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December 12, 2017

Constitutional Taxes: What is an Indirect Tax


I’m going to talk a bit more in-depth about Indirect Taxes. To get a primer on what type of taxes are allowed by the Constitution read Constitutional Taxes by yours truly.

Okay, let’s jump in to the most interesting of the Indirect Taxes – Excises. An Excise is a tax on a profitable privileged activity. It is a “give me my piece of the pie” tax. Excises tax privileged activities which are associated with the receipt or transfer of property. An Excise Tax is a Privilege Tax:

The terms “excise tax” and “privilege tax” are synonymous. The two are often used interchangeably. – American Airways v. Wallace 57 F.2d 877,880

Excises are taxes laid upon the manufacture, sale or consumption of commodities within the country, upon licenses to pursue certain occupations and upon corporate priviliges. …the requirement to pay such taxes involves the exercise of privilege… – U.S. Supreme Court, Flint v. Stone Trace Co., 220 U.S. 107 (1911)

According to Article 1, Section 8, Clause 1 of the Constitution, all duties, imposts and excises shall be uniform throughout the United States. This limitation was put in to keep the federal government from potentially taxing items that are used only, or far more commonly, in any specific area of the country, which would then bear a disproportionate share of the burden of maintaining the national government. Alexander Hamilton wrote about what he called “equilibrium” in Federalist #21:

Imposts, excises, and, in general, all duties upon articles of consumption, may be compared to a fluid, which will, in time, find its level with the means of paying them. The amount to be contributed by each citizen will in a degree be at his own option, and can be regulated by an attention to his resources. The rich may be extravagant, the poor can be frugal; and private oppression may always be avoided by a judicious selection of objects proper for such impositions. If inequalities should arise in some States from duties on particular objects, these will, in all probability, be counterbalanced by proportional inequalities in other States, from the duties on other objects. In the course of time and things, an equilibrium, as far as it is attainable in so complicated a subject, will be established everywhere. Or, if inequalities should still exist, they would neither be so great in their degree, so uniform in their operation, nor so odious in their appearance, as those which would necessarily spring from quotas, upon any scale that can possibly be devised.

It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue. When applied to this object, the saying is as just as it is witty, that, “in political arithmetic, two and two do not always make four.” If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.

The best example we have in the United States of an Excise Tax is the Income Tax. But wait you argue, the Income Tax is a Direct Tax because it comes directly out of my wallet.

Our Income Tax does NOT tax the property that is called “income” but it is the privileged activity which produces the “income” that is taxed. The “income” is purely a measure of the value of that activity.

The income tax is, therefore, not a tax on income as such. It is an excise tax with respect to certain activities and privileges which is measured by reference to the income which they produce. The income is not the subject of the tax: it is the basis for determining the amount of tax. – F.  Morse Hubbard, Treasury Dept. legislative draftsman. House Congressional Record March 27th 1943, page 2580

When a court refers to an income tax as being in the nature of an excise, it is merely stating that the tax is not on the property itself, but rather it is a fee for the privilege of receiving gain from the property. The tax is based upon the amount of the gain, not the value of the property. – John R. Luckey, Legislative Attorney with the Library of Congress in “Frequently Asked Questions Concerning the Federal Income Tax” (C.R.S. Report for Congress 92-303A (1992)

This is where so much confusion comes in regarding the Income Tax, but it isn’t your fault for not knowing the truth. The Federal Government and others that have much to gain from the public’s ignorance of the true nature of the Income Tax has been methodically brainwashing us for more than 70 years. And it worked and worked really well. In fact, it continues to work…

In a 1941 report titled “Collection at Source of the Individual Normal Income Tax” it was noted that,

For 1936, taxable income tax returns filed represented only 3.9% of the population.

Those who filed would have included all normal federal workers, ATF license holders, PWA workers, and so on along with a few misled private people. The same report says,

The largest portion of consumer incomes in the United States is not subject to income taxation. Likewise, only a small proportion of the population of the United States is covered by the income tax.

Did you get that? In 1936 the vast majority of Americans still understood that they were not liable for any income tax. Again, this is a story for another article.

Now you have some deeper knowledge of what an Indirect Tax is and that the Income Tax belongs in this category.

~Patrick

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