April 1, 1943

Tax Review: Ability to Pay

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Volume IV No 4.

Executive Summary Much of the debate, confusion and disagreement, in and out of Congress, over the issue of improving the income tax may be traced to the doctrines of income taxation that have come to be accepted as gospel. Because of these doctrines, and because of various obsessions about them which have become fixed in the minds of many people, any proposal to alter the income tax is regarded by these persons as a kind of blasphemy.

It would be difficult to find a subject in the whole field of government finance in which there has been more uncritical acceptance of dogma than in the case of the income tax. The consequences of this attitude are now apparent in the difficulty of making, or even of securing temperate and objective consideration for, a change of procedure.

It is well understood that the 16th Amendment imposes no mandate with respect to income taxation, except that it permits such taxation without apportionment of the levy among the states according to population. This specific authorization was deemed necessary on the assumption that the income tax is a direct tax. But beyond the circumvention of the “direct tax clause,” the amendment neither orders nor forbids anything. It does not even require that incomes be taxed. It says nothing about the rate or rates of taxation, and it fails entirely to mention ability to pay.

Consequently, Congress has always had full discretion and authority to define income (subject only to the views of the Supreme Court as to what may be income or what income may be within the federal tax jurisdiction), to determine the rate or rates, or even to decide whether or not incomes shall be taxed at all. Under these conditions, there is no reason whatever for regarding the current theory and practice of income taxation as above criticism or improvement.

It is natural that those members of Congress who have served for years on the committees initially responsible for the tax law should be a bit sensitive to criticism, although it is impossible to understand how anyone could have pride of authorship in the obscure, confused, complicated document which is known as the income tax law. While there has been much complaint about the law, this has dealt principally with specific provisions. There has been too little thoughtful consideration of the underlying theories and dogmas on which it rests.

A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.

A direct tax is levied on individuals and organizations and cannot be shifted to another payer. Often with a direct tax, such as the personal income tax, tax rates increase as the taxpayer’s ability to pay increases, resulting in what’s called a progressive tax.

Apportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders.