A Summary

Of the Constitutional Power of the Federal Government to Impose Taxes and Incur Debt

“It is true that the power of Congress to tax is a very extensive power.  It is given in the Constitution, with only one exception and only two qualifications. Congress cannot tax exports, and it must impose direct taxes by the rule of apportionment, and indirect taxes by the rule of uniformity.  Thus limited, and thus only it reaches every subject, and may be exercised at discretion.” 

- U.S. Chief Justice Salmon Portland Chase (The License Tax Cases, 1866)

The Congress shall have Power to lay and collect Taxes:  The Constitution grants Congress extremely broad powers to raise revenue through a variety of different types of taxes.  It divides taxes into two mutually exclusive categories: indirect taxes which must be applied uniformly throughout the country and direct taxes which must be apportioned based on State populations.  The Framers of the Constitution assumed that indirect taxes, which were essentially consumption taxes, would fund the federal government under ordinary circumstances.  Because the burden for indirect taxes ultimately tended to fall on the consumer in the form of higher prices, which in turn drove down demand, the Framers believed that this would act as the ultimate check on government overreach.  The current progressive income tax system has essentially disabled this intended self-regulatory mechanism.  Direct taxes were intended to be used only in emergencies such as in times of war.  Direct taxes were imposed directly on individuals, who, the Framers assumed, could not readily shift their liability to others.  Four factors strongly influenced the Frames in determining the taxation powers granted to the federal government, the restrictions on those powers, and the limitations placed on the taxation powers of the States. 

1. “No taxation without representation.”  One of the major grievances against the British government that led to the creation of the United States was clearly stated in the Declaration of Independence - “For imposing Taxes on us without our Consent”.  The Framers tried to ensure that “taxation without representation” could not be an issue for the United States by investing the “power of the purse” in the legislative body designed to be the one that was the closest to the people.  Therefore the Constitution requires that all revenue bills originate in the House of Representatives where representation is directly proportional to population.  Originally the Constitution left it completely up to each State to decide who could vote and therefore who had representation.  At the time of the Constitution’s ratification, it is estimated that less than half of the white male population had the right to vote.  So in 1789, taxation without representation continued to be a reality for the majority of Americans.    
   
2. The federal government must control its own revenue stream.  The Framers were very explicit in giving Congress the power to raise revenue because the lack of such power under the Articles of Confederation (1777-1788) was considered to be one of the primary problems that led to the need for the new Constitution.  Under the Articles, the central government lacked an independent source of income.  It had to requisition funding from the governments of the member States.  The States could decide to ignore the requisition or to send less money than was requested.  As a result, the central government lacked the necessary revenue to enforce laws and treaties and to pay its debts.  By the time the Constitutional Convention was convened in 1787, the government was effectively rendered powerless and the country was in danger of disintegrating.  
   
3. All States must be treated equally.  To convince the States to accept the Constitution, the Framers had to ensure that the majority of the States could not gang up on a minority and force them to pay a disproportionate proportion of the tax burden of the federal government.  As a result, direct taxes must be apportioned based on population, indirect taxes must be applied uniformly throughout the nation, and no laws which raise revenue can disadvantage one State with respect to the others.  Unfortunately, over time most these requirements have been essentially circumvented in practice.
   
4. Exports are vital to the country’s economic success.  The Framer’s believed international trade was absolutely essential to the development of a strong economy and thus to the country’s long term viability.  Therefore, the Constitution prevents the federal government from imposing taxes or duties on exports and it limits State governments to taxing imports and exports only to the extent necessary to recover the cost of State mandated inspections.
   

The National Debt:  The Constitution gives Congress the power to borrow money on the credit of the United States.  The 14th Amendment makes it unconstitutional for the federal government to default on the national debt.

Income Taxes:  The Constitution, as originally ratified in 1787, gave Congress the power to levy a federal income tax, but the first tax on personal income wasn’t imposed until 1861 when it was used to help pay for the Civil War.  A Supreme Court ruling (Pollock v. Farmers' Loan & Trust Co., 1895) made it difficult to impose income taxes in a way that applied coherently to all forms of income.  The 16th Amendment removed that impediment by exempting all federal taxes on income from the constitutional requirement that direct taxes be apportioned among the states according to population.  This made the modern federal income tax system possible.

Accountability:  To impose accountability on Congressional spending and a check on the power of the executive branch, the Constitution requires that:  

1. Congress must appropriate, through laws, all funds to be spent before those funds can be released by the U.S. Treasury.  
   

2. The executive branch cannot spend any money unless it has been appropriated by the Congress.  

3. The federal government must make its revenues and expenditures public.