Special Issue 2014, Vol. 108, No. 3
Although it can seem paradoxical today that the federal government redistributes from “blue” states where majorities are tolerant of federal taxation to “red” states where they are hostile, the rhetoric was more straightforward in the politics surrounding the adoption of the Sixteenth Amendment a century ago. In fact, Southerners and Westerners demanded the adoption of the federal income tax for the obvious reason that it would benefit their constituents. By exempting income taxation from the apportionment rule that the Constitution specifies for “direct taxes,” the Sixteenth Amendment allowed Congress to tax in proportion to the distribution of income rather than the distribution of population. Because of the lopsided geographical distribution of income at the time, this procedure generated lopsided contributions from the high-income states of the Northeast, particularly New York. Yet some Southerners also thought the income tax was potentially dangerous because it would strengthen the federal government, with results that could potentially threaten their oppression of African Americans (disfranchisement, segregation, and rampant lynching). White Southerners worried about the safety of white supremacy in their debates with each other about whether to ratify the Sixteenth Amendment. In the end, however, they ratified enthusiastically, not only because they knew that their states would benefit, but also because they believed, correctly, that Northerners had lost interest in attempting to protect the rights of African Americans. Thus, this milestone in the history of taxation exemplified the irony of the Progressive Era.
This Article argues that, if the United States was going to have a workable, national income tax, the Sixteenth Amendment was legally and politically necessary in 1913, when it was ratified, and that the Amendment remains significant today. The Amendment provides that “taxes on incomes” need not be apportioned among the states on the basis of population, as would otherwise be required for direct taxes. An apportioned income tax would be an absurdity, and, without the Amendment, Congress could not enact an unapportioned tax on income from property, the sort of tax that was struck down by the Supreme Court in 1895 in Pollock v. Farmers’ Loan & Trust. The Pollock result was changed by the Sixteenth Amendment, but the core of the case has not been overturned. Indeed, in 2012, in National Federation of Independent Business v. Sebelius, Chief Justice Roberts favorably cited Pollock on a constitutional issue. All of that is to say that, without the Sixteenth Amendment, an unapportioned national tax on the income from property would continue to be invalid today. The Amendment is also important for what it does not say. It provides no protection for an unapportioned national tax on property if the tax is not treated as one “on incomes.” Such a tax on property would therefore be subject to the apportionment rule and, as a result, would make the tax difficult, and perhaps impossible, to implement.
Conservative tax arguments have been remarkably consistent in substance, style, and method for almost a century. Substantively, their tax policy consists of three claims: (1) an economic one that low taxes encourage economic growth and prosperity for all, (2)a legal– constitutional one that excessive federal spending and heavy taxes unbalance our federal form of government at best, and at worst unconstitutionally violate state rights, and (3) a patriotic claim that high tax-and-spend policies are un-American. This third, patriotic, claim is a major factor in conservatives’ remarkable success in selling their policy to the public and in the current political stalemate about taxation. The emotional aspect of patriotism inhibits rational discussion and limits the range of politically feasible solutions. This Article suggests that if conservatives would focus on their two substantive points, they would help create an atmosphere more conducive to the thoughtful tax discussion the country requires.
The Article illustrates conservatives’ consistency with an examination of the linked battles concerning income tax reduction and a veterans’ bonus that occurred between 1924 and 1936. This period had much in common with the present, including (1) the growth of government, (2) increased knowledge about human behavior, (3) the development of new mass media, (4)the use of the new media by organizations to disseminate their viewpoints to the public, (5) increased lobbying (at least partially due to the other factors), and (6) mounting concern that the lobbying was distorting the political process. Commentators, then and now, have noted that some organizations purporting to be broad-based civic groups providing neutral information are really vehicles through which small—sometimes wealthy—groups try to shape public opinion and thereby pressure Congress to adopt their self-interested viewpoint. This Article focuses on two groups—the National Economy League, a group active in the 1930s, and, to a lesser degree, the Citizens’ National Committee in the 1920s.
