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You Say You Want a Revolution: Redefining the Taxing Power

Posted on Nov. 30, 2020

What would happen to the taxing power under a modern rewrite of the Constitution? It depends who you ask, but the National Constitution Center recently asked three groups of academics to write new constitutions — “as an educational exercise,” explained one of the drafters, Robert P. George of Princeton University, on Twitter — and the results are an interesting case study in approaches to constitutional tax issues.

The spoiler is that constitutional law scholars, with the exception of libertarians, appear to harbor a disinterest in questions of taxation. That is a major oversight and one that isn’t particularly consistent with the discussions that preceded the adoption of the Constitution. There are plenty of proposals in the project’s three drafts that would radically change our government, but this analysis will focus on those that envision notable changes to the tax system.

You Say You’ll Change the Constitution . . .

The members of the project’s conservative drafting committee — George, Michael W. McConnell of Stanford Law School and Colleen A. Sheehan and Ilan Wurman of Arizona State University — said they hoped their efforts would “spur constructive discussion of the purposes of a constitution for a free people dedicated to the experiment in self-government.”

That the libertarian draft is the only one to completely reconfigure the taxing power is remarkable, because although taxation is rarely the first consideration in governmental organization, it is a linchpin of it. As Alexander Hamilton wrote in The Federalist No. 30, “There must be interwoven, in the frame of the government, a general power of taxation, in one shape or another. 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.”

What does it say about the project’s conservative and liberal documents that they exhibit hardly more than a passing interest in tax? The progressive version went so far as to omit the 16th Amendment entirely without proposing an equivalent replacement. The easy answer might be that the center asked constitutional law scholars, and not tax law scholars, to participate. Their academic backgrounds all will have touched on issues of taxation at various points, and they’re undoubtedly familiar with Supreme Court cases dealing with tax issues, but tax isn’t their primary area of expertise. Still, it’s notable that neither the progressive nor the conservative group pondered whether an income tax-based system is ideal.

Unlike many other provisions in the Constitution that the conservative and liberal drafters substantively changed, the configuration and size of the tax system is essentially taken for granted and left alone to evolve as it might through sporadic legislative reform efforts. That’s surprising because any update to the 230-year-old Constitution should take into account the differences in the size of the federal government in 1789 and today, as well as the divergent relationships between the then-emerging federal government and the existing state governments. A good case can be made that the federal tax provisions in the Constitution merit serious reconsideration, but only the libertarian team seems to have engaged in it. The scope of federal taxation today — standing, as it does, in sharp contrast to the situation in the early days under the Constitution — militates in favor of a closer reexamination as a constitutional matter. The founders were concerned with tax questions (see The Federalist Papers) because they had to fund the federal government they were creating, but the relative amount of revenue needed to do that is dwarfed by what’s needed today.

Dumping the Direct Tax Clause

The conservative drafters wrote that they “were tempted to leave the Constitution largely unchanged, amending only those provisions most obviously in need of alteration,” but they tinkered with the tax and administrative provisions in significant ways. The taxing and spending clause in their draft is similar to the clause that appears in Article I, section 8 of the Constitution, but with notable changes that have implications for the scope of the federal tax base and for spending. The conservative drafters also removed the direct tax clause in Article I, section 2, because, they say, it encompasses a concept that “no one really understands.”

