The recent message of the President to the Congress has strikingly
brought to the attention of the American public the subject of
graduated or progressive taxation upon inheritances and incomes. Acting
upon the suggestions contained in the message, bills providing for such
taxes have already been introduced in the House of Representatives.
Amendments to the Constitution have also been proposed, one of which
is to authorize Congress to tax inheritances amounting to or exceeding
$50,000 and to levy an income tax without apportionment. The pending
bills provide that successions of $10,000 and under and incomes of
$4,000 and under are to be wholly exempted from the proposed taxes. The
proposed graduated scales are to run from three-quarters of one per
cent. on inheritances or successions over $10,000 and not exceeding
$25,000 up to twenty-five per cent. on inheritances or successions
exceeding $30,000,000, and from two per cent. on incomes exceeding
$4,000 per annum and not exceeding $8,000 up to six per cent. on all
incomes over $64,000. It is also suggested that Congress by means of
such taxes should seek, not merely to raise revenue for the support of
the national government, but also to solve social problems by breaking
up fortunes assumed to be swollen to an unhealthy size and thus bring
about a redistribution of wealth.
In considering these proposed measures, it should be borne in mind
that, if they or any similar propositions become laws, the result will
be--and such undoubtedly is the intention--to exempt the majority of
property owners from this form of taxation and to cast the burden
upon a very small minority. It should also be realized that this
proposed progressive taxation, particularly as to inheritances, is
conceded to be only a first step, and that increases in the scale of
progression are contemplated and will certainly follow. Indeed, the
President declares that "at first a permanent national inheritance tax
... need not approximate, either in amount or in the extent of the
increase by graduation, to what such a tax should ultimately be." As
the states have full power to levy taxes on inheritances and at the
present time are deriving probably as much as $10,000,000 per annum
from this source, it must be manifest that, if the scale adopted by
Congress be high, the resources of the states will be correspondingly
curtailed. In case of conflict, national taxes would take precedence
over state taxes. We should also bear in mind that the power to tax is
the strongest of all governmental powers, that it involves the power to
destroy, that it generally knows no limitation except the discretion
and moderation of the lawmakers, and that of all powers it is the one
most liable to abuse.
From the time of the Declaration of Independence to the present hour,
the distinctive feature of the American system of government has been
equality before the law, not merely equality of rights but equality
of duties and equality of burdens. Equality has been demanded in all
things including especially taxation. The few exceptions in taxation,
particularly in times of war, do not affect the general rule that has
been followed. The courts have declared that according to American
ideals "common justice requires that taxation, as far as possible,
should be equal." Experience has shown that the only effectual
protection against injustice and discrimination in taxation lies in the
observance of some rule of equality and apportionment; and, although it
is true that absolute equality is not always attainable, nevertheless
an approximation to equality should be regarded as indispensable. As
Hamilton said, "The genius of liberty reprobates everything arbitrary
or discretionary in taxation." And Judge Cooley in his famous work
on "Constitutional Limitations" said: "It is of the very essence of
taxation that it be levied with equality and uniformity, and to this
end, that there should be some system of apportionment. Where the
burden is common, there should be common contribution to discharge it.
Taxation is the equivalent for the protection which the government
affords to the persons and property of its citizens; and as all are
alike protected, so all alike should bear the burden, in proportion to
the interests secured."[60]
In proportional or equal taxation, whereby every property owner
contributes toward the expenses of the common government according to
the amount of property he owns or inherits, or according to the income
he enjoys, we find a perfectly safe and consistent rule and a definite
and logical principle upon which to work. Proportional taxation
subjects to the burden of government fairly and equally all property
owners without distinction and without discrimination. Nothing is left
to mere discretion or to the play of arbitrary and irresponsible power,
and no class is likely to be unjustly singled out or discriminated
against. Where property is as generally distributed as it is in this
country, a proportional tax ordinarily reaches in one form or another a
majority of the constituents of those who vote the taxes, and the sense
of responsibility to these constituents operates as a conservative
force and as a check upon unfair and unjust taxes, as well as upon
improvident and extravagant expenditures. A proportional tax generally
creates a large body of tax-paying voters whose property interests
impel them to watch their representatives closely and to hold them to
strict accountability. We then have taxation in its practical operation
going hand in hand with representative responsibility, which was the
cardinal principle for which our War of Independence was fought.
