased tax rates after the 1986’s Act.
In
the previous part, the author discussed the main limitation on congressional
taxing power, which is a part of the Taxing Clause, or known as “General Welfare
Clause.” The author explained this limitation when he discussed the Taxing Clause
because it cannot be separated or understood without connecting it with the Taxing
Clause. In addition to this limitation, there are another three important
limitations connected to the congressional power on imposing taxes and
affecting it. First, the Origination Clause, in Article I, Section 7, Clause 1,
which states that: “All Bills for raising Revenue shall originate in the House
of Representatives; but the Senate may propose or concur with Amendments as on
other Bills;” Second, Uniformity Clause, the last part of the Taxing and Spending
Clause in Article I, Section 8, Clause 1, which states that: “all Duties,
Imposts and Excises shall be uniform throughout the United States;” and the
last one stated in Article I, Section 9, Clause 5, provides that: “No Tax or
Duty shall be laid on Articles exported from any State.”
As
we will discuss in this part, these limits would be effective in different and
special situations, in which congressional taxing power will face these limits
while Congress tries to use its power to force taxes, as the Framers intended
to use such limits as methods of separation of powers.
Article
I, Section 7, Clause 1, states that: “All Bills for raising Revenue shall
originate in the House of Representatives; but the Senate may propose or concur
with Amendments as on other Bills.” So, the questions that arise here are: What
are the “bills for raising revenue”? Are such bills limited to tax Acts? And
why did the Framers prevent the Senate from conducting such process alone? If
it is just a regular Act same as other Acts, why did the Framers create this
text and were not satisfied with the text of Article I, Section 7, Clause 2?
The
Framers were influenced by some features of the British system, in which it
gave the House of Commons this privilege because they are representing the
people and the money should be spent and collected within the people’s will. Thus, such bills are limited to and
confined to bills that levy taxes, and Framers set it in a separate
provision for historical reasons.
Thus,
if the Act intends to increase revenue in order to support government in
general, then it is a “bill to levy tax,” otherwise it is not, even the result
of any similar Act would be the same which is increasing revenue, but the Court
differentiates between Acts that mainly aim to increase revenue, and the Acts
that had an impact on increasing revenue but do not mainly aim to support
government, but to achieve different goals. For example, in U.S. v. Munoz-Flores,
the Court held that: “the special assessment statute does not violate the
Origination Clause because it is not a “Bill for raising Revenue.” Court’s determination was based on
the function of the statute which was governing any person convicted of a
federal crime and did not aim to increase revenue at first.
Thus,
a “bill for raising revenue” could exist when there is a governmental project
that needs money and the government needs to raise revenue to support such a project. On the other hand, other bills,
which create revenues in different circumstances, are not included in this
clause.
Basically,
this clause does not restrict Congress’s taxing power as a whole, it is just
organizing the process for definite sorts of tax Acts, in which it requires
such Acts to originate in the House and not the Senate. In Millard v.
Roberts, the Court held that the bill that “enjoins the Treasurer of the
United States from devoting public funds to the purposes authorized by
congressional legislation for the elimination of grade crossings and for a
union railway station in the District of Columbia” is constitutional because it
did not aim to raise revenue as a main goal.
Whatever
Framers intended from such clause, even if they put it in the constitution for
historical purposes, as stated above, this clause organizes the taxing process
and limits the process that Congress may follow while practicing its taxing power,
and it does not, limit its taxing power or eliminate its taxing scope. In fact,
Courts did not struggle in testing tax bills when testing the Origination Clause,
as it does not impose any burden in congressional taxing power, thus, the Court
was testing the taxing procedures by examining Congress’s intention, which is
not hard to know in this case.
The
federal tax system, as a part of the federal system, aimed to motivate foreign
nations to conduct trade and business within the United States. Of course, the
trade and business transactions were existing during the confederation, but
foreign nations were hesitant and afraid of conducting business under the
confederation due to the different tax treatment within the states.
A
need of a “uniformity” in tax treatment was essential in the new federal
system, because foreign investors and businessmen wanted to feel safe and equal
when starting business with any state. In fact, we can easily say that without
the Uniformity Clause, the federal system would be useless and not different
from any confederation union.
The
Uniformity Clause requires a uniform tax treatment for the states in different
tax matters, which will lead to equality in collecting taxes to all U.S.
persons (citizens and permanent residents), by preventing the Legislature from
preferring one taxpayer over another. In specific, it targets high-wealthy
taxpayers from having special credits that low-income taxpayers would not have.
How could Congress achieve uniformity in tax? And what is considered as a
violation for this clause?
