An Illuminating Snippet of Income Tax History

IN 1884, THE AMERICAN PEOPLE WERE sick to death of the corruption of the Republican party and its clients and cronies. In a spasm of cleansing, Stephen Grover Cleveland, a strict limited-government Jeffersonian who campaigned against most (if not all) of the economic and centralizing policies of Lincoln and his successors, was elected president of the United States. Four years later, Cleveland again won the popular vote, but due to the quirks of the electoral college he was denied a second term at that time, surrendering the White House for a term to Republican Benjamin Harrison. In 1892, Cleveland yet again won the popular vote, and this time also won the electoral college majority for the second time, both by wide margins.

Cleveland's view of federal authority and the Constitution can be seen in his commentary upon vetoing an appropriation by Congress of $10,000 to buy seed grain for drought-stricken Texas farmers:

"I can find no warrant for such an appropriation in the Constitution, and I do not believe that the power and duty of the general government ought to be extended to the relief of individual suffering which is in no manner properly related to the public service or benefit. A prevalent tendency to disregard the limited mission of this power and duty should, I think, be steadfastly resisted, to the end that the lesson should be constantly enforced that, though the people support the government, the government should not support the people. The friendliness and charity of our countrymen can always be relied upon to relieve their fellow-citizens in misfortune. This has been repeatedly and quite lately demonstrated. Federal aid in such cases encourages the expectation of paternal care on the part of the government and weakens the sturdiness of our national character, while it prevents the indulgence among our people of that kindly sentiment and conduct which strengthens the bonds of a common brotherhood.

Among the key targets of Cleveland's restoration policies upon resuming the presidency in 1892 were high protectionist tariffs by which politically-connected manufacturers forced competition-insulated prices on consumers by burdening imported goods with a tax. Declaiming against the tariff in his third annual message to Congress during his first term, Cleveland had expressed his views thusly:

"When we consider that the theory of our institutions guarantees to every citizen the full enjoyment of all the fruits of his industry and enterprise, with only such deduction as may be his share toward the careful and economical maintenance of the Government which protects him, it is plain that the exaction of more than this is indefensible extortion and a culpable betrayal of American fairness and justice ... The public Treasury, which should only exist as a conduit conveying the people's tribute to its legitimate objects of expenditure, becomes a hoarding place for money needlessly withdrawn from trade and the people's use, thus crippling our national energies, suspending our country's development, preventing investment in productive enterprise, threatening financial disturbance, and inviting schemes of public plunder."

CLEVELAND ALSO HAD HIS EYE on the untaxed profits of investors in federally-subsidized railroads, whose huge profits resulted in large part from being spared the normal need to pay for the land over which their lines ran. Under the Lincoln administration during which the lines were begun, these railroads had enjoyed grants of right-of-way over federal lands on which to operate. Included in the right-of-way grants was permission for the railroad corporations to rent out such portions as were not being occupied by the tracks themselves. The railroad corporations were also given twenty-square-mile blocks of land alongside the track for each mile of track laid (which grants included the mineral rights associated with this land).

All-in-all, the grants were themselves a public benefit more than sufficient to make the resulting profits properly subject to federal tax as "income". What's more, by the time of the Grant administration the railroaders had expanded their reach into the public pocket enormously, and the overall corruption involved had become a national scandal.

Accordingly, in 1894, Cleveland and his congressional allies passed a revenue act simultaneously reducing the tariff and reviving the 22-year-dormant "federal income" excise tax with application to qualified gains realized as dividends and rents-- that is, the gains enjoyed by the freeloading railroaders. The tax applied at a rate of 2% on "income" gains above $4,000-- a value in today's (2013) world of anywhere from $98,500 to $4,680,000, depending on the way the relative value is calculated. (Click here to run the sample yourself and see all possible results.)

Significantly (in ways that will become clear presently), also in 1894 Cleveland appointed Edward Douglass White to the Supreme Court.

In 1895, the United States Supreme Court held sections 27-37 of the revenue act invalid with its ruling in Pollock v. Farmers' Loan and Trust, 158 U.S. 601. The court's reasoning was that to apply the tax to gains derived in connection with the ownership of property (either the stock on the basis of which dividends were paid or the real estate from which rents were derived) amounted to a tax on the property itself, and thus failed to pass Constitutional muster for lack of apportionment in its administration. Cleveland's effort to lower the tariff was successful, but his effort to pluck for the public purse some of the pelf being pocketed by profiteering patrons of past Republican administrations was thwarted.

Fast-forward 15 years and we find Edward White elevated to Chief Justice by William Howard Taft, just a year after Taft called for a Constitutional amendment to overrule the Pollock court's decision concerning the apportionment requirement for taxation of otherwise excisable rents and dividends. This is not a coincidence.

TAFT IS OFTEN MISTAKEN as a fellow traveler with "progressive" Teddy Roosevelt, but while at one time Taft was supported by Roosevelt, he was ultimately disowned and despised by TR once he revealed himself as a "rule of law" president hearkening back much more to Cleveland than to his immediate predecessor. The extent of Taft's off-the-plantation character is evidenced by his appointment of White, a Democrat and appointee of the very Jeffersonian Cleveland, to Chief Justice-- even though Taft himself was nominally a Republican. As it is put in Wikipedia,

"Roosevelt for his part believed "the President has not just a right but a duty to do anything demanded by the needs of the nation, unless such action is forbidden by the Constitution or federal law." Taft's general opinion on the other hand was that "the President can exercise no power which cannot fairly be traced to some specific grant of power in the Constitution or act of Congress." (quoting Donald F. Anderson, William Howard Taft: A Conservative's Conception of the Presidency (Ithaca, N.Y., 1973)).

In fact, ultimately the Republican leadership began organizing against Taft-- a president nominally of their own party-- with Robert LaFollette forming the National Progressive Republican League dedicated to booting Taft from office. In 1912, Teddy Roosevelt actually formed the Progressive Party in order to run for the presidency against Taft. Roosevelt captured enough of the opposition vote to leave the disastrous Woodrow Wilson the victor.

However, Edward White remained Chief Justice of the Supreme Court. White, of course, was intimately familiar with the purpose of the 1894 Revenue Act and the reasoning and effect of the Pollock decision which declared the relevant part of that act invalid. He was also a man who shared Taft's views and knew what Taft meant to accomplish with the 16th Amendment (and what he did not).

In 1916, Edward White wrote the landmark opinion for a unanimous Supreme Court in Brushaber v. Union Pacific RR. Co., 240 U.S. 1. Brushaber, in harmony with the careful words of the amendment and the purposes for which it was proposed and adopted, declares the meaning and effect of the 16th Amendment to be limited to nothing but undoing the Pollock loophole shielding privilege-based dividend and rent gains from the long-existing income excise tax.

NOTE: For a bit more on the excellent Grover Cleveland, click here.