On December 5, the Supreme Court will hear arguments in an important tax case, Moore v. United States. The petitioners in Moore, a husband and wife, are shareholders in a company located in India (in the farm equipment and agricultural sector) that has retained and reinvested its profits rather than distributing those profits to the shareholders. A tax law passed in 2017 and signed into law by President Donald Trump seeks to impose a tax, known as the Mandatory Repatriation Tax (MRT), on some of the company’s domestic shareholders (including the petitioners) even though, the petitioners argue, income has not been “realized” for them in particular (even as it might have been realized for the company they partly own). They argue that in the absence of such “realization,” the federal tax falls outside the scope of the Sixteenth Amendment, which says that “Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states. . . .” Since the tax is not authorized by the Sixteenth Amendment, the petitioners argue (since no “income” has been “realized”), the tax must under Article I, section 2, be apportioned, that is, spread out such that it raises the same revenue per-state-per-capita, in order to be constitutional. Since the MRT does not do that, the tax, they say, is unconstitutional.
The Supreme Court granted review seemingly to address when “income” under the Sixteenth Amendment may be taxed. The parties and amici all seem to appreciate that the Court’s analysis in this case could have implications for any “wealth” tax the federal government ever might consider enacting. I am counsel of record in an amicus brief filed earlier this week on behalf of Professor Akhil Amar and myself, trying to provide an originalist answer to the questions the Court should be asking. Our brief draws extensively on Akhil’s The Words that Made US book, as well as other scholarly analysis and our own doctrinal exegesis. What follows below is a summary of (including many excerpts from) our brief, which we hope we draw some attention to a Court that is openly and prominently committed to originalist interpretations of the Constitution.
Our big idea is that most of the other briefs in the case have missed the point. The MRT, we argue, does not violate the Constitution on account of the apportionment requirement in Article I, Section 2, for the simple and decisive reason that the MRT is neither a head tax nor a real-estate tax, and thus is not a “direct tax” subject to the Constitution’s apportionment requirement. This is true regardless of the Sixteenth Amendment. In other words, it is true whether or not the MRT is an “income tax” within the meaning of that Amendment. A tax need not be an “income tax” to escape the apportionment requirement. It simply needs to be a revenue measure that is not a “direct tax,” under Article I, Section 2.
Only head taxes and real-estate taxes are direct taxes within the meaning of the Founders’ Constitution, as understood by George Washington; Alexander Hamilton; the overwhelming majority of the 1794 Congress and later early Congresses; and every member of the Supreme Court to opine on the issue in Hylton v. United States (1796), the most important case the Supreme Court decided pre-Marbury. Eventually, even James Madison and Thomas Jefferson repudiated their earlier Republican allies and came to agree with their Federalist counterparts on this issue. Post Founding, our approach also has on its side President Abraham Lincoln and Justice John Marshall Harlan the Elder, among countless others.
None of this is to say the MRT could not be upheld under the Sixteenth Amendment (since certainly the company the petitioners partly own has realized income and the petitioners benefit from that income generation). But the Court need not reach that question. Were the Court to reach that question and for some reason decide that the MRT is not a proper income tax, the MRT should nonetheless survive constitutional challenge (and the judgment of the Ninth Circuit below should be affirmed) for precisely the same reason that one of Congress’s first major tax laws—a tax on luxury-carriage ownership—survived in Hylton: A Carriage Ownership Tax is not a direct tax—and the Mandatory Repatriation Tax is not a direct tax—because neither one taxes human heads or real estate. To the extent that the main or only reason that the Court granted certiorari in this case was to clarify the scope of the Sixteenth Amendment, the Court might well consider dismissing the writ of certiorari as improvidently granted. Alternatively, the Court could call for additional briefing on the meaning of “direct” taxes, the issue we focus on in our brief. But it would be inappropriate for the Court to reverse the judgment below without engaging the fundamental question we raise.
If Petitioners are correct, then Hylton and the federal tax it upheld were wrong. If, instead, Hylton and its many Founding-era supporters are correct, then the petitioners are wrong. Hylton is the key, and we respectfully urged every member of the Court to read this landmark case carefully.
To be sure, after a century of faithfully and properly adhering to Hylton, the Supreme Court in the Lochner-Plessy era unjustifiably departed from Hylton’s clear prescription. And the Court paid a heavy price for its disobedience to the Constitution’s text, history, structure, and correctly decided precedent: The first ruling that deviated from Hylton—Pollock v. Farmers’ Loan and Trust Co., (1895)—was itself renounced by We the People of the United States via the Sixteenth Amendment.
Yet even after the Sixteenth Amendment repudiated Pollock, the Court continued, during Lochner’s and Plessy’s heyday, to disregard Hylton’s lessons. See Eisner v. Macomber (1920). Ultimately, the Court had to backpedal and do damage control. Today, various anti-Hylton cases from a century ago have been hollowed out. Now is the time for the Court—a Court openly and admirably committed to following the Constitution’s text, history, and structure—to restore Hylton and abandon all cases that have broken faith with its originalist teachings.