Speaking
broadly, the Uniformity Clause prevents states from “discriminatory actions by
the national government,” but does that mean that Congress
has to devise a tax that falls equally or proportionately on each state in
order to conform with the Uniformity Clause? If not, when will the tax be
constitutionally “uniform”?
If
the Uniformity Clause prevents Congress from distinction between similar taxpayers,
how could it determine the subject of each tax? In addition, there are some
“geographically isolated problems,” that require Congress to make special tax
treatment; if the Uniformity Clause prevents Congress from organizing all of
this, how could it, effectively, practice its taxing power under the Taxing and
Spending Clause?
In
U.S. v. Ptasynski, the Court held that: “the [Uniformity] Clause does
not require Congress to devise a tax that falls equally or proportionately on
each State.” In Ptasynski, the Court
referred to its decision in Edye v. Robertson, in which it declared that
tax is uniform according to Uniformity Clause “when it operates with the same
force and effect in every place where the subject of it is found,” which means that federal tax Act
that applies in different states is uniform even if it determined group of
taxpayers, as long as such Act applies to all taxpayers (or taxable activities)
that share the same characteristics.
Imagining
the opposite, if the U.S. Constitution did not adopt the Uniformity Clause,
Congress will be able make different tax act for every state, which means the
same situation of the confederation. Although the Court neither in Edye nor
Ptasynski, discussed the effect or determined how could tax have “the
same force,” as its rationale targeted the characteristics of such taxable
activity. Despite this, the author believes that economic impact of the same
tax rules, may differ in similar economic jurisdiction, this could happen when
one state, for example, has faced a natural disaster, or a sudden increase in
demand due to special social events, in which at least theoretically, it could
exist in a state and not exist in another; in such event, the “same force test”
may not be effective.
Clearly,
the author believes that such test is not the best way to describe the
“uniformity,” as the Supreme Court failed to develop a clear jurisprudence with
such limit, because it has failed in determining the role of the Uniformity Clause
in the constitution’s strategy, as stated above, to improve the
economy and promote the free market economy for the federal union.
Still,
the court followed a reasonable rationale when it declared that Congress may
decide, based on geographically isolated problems, the frame of the tax, and
that will not violate the Uniformity Clause as long as there is no “actual
geographical discrimination.” Moreover, it is true that the Uniformity
Clause prevents Congress from distinction between similar taxpayers, but it
“does not prevent [it] from defining the subject of a tax by drawing
distinctions between similar classes.”
In
fact, the Uniformity Clause requires Congress to treat the same “geographically
isolated problems” at the same treatment, but it does not prevent it from
recognizing such geographical difference, otherwise, it could affect the
economy and commerce itself by applying same rules for different economic
circumstances, which could lead to a recession or inflation in states that differ
in economic characteristics. The Supreme Court could have been clearer and more
daring in reining in the Congress taxing power.
This
confirms that the Court supported in its rulings throughout the twentieth
century a broad congressional authority to impose and collect taxes. In fact,
the federal government was fully aware of the importance of money in that
bloody century that brought two world wars and many American wars, during which
the American government needed money to confront its enemies. As the court was
somewhat illogically shy, from applying the Uniformity Clause in its extreme
shape, although it does not make sense to understand this clause without being
applied in extreme due to the historical necessity of equality in tax
treatment. The author does not mean that the Court should always stuck down any
tax act, because that will violate the Taxing and Spending Clause itself, but
he argues that this was last followed in the same text with the Uniformity Clause,
which means that they may not be read separate. As a result, federal business
transactions are governed under one federal tax system, in which such system should
achieve equality.
Congress’s
power on taxing is clear in Article I, Framers intended to grant Congress such
power for many reasons, as we described above. However, Framers were aware of
the importance of separation of powers along with checks and balances, as a
result, they establish the federal government in its three branches to work
together with limits on their powers.
Export
Clause provides another limit on Congress’s taxing power. As stated in Article
I, Section 9, Clause 5, that “No Tax or Duty shall be laid on Articles exported
from any State.” This clause is different from Import-Export Clause in Article
I, Section 10, Clause 2, which limits states’ power on laying imposts or duties
on imports or exports. As this clause (Import-Export Clause)
curbs state’s protectionism in favor of the Congress.
Basically,
Export Clause prevents Congress from imposing taxes on exports during the
course of exportation. Clearly, the tax imposed by
Congress on exports is unconstitutional, whether it discriminates against
exports or not. Moreover, the phrase “exports” includes services and activities
that is closely related to exportation process. More precisely, whatever the
Congress called such tax, goods cannot be taxed once they enter the course of
exportation, but the prohibition includes taxes
not fees on exports during the course of exportation, as the difference between
tax and fee is clear, courts can identify each one’s characteristics to
determine the nature of such duty. Thus, Congress may impose taxes on
goods before they enter the course of exportation, but cannot do so after that.
