ties must necessarily come out of the revenue raised by general taxation.23 § 139. Direct and Indirect Taxes.-The general division of taxes is into direct and indirect; all taxes fall under one of these two heads. The Constitution grants to Congress power to lay and collect both direct and indirect taxes; restrictions, however, are placed upon the method of levying both direct and indirect taxes; all indirect taxes must be uniform and all direct taxes must be apportioned.24 The question as to the proper distinction to be observed in determining whether a tax is a direct or indirect one, has proved one of the most difficult questions which the Supreme Court has ever been called upon to decide. The first of the long series of decisions on this distinction between direct and indirect taxes was that of Hylton v. the United States,25 decided in 1796. The question before the Court on this occasion was whether or not the law of Congress of the 5th of June, 179426, entitled, "An act to lay duties upon carriages for the conveyance of persons," was unconstitutional and void. On behalf of the appellant Hylton it was urged that the tax on carriages was a direct tax and therefore should have been apportioned among the several States according to their population under the last census. As the law in question was not laid in accordance with the rule of apportionment prescribed in the case of direct taxes, but in accordance with the rule of uniformity laid down by the Constitution for duties, imposts and excises, it was contended that the law was thus rendered void and unconstitutional. Alexander Hamilton appeared among the lawyers for the government. The Supreme Court upheld the constitutionality of the law; their decision, rendered by Judge Chase, in part being as follows: "The Constitution evidently contemplated no taxes as direct taxes, but only such as Congress could lay in proportion to the census. The rule of apportionment is only to be adopted in such cases where it can reasonably apply, and the subject taxed must ever determine the application of the rule." "All 23 United States v. Carlisle, App. Cas. (D. C.) 143. 24 See last section. 253 Dallas, 171. 26 U. S. Stat. at large, 373. taxes on expense or consumption are direct taxes. A tax on carriages is of this kind, and of course is not a direct tax. Indirect taxes are circuitous modes of reaching the revenues of individuals who generally live according to their income. In many cases of this nature the individual may be said to tax himself. I shall close this discourse with reading a passage or two from Smith's Wealth of Nations: "The impossibility of taxing people in proportion to their revenue by any capitation seems to have occasioned the invention of taxes upon consumable commodities. The State not knowing how to tax directly and proportionably the revenue of its subject, endeavors to tax it indirectly by taking their expense, which is supposed in most cases will be nearly in proportion to their revenue. Their expense is taxed by taking the consumable commodities upon which it is laid out.' Vol. III., p. 331. "Consumable commodities, whether necessaries or luxuries, may be taxed in two different ways; the consumer may either pay an annual sum on account of his using or consuming goods of a certain kind, or the goods may be taxed while they remain in the hands of the dealer, and before they are delivered to the consumer. The consumable goods, which last a considerable time before they are consumed together, are most properly taxed in the one way; those of which the consumption is immediate, or more speedy, in the other: the coach tax and plate tax are examples of the former method of imposing; the greater part of the other duties of excise and customs, of the latter.' Vol. III., p. 341. "I am, therefore, of opinion that the judgment rendered in the Circuit Court of Virginia ought to be affirmed." This question was also one of the points at issue in the case of Veazie Bank v. Fenno,27 which settled the right of the United States to tax the notes issued by State banks. After a discussion of the decision in Hylton v. the United States, the Court held: "It may be safely assumed, therefore, as the unanimous judgment of the Court, that a tax on carriages is not a direct tax. 8 Wallace, 533. And it may be further taken as established upon the testimony of Paterson, that the words direct taxes, as used in the Constitution, comprehend only capitation taxes, and taxes on land, and perhaps taxes on personal property by giving valuation and assessment of the various descriptions possessed within the several States. "It follows necessarily that the power to tax without apportionment extends to all other subjects. Taxes upon other objects are included under the head of taxes not direct, duties, imposts, and excises, and must be laid and collected by the rule of uniformity. The tax under consideration is a tax on bank circulation, and may very well be classed under the head of duties. Certainly it is not, in the sense of the Constitution, a direct tax. It may be said to come within the same category of taxation as the tax on incomes of insurance companies, which the Court, at the last term, in the case of Pacific Insurance Co. v. Soule (7 Wallace, 434), held not to be a direct tax." The last aspect of this question which has engaged the attention of our Courts has been that as to the nature of an income tax. In Springer v. United States, 