What follows is a transcription of the
house record. Thanks to whomever put this scan on the internet:
|After a lapse of about a
quarter of a century, Congress again
passed an income-tax law. The act of 1894 provided for a tax to
levied, collected, and paid "from and after" January 1, 1895, "and
until the 1st. day of January 1900" (sec. 27) Like the Civil War
it provided that the tax should be based on the "income received in the
preceding calendar year." Although the Supreme Court held this portion
of the act to be unconstitutional, it still recognized that the income tax was in
essence an excise tax.
The Court said that a tax on income from business,
standing by itself, would be
valid as an excise tax;
but the tax on investment income was held to be invalid because the
Court regarded a tax based on income from property as a tax on the
property itself and therefore a direct tax which must be apportioned
among the States (Pollock v. Farmers Loan and Trust Co. (1895)).
Excise tax and privilege tax are
synonymous. The "employments"
referred to are "privileged" employments.
|The Court said that to
sustain a portion of the tax while declaring the
rest invalid, "would leave the burden of the tax to be borne by
professions, trades, employments, or vocations; and in that way what
was intended as a tax on capital would remain, in substance, a tax on
occupations and labor. We cannot believe that such was the
of Congress". So the entire portion of the act relating to income tax
was declared invalid.
That would be "privileged" occupations and labor.
|There are still those who
think that in this case the Court went
further than necessary in treating a tax based on income from property
as a tax on property itself, and that in any event the excise-tax
principle should have been applied to rents and other investment
income, as was done under the Civil War acts. In other words, the
making and holding of investments, while perhaps not technically a
business, is, at least, a kind of activity
which can properly be subjected to an excise tax
reference to the income
A "Return on Investment" tax
- "a tax based on income from property".
Returns on investment is a privilege, thus a tax on such privilege is
an "excise" (privilege) tax.
|That investment income may be included as a part of the
basis for measuring
an excise tax was
recognized by Congress in the act of August 5, 1909. This act
provided, "That every corporation
* * * shall be subject to pay annually a special
excise tax with respect to the
carrying on of doing business by such corporation,
* * * equivalent to a 1 percent upon the entire net income over and
above $5,000 received by it from all sources during such year,
exclusive of amounts received by it as dividends upon stock and other
corporations * * * subject to the tax hereby imposed; * * *."
corporations, such as religious, charitable, and educational
organizations, etc., were specifically exempted from the tax.
As noted on the previous
page, a corporate dividend is a "return" on the "investement" of
capital used in purchasing corporate stock shares.
|The tax imposed
by this act was really an income tax in that it was based upon
income, but was given the correct designation of "excise tax".
It was imposed
with respect to carrying on or doing business;
and it should be noted that the basis was net income from all sources,
except dividends from other corporations subject to the tax. Such
dividends were excepted not because they constituted investment income
but because they represented income which had already been taxed.
The sole test of taxability under
this act was whether a corporation was engaged in business.
it was so engaged,
all the income
(except dividends), including
investment income, was
used in measuring the tax.
The Supreme Court held that the fact that the tax was measured by net
income, and that income from
nontaxable property or property
not used in business was
included in computing net income, did not prevent the tax from
being construed as an excise tax
which did not require apportionment. Flint v. Stone Tracy Co. et al.
"The sole test of taxability under this act
was whether a corporation was engaged in business" which is the
end result of my examination of the Flint v. Stone Tracy, Stratton's
LTD. v. Howbert, and Doyle v. Mitchell Bros cases.
|So far as the objections
raised in the Pollock case are concerned, the principle applied to corporations
under the act of 1909 with the approval of the Supreme Court might have
been extended to individuals engaged in business. In that way investment
of individuals as well as corporations could doubtless have been
brought under the terms of the act. And the field of income could
been completely covered by applying the principle that ownership and
management of investment property is an activity or privilege
respect to which Congress may impose
Return on investment. Gain or profit from invested property.
|However that may be,
Congress chose to remove all doubt by an amendment
to the Constitution. The resolution embodying the proposed
was deposited in the Department of State on July 31, 1909, a few days
before the act of 1909 was approved by the President. The
was duly ratified and became effective as the sixteenth amendment on
February 25, 1913.
What has not been covered is
that the 1894 Tax Act attempted to tax returns on investment. In
the Pollock v. Farmer's Trust case, the Supreme Court in effect,
said that to tax the return on investment is the same as to tax the
investment and such a tax is a Direct Tax, and the tax in question was
not laid according to the rule of
Whether the amendment was duly ratified
THE LAW THAT NEVER WAS is a book written by a person that is alleged to
have investigated the issue and found irrefutable proof that Philander
Knox, then a Cabinet Secretary, is just as crooked as today's
|The sixteenth amendment
authorizes the taxation of income "from
whatever source derived" -- thus
taking in investment income --"without apportionment among the
several States." The Supreme Court has held that the sixteenth amendment did not extend the taxing power
of the United States to new or
excepted subjects but merely removed the necessity which might
otherwise exist for an apportionment among the States of taxes laid on income
whether it be derived
from one source or another. So the amendment made it possible to
bring investment income within the scope of a general income-tax law,
not change the character of the tax. It is still fundamentally an excise or duty with respect
to the privilege of carrying on any activity or owning any property
which produces income.
This ties up a set of loose
ends that will be addressed on the following page.
|The income tax is,
therefor, 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
they produce. The
income is not the subject of the tax: it is the basis for determining the amount of tax.
income is not the subject of the tax: it is the basis for determining
the amount of [excise or privilege] tax.
What privilege do you
exercise when you receive compensation
My original source of page
2580 is a jpeg scanned image. If you
want to copy and save that jpeg image click here. Opens in
a new window. Just close it when you are done.
I have a second source of
page 2580. This second source also contains pages 2579 & 2581.