In
1996, Export Clause came under the limelight again, while congressional taxing
power could be described as “plenary” after the historical Supreme Court
decision in Butler. In fact, the Judiciary regained its “actual” judicial
review power over congressional taxing power after its decisions in U.S. v.
International Business Machines Corp. [hereinafter, IBM case] in
1996, and U.S. v. U.S. Shoe Corp. [hereinafter, Shoe case] in
1998. In these two cases, the Court recognized that despite the Framers knew
that the federal system is necessary instead of the confederation for the
uniformity of taxes with respect to foreign nations, they also intended to
create some limits on Congress’s taxing power.
In
IBM case, the Court held that the tax imposed by the federal government
on IBM’s insurance premiums remitted to foreign insurers is unconstitutional
and violates the Export Clause. In its holding, the Court said: “the Export
Clause does not permit assessment of nondiscriminatory federal taxes on goods
in export transit.” In fact, the Court had previously
ruled that the tax imposed on exports during the course of exportation is
unconstitutional based on Export Clause, so what makes this decision
exceptional?
IBM
case’s Court said
that: “[Export Clause] prohibits Congress from regulating international commerce
through export taxes,” as the Court struck down
government’s attempt to narrow the scope of the Export Clause, instead the
Court held that despite the Framers intention of the Export Clause to “narrowly
alleviate the fear of northern repression through taxation of southern exports
by prohibiting only discriminatory taxes,” the Framers created this clause in
a broad language because they aimed to “alleviate
their concerns by completely denying to Congress the power to tax exports at
all.”
By
such declarations, the Court in IBM case, aborted any possibility of
governmental attempt to argue that Export Clause could allow government in any
way to impose tax on exports during the course of exportation. In fact, the
Court’s use of these “extreme” expressions, aiming to prevent any future
governmental arguments, was necessary in this case, as if government could have
succeeded in narrowing the scope of the Export Clause, then Congress would,
literally, have no actual limitations on its taxing and spending power.
In
addition, in Shoe case, the Court struck down the harbor maintenance tax
ruling that it is unconstitutional because it violates the Export Clause. More
importantly, the Court confirmed that the language of the Export Clause applies
to taxes imposed during the course of exportation, but it does not include fees
or other duties that could be imposed on goods before or during the exportation. In its 1875 decision, Pace v.
Burgess, the Court distinguished the differences between tax and fee and determined what is considered
as fee. The fee, unlike a tax, is “(1) proportional to the government services
or benefits received by the payor and (2) not determined solely on an ad
valorem basis.”
The
Export Clause aims to “encourage industry and competition,” as investors always look for the
best friendly tax environment to conduct their business. Without limiting
Congress’s taxing power of imposing taxes on exports, investors would be
considering moving their business outside the United States to get rid of such
heavy duty, it is not just a matter of international trade encouragement, in
fact, it is a matter of U.S. domestic economy in the first place.
The
separation of powers is the main question when it comes to the powers of one of
the three branches; however, the issue of the limitations of such powers
remains essential. As Congress has broad taxing powers and the Supreme Court
affirmed this rationale in many cases, it also confirmed that there are
some limits that constrain Congress’s taxing power to ensure good economic
performance.
Congress,
alone, has the power to levy taxes, and such power is faced with basic
limitations headed by the Export Clause, which is considered as the last line
of defense in front of Congress’s broad taxing powers. This clause prevents
Congress from taxing exports during their course of exportation.
Court’s
language in IBM case and Shoe case was clear enough to notice
that such limitation on congressional taxing power cannot be overruled because
it is in consistence with the Framer’s intention. However, the concern in Shoe
case was about the difference between the fee and the tax, as Congress may
impose fees on goods during the course of exportation, and the Court in Pace
provided a test for such distinguishing, despite this, the question still
exists of whether the federal government could pass a legislation that imposes
a duty which is tax in its economic nature but considered as a fee for
constitutional purposes.
The
author believes if the Supreme Court were clearer in setting up the rules of
Congress tax powers, such debate will not be raised, but making it hard for tax
courts and Congress and even for the Supreme Court itself in the future reviews
made it unclear. The author believes that the Supreme Court should find a more
accurate interpretation and more easy linking of the taxation clauses in order
to define a clear taxing power of the Congress.
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Biden to Include Minimum Tax on
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Judicial
Review of Congressional Power to Tax under U.S. Constitution: Tensions between
Framers’ Intent and Imperatives of Reality
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