Either the Court will stand with President George Washington, Treasury Secretary Alexander Hamilton, and the unanimous Supreme Court in 1796—not to mention President Abraham Lincoln and the first Justice John Marshall Harlan—or we stand with Justice Mahlon Pitney and other members of the Lochner-era Court, whose approach to constitutional adjudication was nicely captured by Chief Justice John Roberts in his 2005 confirmation hearing: “You go to a case like the Lochner case . . . and it’s quite clear that they’re not interpreting the law, they’re making the law.”
Hylton Explained
The Hylton case that is key to any originalist understanding of federal tax powers involved an annual assessment “levied, collected and paid, upon all carriages for the conveyance of persons, which shall be kept by or for any person, for his or her own use, or to be let out to hire, for the conveying of passengers.” This was a luxury tax upon the sort of high-status conveyances favored and flaunted by wealthy and genteel folk; the statute explicitly exempted from the duty “any carriage usually and chiefly employed in husbandry, or for transporting or carrying of goods, wares, merchandise, produce or commodities.” The tax was imposed on the ownership or possession of a carriage. How many trips the carriage actually made for personal or business purposes was, under the statute, beside the point.
In late 1794, a carriage-owning Virginian, Daniel Hylton, refused to pay. Hylton’s legal team claimed that the act violated the Constitution because the law imposed a “direct tax” that was not apportioned among the states. At President Washington’s urging, Alexander Hamilton, then in private practice, defended the law’s constitutionality before the Supreme Court. In fact, Congress had adopted, and Washington had signed, this law in reliance upon Hamilton’s own earlier writings and official reports to Congress. Hylton was the only case Alexander Hamilton ever argued to the United States Supreme Court.
The Constitution contains two commands with respect to federal taxation. All “Duties, Imposts and Excises” need to be “uniform [that is, governed by the same rates] throughout the United States.” By strong negative implication, not all “taxes” (another category of revenue-raising measures in Article I) would need to be uniform. In fact, at least one kind of tax, a “direct” tax, would explicitly need to be non-uniform. Under Article I Section 2, such a tax would have to be apportioned among the states to correspond to the number of seats each state would hold in the U.S. House of Representatives: “Representatives and direct Taxes shall be apportioned among the several States . . . according to their respective Numbers.” This fixed ratio would inevitably oblige the federal government to vary the direct tax, state by state—making the tax non-uniform—in order to raise the same proportional revenue from each state.
The carriage tax offered a clear illustration of all this. If an annual tax on the keeping of carriages was properly characterized as a “Duty,” the duty per carriage would need to be the same—uniform—in every state. That is precisely what the 1794 Carriage Act provided—a uniform schedule of carriage taxes that applied identically in all states and territories. But suppose instead that the carriage tax were best viewed as a “direct tax.” Given that Virginia, under the most recent decennial census (1790), had nineteen seats in the House of Representatives, and Massachusetts had fourteen, any federal “direct tax” on carriages would have to bring in nineteen dollars from Virginians for every fourteen from Massachusetts residents. Carriage ownership per capita would doubtless vary from state to state. Thus, to meet the requisite nineteen-to-fourteen ratio, the tax owed on each carriage could not be uniform; the government would need to jigger the tax state by state. For every nineteen carriage-tax dollars flowing into federal coffers from Virginia and every fourteen from Massachusetts, exactly thirteen carriage-tax dollars would need to flow from Pennsylvania, ten from New York, and so on.
If the direct-tax concept were construed and defined broadly, its requirement of equal ratios across more than a dozen states would be an administrative nightmare. It would be a nearly insurmountable obstacle to the enactment of a carriage tax. Consider: If, among two equal-size states, one state had one hundred carriages and another had eight hundred, the tax-per-luxury-carriage would need to be eight times higher in the former (most likely poorer!) state to equalize tax revenue and satisfy the dictates of apportionment.
Or suppose that in one particularly austere state, no one kept carriages at all. No carriage-tax revenue would come from that state. Therefore, no carriage-tax revenue could legally come from any state. A single ascetic state could thus make it literally impossible for the tax to be imposed anywhere consistent with the requirement of equal ratios across all the states! So could a single ornery state that, say, outlawed carriages just to stymie the federal government!
In oral argument in Hylton, Hamilton highlighted these mathematical absurdities. A facile and overly broad definition of the direct-tax category could easily generate “ruinous” tax rates in relatively carriage-free states, or, perhaps worse still, simply “defeat the power of laying” the tax altogether. “This is a consequence,” he sensibly warned, “that ought not result from construction” if a more practical and minimally plausible alternative reading were available. “[N]o construction ought to prevail calculated to defeat the express and necessary authority of the government. It would be contrary to reason, and to every rule of sound construction, to adopt a principle for regulating the exercise of a clear constitutional power which would defeat the exercise of the power.”