A legislator who is conscious of the fact that a large, if not a
controlling, number of his constituents will feel the burden of any tax
he votes, is necessarily more careful, more prudent, more economical
and more inclined to be just than if no such sense of responsibility
exists.
On the other hand, where the great majority of voters are to be
exempted from taxation, and where, accordingly, they will feel that
they have no personal interest in governmental expenditures, they
will be likely to take little or no pains to see that there is a
fair apportionment of taxes which others must pay, or any economy in
governmental expenditures for which others must provide. Their sense of
justice and civic duty will become blunted. It will follow that, if the
lawmakers are at liberty to enact laws which exempt the great majority
of their constituents from taxation and cast the burden and expense
of government on the few rich, frequently less than two or three per
cent. of the voters in their respective districts, there will exist
no practical restraint upon expenditure, but, on the contrary, every
temptation to extravagance, wastefulness and injustice.
A graduated or progressive tax is necessarily arbitrary, for there
is no definite rule or principle to apply to the scale. The rate,
reasonable at first, may ultimately become confiscatory. There is
nothing to check or stop the ascending scale. One act of injustice will
lead to another. The appetite will grow and produce fresh injustice. If
a tax of twenty-five per cent. on large fortunes now seems to some but
a moderate beginning, where will the tax stop, and who is to determine
what is or is not reasonable and beyond what point a legislative body
shall not go? A few advocates of progressive taxation have already
suggested fifty per cent. as a maximum applicable to the so-called
surplus of large fortunes, but others more radical and less responsible
may readily advocate a tax of one hundred per cent. upon the surplus
they regard as superfluous or unhealthful. There is, indeed, no limit
to the possible ascent in the scale of progression, and no power to
prevent abuse and oppression on the part of temporary and irresponsible
majorities. The rich would then be completely at the mercy of mere
numbers.
During the French Revolution, the experiment was tried under the name
of compulsory loans. These loans finally absorbed fifty per cent. of
such incomes as the majority of the legislative assembly saw fit to
consider as _abondants_, and one hundred per cent. of all incomes which
they thought were _superflus_.
The late W.E.H. Lecky, one of the most eminent historians of our day,
wrote as follows of progressive taxation in his work on "Democracy and
Liberty": "When the principle of taxing all fortunes on the same rate
of computation is abandoned, no definite rule or principle remains. At
what point the higher scale is to begin, or to what degree it is to be
raised, depends wholly on the policy of governments and the balance
of parties. The ascending scale may at first be very moderate, but it
may at any time, when fresh taxes are required, be made more severe,
till it reaches or approaches the point of confiscation. No fixed line
or amount of graduation can be maintained upon principle, or with any
chance of finality. The whole matter will depend upon the interests
and wishes of the electors; upon party politicians seeking for a cry
and competing for the votes of very poor and very ignorant men. Under
such a system all large properties may easily be made unsafe, and
an insecurity may arise which will be fatal to all great financial
undertakings. The most serious restraint on parliamentary extravagance
will, at the same time, be taken away, and majorities will be invested
with the easiest and most powerful instrument of oppression. Highly
graduated taxation realizes most completely the supreme danger of
democracy, creating a state of things in which one class imposes on
another burdens which it is not asked to share, and impels the state
into vast schemes of extravagance, under the belief that the whole cost
will be thrown upon others."
In McCulloch on "Taxation," for fifty years the standard treatise in
England on the subject, the following language is used: "It is argued
that, in order fairly to proportion the tax to the ability of the
contributors, such a graduated scale of duty should be adopted as
should press lightly on the smaller class of properties and incomes,
and increase according as they become larger and more able to bear
taxation. We take leave, however, to protest against this proposal,
which is not more seductive than it is unjust and dangerous.... If it
either pass entirely over some classes, or press on some less heavily
than on others, it is unjustly imposed. Government, in such a case, has
plainly stepped out of its proper province, and has assessed the tax,
not for the legitimate purpose of appropriating a certain proportion
of the revenues of its subjects to the public exigencies, but that it
might at the same time regulate the incomes of the contributors; that
is, that it might depress one class and elevate another. The toleration
of such a principle would necessarily lead to every species of abuse."
