Independence & Taxes
Last week the United States celebrated the 249th anniversary of its declaration of independence from Great Britain.[i] In celebration of the occasion, President Trump signed into law the One Big Beautiful Act which, among other things, extended the tax cuts enacted during the first year of his first term in the White House.[ii]
As most of us are aware, the debates preceding the enactment of this legislation – whether they occurred in a House or Senate committee, on the floor of either Chamber, in public assemblies, with members of the media, or on city streets – often devolved into what may fairly be described as exercises in divining economic collapse, promoting class warfare, accusing others of demagoguery, etc.[iii]
Regardless of what motivates a particular party’s or speaker’s public statements regarding taxes, it cannot be denied that taxes figure prominently in our national society. This is demonstrated by the fact that taxes represent approximately 99% of the federal government’s annual revenue, and 73% of federal spending was funded by taxes.[iv]
In other words, we depend heavily on taxes to pay for essential services such as national defense, law enforcement, infrastructure, education, and social welfare. We also rely on taxes to promote or discourage certain behaviors because of the economic or social impact resulting from such behaviors.
Notwithstanding this reliance, taxes are overwhelmingly viewed across almost all strata of society as more of a necessary evil than as a resource for performing good works. In part, this perception may be attributed to our “national DNA.”
The Early Years
Most of us are sufficiently familiar with the history of the American Revolutionary War[v] to recall that the colonists’ attitude toward taxes played a significant role in galvanizing support for the Revolution.
Indeed, one of the mottos adopted by the colonists was “no taxation without representation,” a concept which found its way into the list of “repeated injuries” inflicted upon the Thirteen Colonies by the British Parliament, and cited in the Declaration of Independence in support of the Colonies’ decision to “throw off such Government, and to provide new Guards for their future security.”[vi]
Specifically, the Declaration asserted that the king “has combined with others to subject us to a jurisdiction foreign to our constitution, and unacknowledged by our laws; giving his Assent to their Acts of pretended Legislation . . . [f]or imposing Taxes on us without our Consent.”
In other words, the colonists did not object to paying taxes per se. Indeed, each Colony’s legislature – comprised of individuals who were elected from among, and by, the citizens of such Colony – taxed its own citizens as it deemed necessary and proper.[vii]
What the colonists objected to was the imposition of taxes by the British Parliament, with respect to which they had no little to no input or influence.
The Articles
Having won their independence, each of the former Colonies, now as a member of the “confederacy” known as the United States of America, jealously sought to retain and protect its pre-Revolution right to tax its own citizens while denying the same to a “national” government, lest such a government become as oppressive as the one from which they had just broken away.[viii]
Toward this end, the Articles[ix] provided that “[each] state retains its sovereignty, freedom and independence, and every Power, Jurisdiction and right, which is not by this confederation expressly delegated to the United States, in Congress assembled.”[x]
Because the Articles did not grant the “national” government the authority to impose taxes, the power to tax remained with the various state governments[xi] – the national government was effectively denied the ability to raise revenue through taxes; if the national government needed funds, it had to ask the states for contributions – it was unable to compel a transfer of funds.[xii]
In short, the national government was relatively powerless and ineffective.
The Constitution and the Federalists
As we know, the Constitutional Convention was convened to address the shortcomings of the Articles, including their denial of taxing authority to the national government.[xiii]
Thus, among many other important changes in the governance of the newborn United States, the Constitution[xiv] granted Congress the “Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.”[xv]
In support of this general power of taxation, Federalist No. 30,[xvi] written by Alexander Hamilton, stated as follows:
“It has been already observed that the federal government ought to possess the power of providing for the support of the national forces; in which proposition was intended to be included the expense of raising troops, of building and equipping fleets, and all other expenses in any wise connected with military arrangements and operations. But these are not the only objects to which the jurisdiction of the Union, in respect to revenue, must necessarily be empowered to extend. It must embrace a provision for the support of the national civil list; for the payment of the national debts contracted, or that may be contracted; and, in general, for all those matters which will call for disbursements out of the national treasury. The conclusion is, that there must be interwoven, in the frame of the government, a general power of taxation, in one shape or another.”
Hamilton continued:
“Money is, with propriety, considered as the vital principle of the body politic; as that which sustains its life and motion, and enables it to perform its most essential functions. A complete power, therefore, to procure a regular and adequate supply of it, as far as the resources of the community will permit, may be regarded as an indispensable ingredient in every constitution. From a deficiency in this particular, one of two evils must ensue; either the people must be subjected to continual plunder, as a substitute for a more eligible mode of supplying the public wants, or the government must sink into a fatal atrophy, and, in a short course of time, perish.”
State’s Rights?
Notwithstanding the foregoing expansion of the national government’s power to impose taxes, it wasn’t long before some states vehemently objected to the exercise of this power, and even threatened the continued existence of the new nation.
Following the War of 1812, Congress imposed protective tariffs[xvii] on imported manufactured goods, both to raise funds to pay down the debt incurred to fund the War and to protect the nascent New England manufacturing industry that, of necessity, sprung up during the War in response to Great Britain’s blockade of American ports.[xviii]
Many Southern States objected to these tariffs. Their economies were agrarian and they imported most of their manufactured goods. Thus, they believed the tariffs were disproportionately burdensome. In fact, in response to these tariffs, South Carolina adopted the so-called Nullification Ordinance, which declared the federal tariffs null and void within South Carolina. At the same time, the State threatened to secede, and even began preparations for what it anticipated would be a federal military response.[xix]
Although an immediate crisis was averted, thanks to a reduction in tariffs, the experience highlighted the differences between the Northern and Southern economies. The resulting tension continued until the Civil War settled the matter of States’ Rights and Nullification.
The Income Tax
Unfortunately, the national government once again found itself in need of new sources of revenue from which to satisfy the debt incurred during the War.[xx] Starting in 1861, President Lincoln signed into law several revenue-raising measures to help pay for Civil War expenses. These measures created the nation’s first income tax, which was eventually repealed in 1872.
The income tax was revived in 1894 when the Wilson-Gorman Tariff Act reduced certain tariffs and sought to replace the lost revenue by taxing incomes. It didn’t take long for the Supreme Court to declare the tax unconstitutional.[xxi] The Court relied upon Clause 4, Section 9 of Article I of the Constitution, which provided that “[no] Capitation or other direct, Tax shall be laid.” The Court determined the income tax was a direct tax that had to be apportioned among the states according to population.
Not long thereafter something unusual happened, which the National Archives[xxii] describe as follows:
“In 1909, progressives in Congress again attached a provision for an income tax to a tariff bill. Conservatives, hoping to kill the idea for good, proposed a constitutional amendment enacting such a tax; they believed an amendment would never receive ratification by three-fourths of the states. Much to their surprise, the amendment was ratified by one state legislature after another, and on February 25, 1913, with the certification by Secretary of State Philander C. Knox, the 16th amendment took effect. Yet in 1913, due to generous exemptions and deductions, less than 1 percent of the population paid income taxes at the rate of only 1 percent of net income.”
In concluding its discussion of the Sixteenth Amendment, the National Archives state that the Amendment “settled the constitutional question of how to tax income and, by so doing, effected dramatic changes in the American way of life.”
Talk about an understatement.
The ratification of the Sixteenth Amendment in 1913 granted Congress the “power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
Ever since that horse left the proverbial barn, we have been debating how to impose the income tax (for example, on unrealized gain),[xxiii] on whom to impose the tax (for example, only on the wealthier members of society), and why to impose the tax (for example, to fund specific social programs).
Paine on Taxes – Taxes Are Painful[xxiv]
Among the most helpful discussions regarding the role of taxes in society generally is found in the writings of British expatriate, Thomas Paine. Much of Paine’s thinking regarding taxation remains relevant today.
Necessary Evil
To appreciate Paine’s views on taxes, one must first understand his view of government. For purposes of this post, the following excerpt from Common Sense (published in 1776)[xxv] will suffice:
“Some writers have so confounded society with government, as to leave little or no distinction between them; whereas they are not only different, but have different origins. Society is produced by our wants, and government by our wickedness; the former promotes our happiness positively by uniting our affections, the latter negatively by restraining our vices. The one encourages intercourse, the other creates distinctions. The first a patron, the last a punisher.
“Society in every state is a blessing, but government even in its best state is but a necessary evil; in its worst state an intolerable one; for when we suffer, or are exposed to the same miseries by a government, which we might expect in a country without government, our calamity is heightened by reflecting that we furnish the means by which we suffer . . . For were the impulses of conscience clear, uniform, and irresistibly obeyed, man would need no other lawgiver; but that not being the case, he finds it necessary to surrender up a part of his property to furnish means for the protection of the rest; and this he is induced to do by the same prudence which in every other case advises him out of two evils to choose the least.”
Thus, an individual will “surrender up a part of his property” – i.e., pay taxes – to maintain a government that will protect his private property.[xxvi]
Unfortunately, according to Paine – as he distinguished theory from reality – those in government often take advantage of their position.[xxvii]
War and Taxes
Most of Paine’s reflections on taxes are found in his Rights of Man,[xxviii] where he stated that governments “fleece their countries by taxes.”
Specifically, he asserted that “[w]ar is the common harvest of all those who participate in the division and expenditure of public money.”
Paine asked, what is the best way to increase the pot of public money? By increasing public revenue. Because “revenue cannot be increased without taxes,” he stated, “a pretence must be made for expenditure.”