It’s not actually the case that no one understands the direct tax clause in Article I, section 2, or the direct tax clause in Article I, section 9. Together, they mean that direct taxes must be apportioned and that a census must be taken before their enactment. The Constitution stipulates that capitations are direct taxes; taxes on land are almost certainly direct taxes as well. Hamilton spilled plenty of ink on direct and indirect taxes in The Federalist Papers. Among the earliest Supreme Court cases is Hylton v. United States, 3 U.S. 171 (1796), in which Justice Samuel Chase explained, “All taxes on expenses or consumption are indirect taxes. A tax on carriages is of this kind, and of course it is not a direct tax. Indirect taxes are circuitous modes of reaching the revenue of individuals, who generally live according to their income.” (James Madison disagreed; he thought that a tax on carriages was a direct tax and voted against it because it wasn’t apportioned.) A more accurate description of the state of the direct tax clause is that it’s been eroded into near meaninglessness. (Prior analysis: Tax Notes, July 23, 2012, p. 356.) In any event, reviving the direct tax limit on the taxing power has captured the imaginations of few constitutional scholars, so the conservative team dispenses with it. Article I, section 8 would get a makeover (and renumbering) to clarify that it gives Congress the power only to tax, not to tax and spend. The project’s drafters said that clarifies the current Constitution’s taxation clause, which is “one power: the power to tax for certain purposes.” They added a separate clause granting Congress the power to spend “for any purpose promoting the national (not local) interests of the United States,” but imposed limitations on it.

The revamped taxing power in the conservatives’ draft effectively enshrines the federal income tax and estate and gift tax by preventing Congress from enacting capitations, sales taxes, or taxes on real or personal property. Those taxes are all reserved to the states. There could be room here for a VAT, but probably not a wealth tax, depending on the calculation of the tax base. Excluding real estate from the base of a wealth tax would probably encourage those who stood to be taxed to buy real estate, which isn’t an ideal result.

The conservative team proposed a structural change, “touching modern administrative government,” including a legislative veto of regulations by majority vote of both the House and the Senate. The legislative veto could not be overridden by the president. “The current system, in which Congress can disapprove regulations — even regulations that distort the meaning of congressional statutes — only by a passage of legislation, which can be vetoed by the very President whose administration promulgated the regulations, strips Congress of its rightful role as lawmaker,” the conservative drafters explained.

Those drafters would speed the confirmation process for executive officials, giving the Senate three months to reject a president’s nominee, after which time automatic appointment would result. That provision would have applied to situations like former IRS Commissioner John Koskinen’s nomination on August 1, 2013, which wasn’t approved until December 20. “Treaties are also too difficult to ratify,” the conservative drafters said, suggesting that the requirement for two-thirds of Senate approval be reduced to three-fifths. The contemporary trouble for tax treaties is not that they have difficulty getting two-thirds of the votes in the Senate, but that Sen. Rand Paul, R-Ky., maintained a nearly decade-long hold on them because of objections to information sharing provisions. Still, a drop in the number of votes a treaty needs for ratification would likely make the process easier.

The conservative revision also includes a budget proposal that would require Congress to vote for taxes or debt before any money could be spent, with the goal of restoring Congress to its leading role in exercising the power of the purse. The House would adopt a budget resolution with the total amount of expenditures for the next three years, and if the total exceeds anticipated revenues, the budget resolution would have to propose tax increases or borrowing to cover the difference. And the draft would force Congress to enact the tax or borrowing bills before any appropriation for the budget cycle. “When politicians finance current spending by borrowing, this favors the voters of today at the expense of the unrepresented voters of the future,” the drafters explained. They said the budgeting process gives lawmakers little choice but to borrow more, which is inconsistent with Congress’s constitutionally assigned role in the appropriations process.

The other budgetary addition in the conservative draft is a congressionally appointed board of treasury. It would have the responsibility of ensuring that money is spent only in accordance with appropriations passed by Congress, with the goal of curtailing executive branch spending overreach.

The Dispensable 16th Amendment?

The broadest version of the taxing power is in the progressive draft, but it might come at the expense of judicial clarification compared with the other two drafts because of what it omits. Although Article I, section 8 remains unchanged from the Constitution’s formulation, the related changes could have large consequences for the tax system.

The progressive drafters’ intentions for direct taxes are ambiguous, because on one hand, they left a direct tax clause right where the founders put it in Article I, section 2, where it requires representatives and direct taxes to be apportioned among the states and territories. On the other hand, they eliminated the direct tax clause in Article I, section 9. Congress would still be prohibited from taxing articles exported from any state.