28 Judge Swayne in delivering the opinion of the Court said: "The central and controlling question in this case is whether the tax which was levied on the income, gains, and profits of the plaintiff in error, as set forth in the record, and by pretended virtue of the Acts of Congress and parts of Acts therein mentioned, is a direct tax. If it was not having been laid according to the requirements of the Constitution, it must be admitted that the laws imposing it, and the proceedings taken under them by the assessor and collector for its imposition and collection were void. "Our conclusions are that direct taxes, within the meaning of the Constitution, are only capitation taxes, as expressed in that instrument, and taxes on real estate; and that the tax of which the plaintiff in error complains is within the category of an excise or duty." In 1895 the constitutionality of the income tax provisions of the Act of August 15, 1894, was twice argued before the Supreme 28 Court. On April 8, 1895, the Court, one Justice being absent, decided in the cases of Pollock v. Farmers Loan & Trust Company, and Hyde v. Continental Trust Company :20 "A tax on the rents or income of real estate is a direct tax, within the meaning of the term as used in the Constitution of the United States. "A tax upon income derived from the interest of bonds issued by a municipal corporation is a tax upon the power of the State and its instrumentalities to borrow money and is frequently repugnant to the Constitution of the United States. Upon each of the other questions argued at bar, to-wit: 1. Whether the void provision as to rent and income invalidates the whole act? 2. Whether as to the income from personal property as such, the act is unconstitutional, as laying direct taxes? 3. Whether any part of the tax, if not consid ered as a direct tax, is invalid for want of uniformity on either of the grounds suggested? The justices who heard the argument were equally divided, and, therefore, no opinion is expressed." Upon a second hearing30 held before a full Court, the entire law was declared unconstitutional on May 20, 1895. Mr. Chief Justice Fuller delivered the opinion of the Court. "As heretofore stated the Constitution divided Federal taxation into two great classes, the class of direct taxes and the class of duties, imposts, and excises, and prescribed two rules which qualified the grant of power as to each class. "The power to lay direct taxes, apportioned among the several States in proportion to their representation in the popular branch of Congress, a representation based on population as ascertained by the census, was plenary and absolute, but to lay direct taxes without apportionment was forbidden. The power to lay duties, imposts, and excises was subject to the qualification that the imposition must be uniform throughout the United States. Our previous decision was confined to the consideration. of the validity of the tax on the income from real estate and on the income from municipal bonds. The question thus limited, was whether such taxation was direct or not, in the mean 29 157 U. S. 586. 30 158 U. S. 601. ing of the Constitution, and the Court went no further as to the tax on the incomes from real estate than to hold that it fell within the same class as the source whence the income was derived, that is, that the tax upon the realty and a tax upon the receipts therefrom were alike direct; while as to the income from municipal bonds, that could not be taxed, because of want of power to tax the source, and no reference was made to the nature of the tax being direct or indirect. "We are now permitted to broaden the field of inquiry and determine to which of the two great classes a tax upon a person's entire income, whether derived from rents or products or otherwise, of real estate, or from bonds, stocks or other forms of personal property, belong; and we are unable to conclude that the enforced subtraction from the yield of all the owner's real or personal property, in the manner prescribed, is so different from the tax upon the property itself that it is not a direct but an indirect tax in the meaning of the Constitution. "Whatever the speculative views of political economists or revenue reformers may be, can it be properly held that the Constitution, taken in its plain and obvious sense, and with due regard to the circumstances attending the formation of the government, authorize a general unapportioned tax on the products of the farm and the rents of real estate, although imposed merely because of ownership and with no possible means of escape from payment, as belonging to a totally different class from that which includes the property from whence the income proceeds? "There can be only one answer, unless the constitutional restriction is to be treated as utterly illusory and futile, and the object of its framers defeated. We find it impossible to hold that a fundamental requisition, deemed so important as to be enforced by two provisions, one affirmative and one negative, can be refined away by forced distinctions between that which gives value to property and the property itself. "Nor can we conceive any ground why the same reasoning -does not apply to capital in personalty held for the purpose of income or ordinarily yielding income, and to the income therefrom. All the real estate of the country and all its invested personal property, are open to the direct operation of the taxing |