Indirect tax

“ But any doubt on this subject ought no longer to be tolerated, for we now have, almost for the first time, a definition of or distinction between direct and indirect taxes that is founded on sound philosophy and large experience, and can not be refuted—namely, a direct tax has always in it an element of compulsion. The person against whom or on whose property or income a direct tax is levied has no option whether or when he shall pay. ”

“ A very important phase of the tax question to be considered here (owing to its being the source of almost the entire income of the United States Government) is what is known as “indirect” taxation, or the tax on commodities, processes, etc. This is more easily collected than a direct tax, because the consumer hardly realizes that he is being taxed when paying for articles which he may use his own discretion about purchasing; but it bears most heavily upon the poor, as only articles in general use will yield the necessary revenue. ”

“ The distinction between a direct and an indirect burden by way of tax or duty was developed, and it was shown that an income tax laid generally on net incomes, not on income from exportation because of its source or in the way of discrimination, but just as it was laid on other income, and affecting only the net receipts from exportation after all expenses were paid and losses adjusted and the recipient of the income was free to use it as he chose, was only an indirect burden. ”

“ Nevertheless, nothing is more certain than that, as long as this invidious and unjust accumulation of the whole direct tax is on one class of 150,000 persons, it will be highly popular with the remaining 29,000,000, and that the popular journals will never cease to resound with the propriety of extending still farther the partial burden of direct, and the general exemption under the name of Free Trade from the indirect taxes. ”

“ I recommend to Congress the abolition of the minimum principle, or assumed, arbitrary, and false values, and of specific duties, and the substitution in their place of ad valorem duties as the fairest and most equitable indirect tax which can be imposed. By the ad valorem principle all articles are taxed according to their cost or value, and those which are of inferior quality or of small cost bear only the just proportion of the tax with those which are of superior quality or greater cost. The articles consumed by all are taxed at the same rate. ”

“ For instance, should a legislator, wishing to impose a new tax, choose that which would be theoretically the most just? By no means. In practice the most unjust may be the best for the masses. Should it at the same time be the least obvious, and apparently the least burdensome, it will be the most easily tolerated. It is for this reason that an indirect tax, however exorbitant it be, will always be accepted by the crowd, because, being paid daily in fractions of a farthing on objects of consumption, it will not interfere with the habits of the crowd, and will pass unperceived. ”

“ Abolition of industrial trusts, those that exist because of tariff protection and those that exist because of freight discriminations whether by rebates, special rates or otherwise.
7. Taxation that will tax every man according to his accumulated wealth—tax property, not man; collect state and municipal taxes by direct tax on the accumulated wealth of society assessed at actual cash value; collect national taxes by a direct tax on the earnings of accumulated wealth, whether large or small. Have only direct taxes, for indirect taxes cover injustice and extravagance. ”

“ These economists teach that the question of whether a tax is direct or indirect depends not upon whether it is directly levied upon a person, but upon whether, when so levied, it may be ultimately shifted from the person in question to the consumer, thus becoming, while direct in the method of its application, indirect in its final results, because it reaches the person who really pays it only indirectly. ”

“ The difference in effect between a tax measured by gross receipts and one measured by net income, recognized by our decisions, is manifest and substantial, and it affords a convenient and wo kable basis of distinction between a direct and immediate burden upon the business affected and a charge that is only indirect and incidental. A tax upon gross receipts affects each transaction in proportion to its magnitude and irrespective of whether it is profitable or otherwise. ”

“ But in addition to these two forms of direct taxation indirect taxation also was coming more and more to the front. The right of the king to grant licences to bring goods into or to trade within the realm, a right springing from the need for his protection felt by the strangers who came there for purposes of traffic, laid the foundation of our taxes on imports. Those on exports were only a part of the general system of taxing personal property which we have already noticed. ”

“ There is, however, a frequent plea in support of indirect taxation, which must be altogether rejected as grounded on a fallacy. We are often told that taxes on commodities are less burdensome than other taxes, because the contributor can escape from them by ceasing to use the taxed commodity. He certainly can, if that be his object, deprive the Government of the money ”

“ The finances of the United States are characterized by rapid increase in magnitude of fiscal operations, and by the great facility with which revenues are secured, resulting in a general tendency for revenue to outstrip expenditures. While the Federal Government possesses the constitutional right to levy both direct and indirect taxes, the requirement that the former shall be apportioned among the States in proportion to population, and the popular hostility to direct taxation, have in effect practically confined the Federal Government to the field of indirect taxation. ”

“ It matters not whether the tax is, as appellee contends, an indirect or excise levy on net worth measured by corporate capital and surplus or is, as appellant urges, a tax on personal property based on a valuation gauged by capital and surplus. Our inquiry is narrowed to whether in practical operation and effect the tax is in part a tax upon federal bonds. We can only conclude that the tax authorized by § 54:4-22, whether levied against capital and surplus less liabilities or against entire net worth, is imposed on such securities regardless of the accounting label employed in describing it. ”

“ It being beyond dispute, therefore, that the sum of taxation in this case was fixed almost exclusively by the gross earnings from interstate commerce, who, may I ask, can point out the distinction between taxing the gross earnings derived from interstate commerce and taxing a valuation based on such earnings? The elementary principle so often applied by the court, that a tax which may not be imposed directly cannot be levied indirectly, is decisive. ”

