The United States Constitution allows only two types, or classes, of taxes to be used. They are Direct Taxes and Indirect Taxes.
In this article I will explain what the two types are and why the Constitution limits taxation to only these two classes. In later articles I’ll dive deeper into each class of tax and give you a much deeper breadth of knowledge of them.
To talk about any taxation in the United States we need to start with the United States Constitution and see what it says about taxation.
Article 1, Section 2, Clause 3
Representatives and direct taxes shall be apportioned among the several states which may be included within this union, according to their respective numbers, which shall be determined by adding to the whole number of free persons, including those bound to service for a term of years, and excluding Indians not taxed, three fifths of all other Persons.
Article 1, Section 8, Clause 1
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;
Article 1, Section 9, Clause 4
You undoubtedly noticed that the above clauses make no mention of Indirect Taxes. This is because anything that isn’t a Direct Tax is “by nature” an Indirect Tax.
[T]axation on income [is] in its nature an excise… – Unanimous U.S. Supreme Court in Brushaber v. Union Pacific R. Co., 240 U.S. 1 (1916)
This is what Black’s Law Dictionary, 2nd Edition, says about Direct and Indirect taxes:
One which is demanded from the very persons who it is intended or desired should pay it. Indirect taxes are those which are demanded from one person in the expectation and intention that he should indemnify himself at the expense of another.
A capitation is “a poll tax; an imposition which is yearly laid on each person according to his estate and ability.”, according to the Bouvier’s Law Dictionary, 6th Edition (1856). It is a type of Direct Tax.
Now, all Federal Direct Taxes have to be apportioned among all the states of the Union according to their population as taken by the census. The Federal government collects the taxes directly from the states and the states decide on how they want to collect the taxes from their citizens. This has happened at least two times in our history: once in 1798 to raise two million dollars and again in 1813 to raise three million dollars.
Apportionment simply means that every state will pay it’s share of the tax burden based upon it’s population numbers in proportion to the total national population. The Framers put this limitation into place so that Congress couldn’t favor one state over another when they wanted to raise extra funds via a Direct Tax.
Indirect Taxes are imposts, duties, and excises. They are generally funded by someone other than the person who is required to pay the tax. They can be laid upon the purchase of an optional article, such as alcohol and tobacco. The seller is responsible for sending in the tax but they pass the cost on thru to the person buying the item. The Federal Gas tax is another example of an Indirect Tax – though I would argue that gasoline for my vehicle that I need to drive to work in is NOT an optional purchase, but that is an argument for a later time.
The Federal Income Tax is also an Excise tax. You can read more about that here.
Now you know the only two classes of Constitutionally legal taxes are Direct and Indirect. You also have learned that the Income Tax is in the Indirect class and is known as an Excise Tax. Take your newfound knowledge and impress everybody around the water cooler at work with it. Share it on your social media accounts and be the talk of the town.
If you have read this far then you might also be interested to know how some everyday common words such as “employee”, “employer”, “US Person”, “wages”, “trade or business”, and “taxpayer” have a completely different and critically important definition in the tax laws. You can read about it here: Federal Income Tax – Terms of Art.