They Wrote the Constitution That Way For a Reason

Plus: Aesop explains Econ 101, the Irish troubadour Johnny Cash, and Marxist canines.

Nov 05, 2023

a sign that says pay your tax now here — Photo by The New York Public Library on Unsplash

The Framers of the Constitution took great care in constructing our system of taxation. Under the Articles of Confederation — the status quo in 1787 — the national government merely could request funds from the states. This proved infeasible. The states, possessed of the power to determine what entered the national purse, often declined to provide necessary funds.

In the end, and much to the Anti-Federalists’ dismay, the Constitution vested in Congress the authorities to tariff and to lay taxes directly on the citizenry. The catch: Direct taxes must be apportioned among the several states. The federal government had gained the power to tax, yet the framers circumscribed that power carefully.

The 16th Amendment, ratified in 1913, created a carveout to Article I, allowing Congress “to lay and collect taxes on incomes…without apportionment among the several States, and without regard to any census or enumeration.” In short, it allows Congress to levy the modern income tax.

The 16th Amendment does not provide the federal government unbounded authority to implement any sort of tax it can dream up. While this may appear obvious to the averagely literate reader, it seems Congress needs a refresher.

This author, in the Washington Examiner:

The Supreme Court is set to determine whether Congress, for the purposes of taxation, may classify unrealized capital gains as “income.” Should the justices rule in Moore vs. United States rule against the plaintiffs, the federal government effectively would gain seismic new powers to tax almost any property from which it hopes to extract revenue. This would conflict directly with the Constitution’s plain text and original meaning.
Charles and Kathline Moore, the case’s plaintiffs, have challenged an obscure provision in 2017’s landmark Tax Cuts and Jobs Act. This provision created a “mandatory repatriation tax” (MRT), which subjects Americans who own stock in foreign companies to a one-time tax on some of those companies’ earnings over the previous 30 years. Congress classified it as an “income” tax.
The Moores in 2006 purchased a 13% share of an Indian company, KisanKraft, that provides farming equipment to impoverished regions. Since then, they never have received any dividend or other form of compensation or profit from this investment. They have seen no “income.” Nonetheless, they found themselves subjected to the MRT.
The Moores were…taxed as if KisanKraft…had…distributed to the Moores a dividend worth 13% of KisanKraft’s total earnings since 2006,” the Cato Institute explains in its amicus brief.

Read the full piece here.

Some Wisdom

“The Cock and the Pearl,” one of Aesop’s fables, lays out perfectly why, economically speaking, any product or service’s value is situational and cannot be divorced from its marginal utility to the perspective buyer. (Something’s value cannot be determined fully by some politically convenient metric such as, say, the sheer amount of labor invested in it.)

A cock was once strutting up and down the farmyard among the hens when suddenly he espied something shinning amid the straw. “Ho! ho!” quoth he, “that’s for me,” and soon rooted it out from beneath the straw. What did it turn out to be but a Pearl that by some chance had been lost in the yard? “You may be a treasure,” quoth Master Cock, “to men that prize you, but for me I would rather have a single barley-corn than a peck of pearls.”
Precious things are for those that can prize them.

Functionally speaking, free markets produce far greater wealth and innovation than planned economies because, through price signals and the profit motive, they incentivize market actors to fulfill the real-world needs of others. “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest,” as Adam Smith wrote.

Morally speaking, this system promotes unparalleled voluntarism and collaboration among humans — even those who have never met. “In a free market,” Walter Williams said, “if I want something from you, I have to do something for you.”

“Think of the money that you’ve earned as a certificate of performance,” Williams continued. “It’s proof you’ve served your fellow man.”

Some Beauty

This author dove headlong back into Irish folk music this week. Some favorites include the High Kings, the Kilkennys, the Clancy Brothers, and (for a more modern flavor) the Young Dubliners. But one of the best comes from an unlikely voice, Johnny Cash.

Here’s his “Danny Boy:”