What a History of Tax Withholding Tells Us About the Relationship Between Statutes and Constitutional Law
In this Article, I explain what a seemingly obscure statute, the Current Tax Payment Act of 1943, can tell us about the relationship between statutes and constitutional law. I use William Eskridge and John Ferejohn’s notion of a “superstatute” as a lens through which to view this relationship. A “superstatute,” in Eskridge and Ferejohn’s conception, is a statute that has small “c” constitutional emanations, emanations that both affect interpretations of the large “C” Constitution and are entrenched against subsequent legislative change. To better understand the precise contours of the notion of a superstatute, I look at the Current Tax Payment Act of 1943, which instituted the system of federal tax withholding for wage income. I describe the history of federal income tax withholding leading up to the passage of that Act, explaining in turn how that history sheds light on the underlying notion of a superstatute.
Income tax systems in some countries follow primarily schedular models that classify income by type, match it with deductions from the same class, and compute a separate tax on each class. The United States income tax uses a global tax model under which it taxes citizens and permanent residents on their worldwide income without regard to source or character. The United States system is not purely global but includes schedular elements. This Article exposes embedded schedularity in the United States income tax in the three principal areas of investment income, personal services income, and tax free income. The Article tests whether that schedularity enhances or undercuts the tax principles of horizontal and vertical equity that underlie the development of both global and schedular tax systems in advanced economies. Horizontal equity is a straightforward principle and seems an indisputable precept. It requires that like taxpayers incur like tax burdens. The principle of vertical equity is more nuanced and departs from the principle that as one’s income increases, one can and should contribute ever larger percentages of that income to supporting governmental services. Vertical equity assumes that the wealthier one is, the less likely it is that an increased tax burden will diminish the individual’s welfare in any material way. Conversely, the less wealthy one is, the more likely it is that an increased tax burden will diminish the individual’s welfare materially. The vertical equity principle led to the development of the progressive rate structures. While the Article observes that Congress uses schedular elements to accomplish distributional policy goals, initially in order to protect progressivity, more recently schedularity has tended to increase overall regressivity in taxation. The Article concludes that United States taxation seems to be moderately schedular and that schedularity in the United States contributes to regressivity in taxation.
This Article surveys the history of the U.S. income tax system from 1913 to the present, examining changes in the structure of the graduated rates system over the past 100 years, using inflation-adjusted dollars. By connecting these changes to key events in the history of the United States, the Article contextualizes modifications Congress has made to the income tax over time as well as the current debate surrounding several proposals for reform. First, the Article demonstrates that the rate structure has become more flat (with lower rates and fewer brackets than in the past), compressed (with less graduation, steeper jumps between brackets, and less penetration of the rate schedule into the income strata), and complex (with the proliferation of tax expenditures) over time. Second, the Article reveals that the structures that would result from two of the tax reform proposals being discussed in the popular media resemble historical rates and brackets. Because these proposals for tax reform have analogs in earlier versions of the income tax, the Article argues that analysis of economic data from prior periods may help inform tax policy and identifies an agenda for future research.
Conceptions of property exist on a spectrum between the Blackstonian absolute dominion over an object to a bundle of rights and obligations that recognizes, if not encourages, the splitting of property interests among different people. The development of the bundle of rights conception of property occurred in roughly the same era as the enactment of the modern federal income tax. Nevertheless, when Congress enacted the tax in 1913, it did not consider how the nuances of property, and the possible splitting of the property interests in an income-producing item, might affect application of the tax. Soon after the tax’s enactment, the Treasury Department and the courts were confronted with questions of who owned, and could be taxed on, what income. As shown by an examination of family partnerships and synthetic leases, the government continues to struggle with determining who owns a sufficient property interest to be taxed because Congress has yet to define ownership for tax purposes.