The well-known French political economist and scientist Leroy-Beaulieu
in his works, _Traité d'Economie Politique_ and _Science des Finances_,
discusses at length the whole subject of graduated or progressive
taxation, and condemns it as vicious in theory and unwise and unjust in
practice. Among other things he says: "Progressive taxation constitutes
actual spoliation. It violates, besides, the rule, established by all
civilization, that taxation ought to be imposed with the full consent
of the taxpayer; for, it is quite clear, that in this case, it is
the mass of the voters who relieve themselves of the heavy weight of
the tax and cast it upon the few, and these few do not consent, even
tacitly, to the excess with which the government wishes to burden
them. When the rate of the tax is equal for all, we can consider that
the vote for the tax by the legislature carries with it the implied
acquiescence of all the assessable; otherwise not.... Every system of
progressive taxation, however attenuated, is iniquitous and dangerous."
And the same conclusions have been reached by a number of other
distinguished French scholars and statesmen, among whom may be cited
Thiers, Beauregard and Stourm.
The right of the states to levy progressive and unequal taxes on
inheritances and testamentary dispositions is frequently sought
to be upheld upon the theory that the power of our legislatures
over successions to the property of decedents is unlimited, that
the right to succeed is a mere statutory privilege, and that our
lawmakers may arbitrarily grant or withhold that privilege at their
will and discretion. It is, however, far from established that
any such arbitrary and unrestrained power is vested in our state
legislatures as that of denying wholly the right of inheritance or
of testamentary disposition, or of discriminating in the regulation
or grant of the privilege. The power to regulate the exercise of any
right does not necessarily imply the power to deny it altogether.
All rights of property as well as of personal liberty are subject to
reasonable regulation, but this does not involve the power absolutely
or arbitrarily to destroy such rights. The right of inheritance by
children was not originally the creation of statute law at all,
although the contrary is often assumed. It was a customary right long
before the Conquest and prior to any statute of which we have record.
It is treated by legal historians as "our common law of inheritance."
In the latest authoritative history of the English law, that by Pollock
and Maitland, the authors say that "in calling to our aid a law of
intestate succession, we are not invoking a modern force," and that
"the time when no such law existed is in strictest sense a prehistoric
time." We find that it was a right already established in every one of
the thirteen original states at the time the national government was
founded; that it has always existed in civilized countries, so far as
we have any knowledge; that it was recognized in the Twelve Tables as
a right among the Romans; that it was a right long before among the
Egyptians, and that it pervades the Mosaic law. A distinguished writer
declares it to be the general direction of Providence itself. And
Chancellor Kent said that "nature and policy have equally concurred to
introduce and maintain this primary rule of inheritance in the laws and
usage of all civilized nations."
The power of testamentary disposition undoubtedly developed
as a limitation upon the right of inheritance and in order to
prevent escheat for want of heirs. But however originating or
evidenced--whether in old customs or in the practice of _post-obit_
gifts--the right has been recognized from time immemorial. As
Blackstone said in his "Commentaries," "in England this power of
bequeathing is coeval with the first rudiments of the law, for we have
no traces or memorials of any time when it did not exist."
Whatever may be the general language to be found in some judicial
decisions, and whatever may be the extreme power of our state
legislatures in the abstract, it is hardly conceivable that any state
would attempt to escheat or confiscate all the property of decedents to
the exclusion of children and near relatives, or that it would wholly
deny the right of testamentary disposition. At any rate, if escheat or
confiscation were ever decreed, it would have to be by laws applying
equally to all decedents, and not merely to a selected class. The
guaranties of the fourteenth amendment would prevent any discrimination.
But, however unlimited the power of the states may be in this regard,
there can certainly be no doubt that it was not the intention of
the framers of the Constitution of the United States to delegate to
Congress the power to regulate successions to the estates of decedents
or the privilege of testamentary disposition or inheritance. No one has
yet seriously claimed that any such authority is within the legitimate
sphere of the national government as contemplated by its founders.
The power of regulating successions to the property of decedents was
reserved to the states, and the courts would undoubtedly hold that any
direct attempt on the part of Congress to regulate successions as such,
or the ownership or transfer of property, was in excess of its powers.
In dealing with successions, therefore, Congress can only exercise the
power of taxation.
Yet it is urged that, as Congress has the power to tax successions, it
may under the guise of exercising that power regulate inheritances and
thereby break up large fortunes and force a redistribution of wealth.