“ Apart from these more fundamental considerations which we think are of controlling force in the application of the commerce clause, we can find no adequate basis for distinguishing the present tax laid on the sale or purchase of goods upon their arrival at destination at the end of an interstate journey from the tax which may be laid in like fashion on the property itself. ”

“ But we think the tax assailed here finds support in reason, and in the practical needs of a taxing system which, under constitutional limitations, must accommodate itself to the double demand that interstate business shall pay its way, and that at the same time it shall not be burdened with cumulative exactions which are not similarly laid on local business. ”

“ Therefore, the total amount exacted from interstate commerce under a gross receipts tax can fluctuate just as the total paid under a property tax. Since property and corporate franchises used in interstate commerce can be constitutionally taxed by States, whether profitable or unprofitable, it seems difficult to justify a constitutional test for state income taxes based upon existence or absence of profit. ”

“ To say that there is no sale because there is no risk-shifting and that there is no risk-shifting because the price to be paid is payable only from the income produced by the business sold, is very little different from saying that because business earnings are usually taxable as ordinary income, they are subject to the same tax when paid over as the purchase price of property. This argument has rationality but it places an unwarranted construction on the term 'sale,' is contrary to the policy of the capital gains provisions of the Internal Revenue Code, and has no support in the cases. ”

“ And the amount of the taxation may be determined by the value of the property, or its use, or its capacity, or its productiveness. It may touch business in the almost infinite forms in which it is conducted, in professions, in commerce, in manufactures, and in transportation. Unless restrained by provisions of the Federal Constitution, the power of the State as to the mode, form, and extent of taxation is unlimited, where the subjects to which it applies are within her jurisdiction. ”

“ The taxing provision does not impose a tax in respect of all transfers, but only in respect of such as yield a profit over cost and allowed expenses. If there be no profit, there is to be no tax. If there be a profit, the tax is to be 50 per cent. ”

“ That tax is to be returned by, and collected from, the corporation as his agent and instrument.
A tax is understood to be a charge, a pecuniary burden, for the support of government. Of all burdens imposed upon mankind that of grinding taxation is the most cruel. It is not taxation that government should take from one the profits and gains of another. That is taxation which compels one to pay for the support of the government from his own gains and of his own property. ”

“ I say this because, among all the hundreds of cases dealing with the power of the States to tax commerce, there is not a single decision adjudicating the precise situation now before us. Concretely, we have never decided that a State may tax a corporation when that tax is on income related to the State by virtue of activities within it when such activities are exclusively part of the process of doing interstate commerce. ”

“ The only limitations imposed are that direct taxes, including the capitation tax, shall be apportioned; that duties, imposts, and excises shall be uniform; and that no duties shall be imposed upon articles exported from any state. With these exceptions, the exercise of the power is, in all respects, unfettered.
'If a tax upon carriages, kept for his own use by the owner, is not a direct tax, we can see no ground upon which a tax upon the business of an insurance company can be held to belong to that class of revenue charges. ”

“ The adoption of the taxing act, as recommended by the commission, may therefore be taken, as appellant contends, to evidence a definite and specific legislative purpose to levy a new type of franchise tax, measured by corporate net income, including the tax exempt income from federal and state bonds. ”

“ As compared with the company deriving its income only from taxable sources, the enterprise with the same total amount of investment income derived partly from exempt and partly from taxable sources would pay more tax per dollar of taxable gross income, i.e., taxable income before deduction for the reserve. ”

“ But to recognize the increment in value as affecting earnings and profits would no more harmonize with the taxless character of the transaction than to treat a realized gain as doing so. The same policy which carries over the transferor's basis for purposes of the corporation's income tax, § 113 (a) (8) , requires carrying it over for determining the taxability of its distributions as the Commissioner's regulation directs: gains and losses are to be brought into earnings and profits at the time and 'to the extent' that they are recognized under § 112. ”

“ Taxation would not then fall unduly on the man of moderate means; and while none would be entirely exempt from assessment, all, in proportion to their pecuniary abilities, would contribute toward the support of the State. A modification of the internal-revenue system, by a large reduction in the number of articles now subject to tax, would be followed by results equally advantageous to the citizen and the Government. ”

“ Many States, for instance, impose taxe on the consumption of goods and such taxes have been sustained regardless of the extra-State origin of the goods, or whether a tax on their sale had been imposed by the seller State. Such potential taxation by consumer States is but one factor pointing to the deterrent effect on commerce by a superimposed gross receipts tax. ”

“ Indeed, it is obvious that an income tax, levied on the profits of any business, does not fall ultimately on the consumer or patron of that business, in any other sense than that in which a poll tax or land tax may be said ultimately to fall, or be charged over by the payer of those taxes upon the persons with whom and for whom they do business, or to whom they rent their lands. ”

“ In each case the amount of the tax will increase as the profitability of the interstate business done increases. This Court has consistently upheld state net income taxes of general application so applied as to reach that portion of the profits of interstate business enterprises fairly allocable to activities within the State's borders. We do no more today. ”