There are two basic types of tax. There is indirect tax and direct tax. The term indirect is in reference to a person’s labor. For example, gas tax, tobacco tax or sales taxes are all indirect taxes. Social security, Medicare and Federal income taxes are direct taxes on your labor. Generally speaking indirect taxes are avoidable, whereas direct taxes are not. Click the link for h1 form.
Now, the Constitution states in Article 1, section 9, “No capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.” To make this real simple and plain, “No direct tax on labor is allowed unless it is split up evenly among everybody”
By the way, if you are a federal employee, you are considered by the government to be privileged as opposed to a private sector worker. Since your income is derived from gains (tax of citizens), it is constitutional to lay tax on your wages. That is “considered” an indirect tax.
Here is how the Supreme Court describes it;
“An income tax is neither a property tax nor a tax on occupations of common right, but is an excise tax.” “The legislature may declare as ‘privilege’ and tax as such for state revenue, those pursuits not matters of common right, but it has no power to declare as a ‘privilege’ and tax for revenue purposes, occupations that are of common right” Simms v. Ahrens, 271 SW 720 (1925)
Congress on the other hand has the right to tax gains or profits. Examples would be dividends, royalties, alimony, pensions and things of that nature.
So doesn’t this mean that the Federal Income tax that we pay nowadays is unconstitutional? No it doesn’t!!! Let’s start at the beginning.
The Beginning of Income Tax
In 1862, America was in the midst of a civil war. Abe Lincoln thought that this would be a quick and painless war, but it turned out to be long and bloody. President Lincoln had left the gold standard and started printing money (greenbacks) out of thin air to finance northern government. This caused inflation in the dollar supply. So on July 1st 1862, they passed the Internal Revenue Act of 1862 (which was a revision of an earlier flat rate income tax passed in 1861) to combat inflation and finance the war.
This was the first income tax and it was put on the pay of government workers and it was withheld. Luxury taxes (remember the monopoly board?) were imposed on a long list of commodities, including alcohol, tobacco, jewelry, yachts, playing cards etc. The act taxed licenses (on almost all professions) and also gains and profits (receipts from corporations, interest and dividends) as well as stamp tax and inheritance tax.
This Act established that income is ‘gains’ or ‘profits’. This is the reason why only government workers paid it. If income meant anybody’s wages that had a job, then obviously everyone would have been taxed, and of course, that would have been unconstitutional. A person’s labor is his own personal property and cannot be taxed.