He argued that “taxes were not raised to carry on wars, but that wars were raised to carry on taxes.”
Tax Reform
Paine’s mistrust of government and his more colorful assertions aside, many of his observations continue to resonate and, thus, cannot be easily ignored.
Let’s start with his basic premise that, as a general matter, “when taxes are once laid on, they are never taken off.”[xxix] Thus, the act of imposing a tax should not be undertaken lightly.
With that, Paine distinguished between taxes that are imposed on wealth that is inherited, on the one hand, and wealth that is acquired by one’s efforts or “industry,” on the other.
Generational Wealth
Inherited wealth, according to Paine, is an “evil” that must be limited. As he put it, there is a level of inherited wealth the excess beyond which “may not improperly be called a prohibitable luxury.”[xxx]
In other words, wealth beyond a certain threshold should be prohibited; “an overgrown estate . . . is a luxury at all times, and, as such, is the proper object of taxation,” according to Paine, and “the object is not so much the produce of the tax as the justice of the measure.”
Sounds familiar?[xxxi]
Commerce/Labor
Wealth acquired through commerce or labor, however, is to be encouraged. Commerce, Paine asserted, “is a pacific system, operating to cordialise mankind, by rendering nations, as well as individuals, useful to each other. . . The most effectual process is that of improving the condition of man by means of his interest . . .”
Moreover, such wealth must be protected from what Paine described as “the greedy hand of government thrusting itself into every corner and crevice of industry, and grasping the spoil of the multitude. Invention is continually exercised to furnish new pretences for revenue and taxation. It watches prosperity as its prey, and permits none to escape without a tribute.”[xxxii]
Notwithstanding his advocacy on behalf of business, there are limits to Paine’s support for the favored taxation of industry and the accumulation of commercial wealth. Although he stated that it “would be impolitic to set bounds to property acquired by industry, and therefore it is right to place the prohibition beyond the probable acquisition to which industry can extend,” he also stated that “there ought to be a limit to [such] property.”
Thus, Paine believed there was a line beyond which wealth cannot be said to have been generated by one’s efforts or industry and, so, as in the case of generational wealth, was a proper object of what may be described as “confiscatory” taxation.
For What It’s Worth
In the end, much of the tax law – as in the case of most other legislation – is concerned with drawing lines. Query where such lines will be drawn in the future.
As the foregoing demonstrates, the debate over the appropriate objects of taxation – inherited wealth, commercial or investment wealth. Labor or imports – and the degree to which they should be taxed has been troubling Americans since the founding of the republic, and there is little reason to doubt that it will continue to do so.
The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the Firm.
[i] The Declaration of Independence was signed by the 56 members of the Second Continental Congress on July 4, 1776. Great Britain did not formally recognize the independence of its former colonies until the Revolutionary War ended, seven years later, with the signing of the Treaty of Paris in September of 1783.
[ii] The 2017 Tax Cuts and Jobs Act, P.L. 115-97.
[iii] Of course, there was also a generous serving of finger-pointing, name-calling, and the like. The kinds of activities in which adults who have been entrusted with great power and responsibility are too often engaged.
[iv] https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/#:~:text=Maintaining%20the%20National%20Debt,spending%20in%20fiscal%20year%202025.
The excess of the amount spent during a fiscal year over the amount of taxes collected results in a deficit for the year, which is covered by borrowing from the “public.” https://fiscaldata.treasury.gov/americas-finance-guide/
[v] I don’t think I’m alone when I refer to the Revolutionary War as the first Civil War fought in Colonial North America. For better or worse, the colonials’ successful separation from Britain allowed many of the issues around which the Colonies themselves were divided, and which until then had been simmering beneath the surface, to come to the fore, first with the adoption of the Articles of Confederation (the “Articles”), then with the debates leading up to the Constitution, and finally with the tragedy of the second, and much bloodier, Civil War among the former Colonies only 85 years later. Query whether those issues have been resolved. I think not.
[vi] https://www.archives.gov/founding-docs/declaration-transcript
[vii] You may recall that the colonists generally considered themselves citizens of their respective colonies (and subjects of the British Crown), and as citizens of their respective states after the Revolutionary War. Some have written that it wasn’t until after the War Between the States that a national identify was “firmly” established. Recent experience, however, seems to suggest that the concept of our national identity has evolved and is not as uniformly held as it may have been just a few decades ago.
[viii] Although the following statement was attributed to various Loyalists before the Revolution, it was picked up by others who questioned the proposed authority – including the power to tax – to be bestowed upon the new federal government: “Which is better? To be ruled by one tyrant three thousand miles away or by three thousand tyrants one mile away?” This concern motivated, in no small part, the decision to adopt a republican, rather than democratic, form of government. In fact, the concern went beyond the federal government to the states – see Art. IV, Sec. 4 of the Constitution: “The United States shall guarantee to every State in this Union a Republican Form of Government, . . .”