In other words, the argument is that Congress may, under the cover or
pretense of a tax law, accomplish indirectly an object which, for want
of power, it could not accomplish directly, although the accomplishment
of this object would constitute a deliberate encroachment upon the
reserved rights of the states.
There is great danger in this view, and it opens the door to abuse by
Congress of the power of taxation. If a federal statute purports on
its face to be a tax measure, and in fact to some extent operates to
that end, the courts cannot ordinarily set it aside, even though the
motive for its enactment be to accomplish an object not entrusted to
the national government. The jurisdiction of the courts is limited.
Legislation which seeks to effect illegitimate ends cannot always
be nullified. The power of Congress to levy a graduated inheritance
tax as a revenue measure would be practically unlimited unless,
in the particular instance, the law were so extravagant, and its
unconstitutional object so plain, as to establish beyond doubt an
unauthorized purpose. It is not within the province of the judicial
power to determine whether a given tax which raises revenue is
reasonable or unreasonable, or to inquire into the motives of Congress
in enacting the law. The courts might not, therefore, be able to set
aside an inheritance tax law passed by Congress even if it absorbed
fifty per cent. or more of successions, although it might be quite
apparent that the real object of the law was to invade the province
of the states and to regulate inheritances in clear violation of the
spirit of the Constitution.
Nothing could be better calculated ultimately to undermine our whole
system of constitutional government than the idea that the courts alone
are the guardians of the Constitution and that Congress may rightfully
enact any statute which the courts cannot properly nullify. The truth
is that the duty of preserving and defending the Constitution in all
its integrity is vested in Congress and the President far more than in
the courts, and that if Congress and the President do not observe the
restraints and limitations imposed by the Constitution, Congress may
pass many statutes which are unconstitutional in substance but which
the courts cannot set aside. It is often urged that all questions of
constitutionality should be left to the courts and not be passed upon
by Congress or the President. The true doctrine, however, is that
Congress should not enact and the President should not approve any
statute which they, as the agents and representatives of the people,
are not satisfied seeks to accomplish a legitimate end within the scope
of some power delegated to Congress and not reserved to the states or
to the people. They should first determine, as their oath of office
requires, whether, according to their best judgment, the act is or is
not constitutional. It was the distinct intention of the framers of
the Constitution, and they so provided in express words, that every
member of Congress, every senator and every representative, should be
bound by oath or affirmation to support the Constitution, and that the
President, especially, should be charged with the duty of preserving,
protecting and defending it to the best of his ability. This duty
extends not only to the letter but to the spirit of the Constitution.
It will be a lamentable exhibition of a lack of what may well be
termed constitutional morality if, in the debates on the pending
measures, we shall again hear the suggestion that objects concededly
outside the scope of any power delegated to the national government
may nevertheless be accomplished indirectly by means of a federal
inheritance tax, in violation of the reserved rights of the state
governments.
If, in framing an inheritance tax law, Congress will bear in mind
that the regulation of successions to the property of decedents is a
matter solely within the jurisdiction of the states and ought not to
be usurped by the federal government, the object of raising revenue
alone may lead to fair and reasonable taxes levied impartially upon
all who should be called upon to pay for the support and maintenance
of the common government whose protection they enjoy. It would then,
perhaps, be better appreciated that the states have important and
extensive governmental functions to perform; that they need inheritance
taxes for the support of their governments, schools, charities, police
and public improvements, and that any heavy federal succession taxes
would embarrass and cripple them. It is, of course, one thing to
resort to a federal inheritance tax as a temporary war measure, when
patriotism inspires ready acquiescence and willing sacrifice, and
quite a different thing to establish such a tax as a permanent method
of raising national revenue in times of peace and prosperity when the
effect may be to withdraw that source of revenue from the states.
The subject of federal income taxes remains to be considered. There is
no doubt that any state may levy income taxes. Nor is there any doubt
that, under the federal Constitution as it now stands, Congress may
levy an income tax provided it be apportioned according to population
as required in regard to all direct federal taxes. There is also no
doubt that Congress, by means of an excise tax, may reach income
derived from any business or profession, and that any such tax, being
essentially an excise tax on business, need not be apportioned but
need merely be uniform throughout the United States. For example, a
tax on the earnings of railroads and manufacturing businesses could be
levied without apportionment, and it would produce a large revenue. It
would also have the advantage of tapping income at the source. A tax by
Congress on lands and personal property as such would, no one disputes,
be a direct tax and subject to the rule of apportionment, and a tax on
the income of property is in substance and practical and legal effect
the equivalent of a tax on the property itself.