But what, precisely, was the proper definition of a “direct tax” within the meaning of the Constitution? We know from the Constitution’s text that one kind of tax is “direct”—a so-called capitation, or per-head tax. Why, we might ask, were capitations subject to apportionment rather than uniformity? The embarrassing answer is slavery: The direct-tax and capitation rules were part of a broad pro-slavery deal.
Here’s how the deal worked. Because a capitation tax was a direct tax subject to apportionment, Congress could not tax slave property—and thus effectively move the country towards abolition—simply by taxing all slave ownership uniformly. The heads of enslaved people could not be taxed in the same way as heads of cattle or heads of lettuce (the latter two of which would simply be subject to the requirement of uniformity). A tax on slave property would have to raise as much money from abolitionist Massachusetts as it did from Virginia (accounting for different size in the two states’ House delegations), making a tax on slavery completely impossible.
As Justice William Paterson, himself a Philadelphia delegate, later put the point in Hylton:
The southern states, if no provision had been introduced in the constitution, would have been wholly at the mercy of the other states. Congress in such case, might tax slaves, at discretion or arbitrarily, and land in every part of the Union after the same rate or measure: so much a head in the first instance, and so much an acre in the second. To guard them against imposition in these particulars, was the reason of introducing the clause in the constitution . . . .
Beyond capitations, what else fell into the category of direct taxes? Article I, Section 9, referred to “other” direct taxes and thus suggested that capitations were not the only direct taxes. Hamilton at oral argument had an answer. The old Congress under the Articles of Confederation had linked land assessments with head counts and had linked both with properly apportioned state-by-state taxes. Unlike fleeting, consumable, and easily alienable assets like carriages, whiskey, tobacco, etc., land was fixed and permanent. It was possible to imagine a state with zero carriages but not one with zero land. (Remember, zero of any direct-taxable item in any state made state apportionment mathematically impossible.) Like population, land values could be made part of a manageable decennial census, unlike many other items that would be much harder to count in every census—whiskey barrels, tobacco hogsheads, and the like.
A definition of direct taxes as subsuming essentially only head taxes and land taxes was not merely historically grounded and functional, but also forceful as a textual matter. A “direct” tax can sensibly be understood as a tax that is impossible, or at least very difficult, to avoid. A carriage tax was easy to avoid: simply stop possessing carriages! But a human head tax could be avoided only by death itself, and a land tax whose escape would require selling one’s homestead could impose extreme hardship on the many Americans in the 1780s who were land-rich but cash poor. In the illiquid economy that was early America—a nation short on specie and banks—many a young farmer inherited his family’s land but would lack ready money to pay a substantial real-estate tax.
Hamilton himself made this distinction in his Hylton oral argument. Indeed, in a letter to his wife extolling Hamilton’s argument, Justice James Iredell stressed this precise point: “Having occasion to observe, how proper a subject it [a carriage] was for taxation, since it was a mere article of luxury, which man might either use, or not, as was convenient to him, he [Hamilton] added, ‘It so happens, that I once had a carriage myself, and found it convenient to dispense with it. But my happiness is not in the least diminished.’”
Hamilton knew his stuff when it came to taxes. At the 1787 Philadelphia Convention, Hamilton drafted his own constitutional plan that defined “direct taxes” almost exactly the way he and the Court did in Hylton nine years later: “Taxes on lands, houses, and other real estate, and capitation taxes shall be proportioned in each State . . . .”
Most important of all, Hamilton had publicly laid out his various tax theories for all would-be ratifiers to peruse and ponder. He devoted no fewer than seven (!) Federalist essays to the topic of taxation. His analysis in Federalist No. 36, where he expressly discussed “direct” and “indirect” taxes, is perfectly on point today. As contrasted with “indirect taxes,” he wrote, “direct taxes” beyond capitations simply meant taxes on “real property or . . . houses and lands.”
In ruling unanimously in support of the Carriage Tax, of the Congress, and, indeed, of President Washington himself (who had signed the law and strongly backed it), the Court not only embraced Hamilton’s result, but also echoed his reasoning. As Chief Justice Roberts, in the modern Court’s most important modern tax case, National Federation of Independent Business (NFIB) v. Sebelius, would observe:
Soon after the framing, Congress passed a tax on ownership of carriages, over James Madison’s objection that it was an unapportioned direct tax. This Court upheld the tax, in part reasoning that apportioning such a tax would make little sense, because it would have required taxing carriage owners at dramatically different rates depending on how many carriages were in their home State. . . . The [Hylton] Court was unanimous, and those Justices who wrote opinions either directly asserted or strongly suggested that only two forms of taxation were direct: capitations and land taxes. That narrow view of what a direct tax might be persisted for a century.