[ix] Which the Second Continental Congress adopted in 1777, and which became effective in 1781 after Maryland’s ratification.
[x] Article II of the Articles. https://www.archives.gov/milestone-documents/articles-of-confederation
[xi] This was hardly a solution to concerns over abusive taxation. Witness Shay’s Rebellion of 1786-1787, which arose in response to Massachusetts’s increased efforts to collect taxes from its citizens and their businesses. The rebellion was put down by the state militia – the national government was unable to raise the necessary funds to send its own troops.
[xii] Article VIII of the Articles provided as follows:
“All charges of war, and all other expenses that shall be incurred for the common defence or general welfare, and allowed by the united states in congress assembled, shall be defrayed out of a common treasury, which shall be supplied by the several states, in proportion to the value of all land within each state, granted to or surveyed for any Person, as such land and the buildings and improvements thereon shall be estimated, according to such mode as the united states, in congress assembled, shall, from time to time, direct and appoint. The taxes for paying that proportion shall be laid and levied by the authority and direction of the legislatures of the several states within the time agreed upon by the united states in congress assembled.”
[xiii] The Convention was convened in 1787 and the Constitution was fully ratified in 1789.
[xiv] https://www.archives.gov/founding-docs/constitution
[xv] Clause 1, Sec. 8, Art. I of the Constitution. Clause 2 gave Congress the power “to borrow Money on the credit of the United States.” Clause 3 granted Congress the power to “regulate Commerce with foreign Nations, and among the several States . . .”
However, Clause 4 of Sec. 9 of Art I provided that “[no] Capitation or other direct, Tax shall be laid.”
Two years later, the Tenth Amendment to the Constitution was ratified, to clarify that “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” It was understood that, among the powers reserved to the States, was the right to impose any kind of taxes, except those forbidden by the Constitution.
[xvi] “Concerning the General Power of Taxation,” The New York Packet (December 28, 1787). https://avalon.law.yale.edu/18th_century/fed30.asp
[xvii] President Trump’s recent activity has reignited an interest in the use and imposition of tariffs.
[xviii] New England opposed the War of 1812 for several reasons, including the effects of the Royal Navy’s attacks on New England shipping and ports. Indeed, at the Hartford Convention of 1814, the New England States considered seceding from the United States in response to the War.
[xix] The Nullification Crisis. I sure hope the information presented in this discussion is not new to you.
[xx] https://www.senate.gov/artandhistory/history/common/civil_war/RevenueAct_FeaturedDoc.htm#:~:text=The%20Civil%20War:%20The%20Senate’s%20Story,-Featured%20Document:%20The&text=One%20of%20the%20most%20challenging,proved%20to%20be%20more%20effective.
[xxi] Pollock v. Farmers’ Loan & Trust Company, 157 U.S. 429 (1895). https://www.visitthecapitol.gov/artifact/pollock-v-farmers-loan-and-trust-company-supreme-court-united-states-october-term-1894
[xxii] https://www.archives.gov/milestone-documents/16th-amendment .
[xxiii] See my discussion of Moore v. U.S. here: https://www.taxslaw.com/2024/07/the-supreme-courts-non-opinion-on-the-realization-of-income-a-lost-opportunity/
[xxiv] Apologies. I couldn’t resist.
[xxv] https://oll.libertyfund.org/pages/1776-paine-common-sense-pamphlet
[xxvi] Obviously, Paine was a student of social contract theory, as were most of the Founders.
[xxvii] Hmm.
[xxviii] https://publicpolicy.pepperdine.edu/academics/research/faculty-research/french-revolution/tpaine.htm
[xxix] Sounds like New York’s “temporary” surtaxes on higher brackets of individual income. I can’t recall a time when they expired or weren’t replaced by still higher rates.
[xxx] https://www.ushistory.org/paine/rights/c2-055.htm?srsltid=AfmBOooiLtmPBeWSLc101xJLxDbFfF2hr14H7nptdeALhkk_mJL-MxRE
[xxxi] I keep expecting someone to make an argument for confiscatory taxes based on an interpretation of the final clause of Section 9 of Article I of the Constitution, which reads in relevant part as follows:” No Title of Nobility shall be granted by the United States . . .” After all, in a real sense, the landed nobility of yesteryear have been replaced by billionaires and near-billionaires from the technology and financial industries.
[xxxii] https://www.ushistory.org/paine/rights/b2-intr.htm?srsltid=AfmBOoory-QtJfUbXWp3kQJQzWYRuyH7V_WclzVksxIXqA1FSJ45Lzgo