The progressive draft is the only one that includes more amendments than the Bill of Rights, but it omits the 16th Amendment’s approval of an income tax. That choice could set up interesting constitutional questions similar to the one that originally resulted in the amendment because of the retention of the direct tax clause. When Congress enacted an income tax in 1894, it didn’t apportion the tax among the states, so when it was challenged, the Supreme Court held it unconstitutional as a violation of the direct tax clause. Relitigating century-old case law might not be at the top of the agenda in a newly reconstituted United States.

It’s unclear whether the progressive drafters view the 16th Amendment as dispensable, but they eliminated several other amendments that would dramatically change the duties and function of the federal government. They may have intended to effect significant change, or at least reconsideration, of the tax system through the revisions. Most likely, tax under the progressive draft is still a work in progress. Including the apportionment of direct taxes and the unchanged taxing power provision suggest that the team hadn’t fully examined this area yet.

Out With the Income Tax

The award for the most considered vision of federal taxation goes to the libertarian group of Ilya Shapiro of the Cato Institute, Timothy Sandefur of the Goldwater Institute, and Christina Mulligan of Brooklyn Law School. While they seem to have occasionally succumbed to the temptation to make reforms that aren’t really constitutional in nature, they began with the premise that there’s a difference between the Constitution and other laws.

Theirs is not an entirely pragmatic approach, but their document at least recognizes that taxation cannot be an afterthought in the experiment of self-government. Their prefatory remarks implied that they like the Constitution as it is in its “libertarian or, more precisely, classical liberal” current form. They are much less fond of the Progressive Era amendments, so they did away with the 16th Amendment.

What they propose instead of a federal income tax is a uniform VAT on goods and services. Income, gift, estate, and direct taxes would be prohibited, as would any tax on aggregate consumption or expenditures. Tax increases would require the approval of three-fifths of the House and Senate and would have to be presented separately to the president. The important change to Article I, section 8 is that it would limit the use of the taxation power: “The purpose of such [tax] measures is limited to paying the debts and providing for the common defense and general welfare of the United States; but the general welfare shall not be construed to refer to the specific welfare of any particular group or individual.” The last limitation would probably end up being significant because it would seem to preclude existing provisions like the earned income tax credit, Opportunity Zones, retirement savings incentives, the mortgage interest deduction, education tax credits, and the research credit.

The libertarian drafters’ view of tax stands in contrast to the vision laid out by Hamilton in The Federalist No. 30, which says, “A complete power, therefore, to procure a regular and adequate supply of [revenue], as far as the resources of the community will permit, may be regarded as an indispensable ingredient in every constitution.” And indeed, that’s partly the point of the proposal. Hamilton’s concern over giving government an incomplete power to tax is one of the problems with the libertarian iteration because if the government finds itself with insufficient resources, it would have to raise taxes or else “sink into a fatal atrophy, and, in a short course of time, perish.”

The libertarian draft effectively puts an exclamation point on the requirement that revenue-raising bills originate in the House by prohibiting the Senate from amending a House bill to add a tax. “Many state constitutions prohibit this shell game by requiring that amendments be ‘germane’ or ‘incidental,’ so we adopted that rule,” the writers explained.

The libertarian draft even provides for taxpayer standing to challenge allegedly unconstitutional uses of funds. Upending the holding in Frothingham v. Mellon, 262 U.S. 447 (1923), that an individual taxpayer (or a state, in the companion case of Massachusetts v. Mellon) cannot challenge a federal tax statute as only a taxpayer because she lacks the direct and definite injury required for standing could be a destabilizing change in the standing law. “The party who invokes the [judicial] power must be able to show not only that the statute is invalid, but that he has sustained or is immediately in danger of sustaining some direct injury as the result of its enforcement, and not merely that he suffers in some indefinite way in common with people generally,” as Justice George Sutherland put it in Frothingham.

Finally, D.C. residents would mostly become Marylanders under the libertarian conception of the new union. The only Washington, D.C., that would remain would be the part that federal buildings sit on, and individuals who temporarily live in that district would be considered citizens of the states from which they came. Taxation without representation solved!

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