Unfortunately, not all post-Hylton case law proved faithful to its vision. As the NFIB Court went on to point out:
In 1880, for example, we explained that “direct taxes, within the meaning of the Constitution, are only capitation taxes, as expressed in that instrument, and taxes on real estate.” Springer, [102 U.S.] at 602. In 1895, we expanded our interpretation to include taxes on personal property and income from personal property, in the course of striking down aspects of the federal income tax. Pollock v. Farmers’ Loan & Trust Co., 158 U.S. 601, 618 (1895). That result was overturned by the Sixteenth Amendment, although we continued to consider taxes on personal property to be direct taxes.
But, as Professor Bruce Ackerman has demonstrated, the Court’s rulings in Pollock and Macomber departed from the originalist understandings that were embodied in Hylton and then re-embraced in Springer (which properly upheld the President Lincoln-backed income tax enacted to fund the defense of the Union during the Civil War). Pollock was handed down just a year before Plessy v. Ferguson (1896), and shared some its racial amnesia. Rather than follow Justice Paterson’s admonition in Hylton to construe the “direct tax” concept narrowly given the concept’s pro-slavery background, the Pollock Court, without articulating any historically or textually coherent limiting principle, “blew [the direct-tax provisions of the Constitution] up to unprecedented proportions.”
The first Justice John Marshall Harlan penned a powerful dissent (as he did again a year later in Plessy), pointing out how the Pollock majority had betrayed the originalist and limited scope of the direct-tax concept. Harlan was not the only one who denounced the Pollock majority. “Nothing has ever injured the prestige of the Supreme Court more,” sighed President and future Chief Justice William Howard Taft. Via the Sixteenth Amendment, the American people registered their emphatic disapproval of Pollock.
One might have thought that such a powerful repudiation would chasten the Justices of the early twentieth century, but the Court from that era—most often associated with Lochner v. New York (1905)—is not known for its general wisdom or institutional restraint. Thus, it is perhaps not completely surprising that the Court in Macomber in 1920 reiterated Pollock’s mistake: the expansion of the “direct-tax” beyond head-count and real-estate taxes. At issue in Macomber was the Standard Oil Company of California’s issuance of a two-for-one stock swap for its shareholders; the stock exchange left each shareholder owning the same percentage of the company as before. For this reason, the Court (for whom Justice Pitney wrote) ruled that there was no income generated within the meaning of the Sixteenth Amendment, and therefore Congress could not (absent apportionment) impose any taxes on this event. But whether “income” was generated within the meaning of the Sixteenth Amendment does not answer the real question at issue: whether Congress had the power to impose a tax under these circumstances. As Professor Ackerman explained:
Let us assume, with Justice Pitney, that Congress’s tax on the stock dividend was not within the power vested in it by the Sixteenth Amendment. This hardly implies that it could not be vindicated by the original grant of power “to lay and collect Taxes, Duties, Imposts and Excises.” To the contrary, until Pollock, the Court had consistently decided that the “direct tax” clauses included “only capitation taxes . . . and taxes on real estate”—and not shares in firms such as the Standard Oil Company of California! But Justice Pitney cited neither Hylton nor any of its progeny—including especially the unanimous decision of the [Springer] Court in 1881, upholding the Reconstruction Income Tax . . . . He writes as if Pollock’s unprecedented extension of the “direct tax” category to include all forms of property could continue to serve as an unquestionable starting point [notwithstanding the clear repudiation of that case by the American People in the Sixteenth Amendment].
Happily, the Court has since issued rulings that would permit the tax at issue in Macomber (and all of the kinds of taxes at issue in Pollock, for that matter). See United States v. Phellis (1921) (shares in a subsidiary corporation that were issued to stockholders of the parent corporation were taxable as income); Helvering v. Bruun (1940) (repudiating Macomber’s suggestion that “severance” is required before income can be realized); South Carolina v. Baker (1988) (overruling another aspect of Pollock, dealing with Congress’s ability to tax income from bonds issued by state and local governments.)
But as Professor Ackerman has pointed out, although the Lochner approach to constitutional interpretation has been thoroughly discredited and “Pollock was left amongst the doctrinal debris scattered on the landscape, [n]one of the landmark New Deal decisions had explicitly swept it away. . . .” For this reason, Pollock’s fundamental sin—in disregarding Founding understandings of “direct” taxes—has not explicitly been acknowledged and rectified by the Court.
Like Plessy and Lochner, Pollock and Macomber were—to borrow language from a recent landmark case (the Dobbs abortion case)—“egregiously wrong from the start.” Their “reasoning was exceptionally weak, and the decision[s] ha[ve] had damaging consequences.” The time is ripe to lay these erroneous Plessy–Lochner era cases to rest.