As Chief Justice Fuller said in the Income Tax cases: "The acceptance
of the rule of apportionment was one of the compromises which made the
adoption of the Constitution possible, and secured the creation of that
dual form of government, so elastic and so strong, which has thus far
survived in unabated vigor. If, by calling a tax indirect when it is
essentially direct, the rule of protection could be frittered away, one
of the great landmarks defining the boundary between the nation and the
states of which it is composed, would have disappeared, and with it one
of the bulwarks of private rights and private property."[61]
Nor is the rule of apportionment in itself unfair, even under the
conditions existing to-day. If a direct income tax were now levied and
duly apportioned among the states according to population as required
by the Constitution, the smaller states would pay comparatively
little and the more populous and richer states would have to bear
what would seem to be their full share of national taxation. New
York would then have to pay approximately ten per cent. of such a
tax, Pennsylvania eight per cent., Illinois six per cent., Ohio five
per cent., whilst Nevada would pay only one-twentieth of one per
cent. and Delaware one-quarter of one per cent., although these two
states have a representation in the Senate equal to that of New York
and Pennsylvania. Indeed, ten states would have to pay more than
one-half of any direct tax, leaving the balance to be divided among
the remaining thirty-six states according to their population. On the
other hand, if a graduated income tax such as is now proposed were
levied without regard to apportionment, and all incomes of $4,000 and
under were exempted, the effect would be to cast more than ninety per
cent. of the entire tax upon the inhabitants of less than one-third of
the states.
Nearly twelve years have passed since the decision of the Income Tax
cases, and there has been ample time to amend the Constitution if
the people had so desired. But, instead of submitting an amendment
such as was introduced in the House of Representatives last week, it
is suggested by some that an attempt should be made to disregard or
circumvent the Constitution as interpreted by the Supreme Court and to
speculate on the change of its personnel and the chance of different
views on the part of new incumbents. Surely, the simpler and wiser
course would be to ascertain the wishes of the people in the manner
provided by the Constitution. Assuming, as is so frequently asserted,
that the people generally want a federal income tax, ratification of an
amendment can be readily secured. The Congress, by a vote of two-thirds
of both houses, can at once propose the necessary amendment, which will
become effective when ratified by three-fourths of the states. The
ratification can probably be secured in less than six months if there
really exists any general sentiment in favor of such an amendment, for
more than three-fourths of the state legislatures meet this winter. If
deemed necessary, conventions could be called to meet within a few
months. In any event, the delay ought not to exceed fourteen months.
No student of our institutions can doubt that amendments to the
Constitution will soon be thought necessary, and that such amendments
will be submitted to the people. Our political system has not ceased
to grow. Conditions are constantly changing, and powers which were
adequate for the government of a federation of agricultural states may
become insufficient for the necessities of the national government of a
highly commercial and manufacturing people, with world-wide interests.
Mr. Root's eloquent speech last night before the Pennsylvania Society
has shown us how inevitably and irresistibly we are tending toward
centralization. But it is mischievous and dangerous for the people to
be taught that there is great or insurmountable difficulty in securing
amendments to the Constitution in order to supply its defects or to
meet changed conditions and that they must therefore accomplish their
wishes by indirect means or by perverting delegated powers. The future
contentment of the American people requires that they shall feel that
they may readily, and are at liberty to, amend their organic law
according to their mature judgment whenever they deem it necessary to
do so. All that can be asked is that they shall act deliberately in the
manner provided by the Constitution and under circumstances calculated
to afford time and opportunity for error to be exposed, for theorizing
and clamor and prejudice to exhaust themselves and "for the sober
second thought of every part of the country to be asserted." If, then,
it be determined to give to the national government the power to levy
income taxes without apportionment, or to control successions to the
estates of decedents, or any other power, the will of the sovereign
people will have to be obeyed. But let us hope that when amendments are
adopted they will be conservative and wise, that the reserved powers
of the states will not be heedlessly curtailed to the embarrassment of
the states, and that it will be appreciated that local self-government
is still essential to the perpetuation of our republican and federal
institutions.