According to a recent plurality of the U.S. Supreme Court, the danger that federal taxes will “crowd-out” state revenues justifies aggressive judicial limits on the conditions attached to federal spending. Economic theory offers a number of reasons to believe the opposite: federal revenue increases may also buoy state finances. To test these competing claims, I examine for the first time the relationship between total federal revenues and state revenues. I find that, contra the NFIB v. Sebelius plurality, increases in federal revenue—controlling, of course, for economic performance and other factors—are associated with a large and statistically significant increase in state revenues. This version of the study provides extensive background explanations of underlying economic concepts for readers unfamiliar with the prior public finance literature.
A Corporate Tax for the Next One Hundred Years: A Proposal for a Dynamic, Self-adjusting Corporate Tax Rate
The United States has included some form of income tax on corporations at least since the enactment of the Sixteenth Amendment one hundred years ago. Notwithstanding this long lineage, however, surprisingly little is known about who ultimately ends up bearing the cost of the tax, or whether it even matters. Perhaps in simpler economic times such as 1913, or 1932, or even 1980, this might have been acceptable. But as the world confronts vastly different economic conditions than the ones faced in the past, finding new ways to understand and implement the corporate tax for the next one hundred years will become crucial to its survival. This Article will introduce one such way, by taking into account how macroeconomic conditions, such as high unemployment, impact who bears the cost of the corporate income tax. This insight can fundamentally alter the landscape of the existing corporate tax policy debate, from whether to use corporate taxes to increase the progressivity of the income tax, to lowering the corporate tax rate to stimulate the economy, to abolishing the corporate tax altogether. By explicitly incorporating both macro- and microeconomic considerations into fiscal policy, policymakers can transform the corporate income tax from a blunt and uncertain fiscal tool into a precise instrument robust enough to survive the next one hundred years.
This Article will consider one specific example—proposing a dynamic, self-adjusting corporate tax rate, or DST for short. The DST takes into account the fact that specific macroeconomic conditions, such as high unemployment, can create incentives for employers to shift the cost of the corporate tax onto labor through lower wages, increased layoffs, or otherwise. The DST offsets this by charging employers (through higher marginal tax rates) when they do shift the cost of the corporate tax onto labor while, at the same time, rewarding employers (through lower marginal tax rates) when they make instead new investments in labor. In this manner, the DST could help reduce existing tax-induced distortions to behavior and address high unemployment at the same time.
Tax laws applicable to triangular mergers lack neutrality, are complex, and overlap substantially with other tax-preferred forms of corporate acquisition. Their current status is a result of both path dependency and Congress’s attempt to create consistency within a framework founded upon inconsistent conceptualizations of the corporation. This Article highlights problems arising under current rules, including a notable lack of tax neutrality among merger forms. It proposes pragmatic revisions made within the constraint of double taxation of corporate profits and then revisits the question through a more normative framework. The Article concludes that the tax treatment of target shareholders and the target corporation in corporate acquisitions should be disaggregated. Finally, it observes that both pragmatic and normative solutions proposed within the reorganization statute are unsatisfying in light of larger structural problems in the Internal Revenue Code.
This Essay takes a critical look at the tax fallout from the U.S. Supreme Court’s decision in United States v. Windsor, which declared Section 3 of the federal Defense of Marriage Act (DOMA) unconstitutional. The Essay first describes the path that led to the decision in Windsor. Then, it turns to describing the ways in which the post-Windsor tax terrain may actually be worse for same-sex couples than the bleak tax landscape that they faced before that decision. Under DOMA, same-sex couples already faced a debilitating level of uncertainty in determining how the federal tax laws applied to their relationships. Post-Windsor, same-sex couples will see this uncertainty multiply—even after receiving guidance from the IRS on the implementation of the Windsor decision in the federal tax context. They will have to grapple not only with lingering questions surrounding the federal tax treatment of relationships that are not recognized, but also with new questions regarding whether and how their relationships will be recognized for federal tax purposes. Moreover, it seems that dispatching discrimination designed to erode the progress of same-sex couples toward formal equality has served only to entrench the privileged status of marriage in our federal tax laws rather than foster the recognition of a broader array of human relationships.