Amendment 16 says only: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration" and so fails to define the term "income". A whole mess of confusion has followed - and even preceded its apparent 1913 ratification.
Remarks on the Meaning of "Income"
by Jim Davies
Its other major terms are defined elsewhere in the Constitution; for example "congress" is the subject of the whole of Article 1 and "apportionment" is explained in Article 1 Section 9. But "income" itself, by far the most important term used, is not. Given that Amendment 16 is said to be the clause enabling the whole of the trillion dollar a year "income tax", that omission may be highly significant.
ConsequencesSince the term "income" is used inside Amendment 16, part of the US Constitution, it cannot be defined outside the Constitution; for that would amount to a further amendment, which can be done only by the procedure shown in its Article 5, with three quarters of the States concurring. Whatever the term meant or didn't mean in 1913, therefore, we're stuck with it.
If the meaning of the term was obvious and unambiguous, this would not be a problem; for as Profesor Jonathan Siegel of George Washington University has said "The general rule is that where a statutory term is undefined, it should be given its ordinary, common meaning." However, this paper suggests that there is (and was, in 1913) no such thing. If that's the case, we cannot know what Amendment 16 means, and never will know unless and until it is further amended with a definition. Likewise Title 26 Subtitle A, which is the body of law that Congress enacted after being so enabled, cannot and did not define the term - though it makes use of it extensively. That is absurd! A vitally important body of law about an entity which is, literally, meaning-less!
For example 26 USC 1 imposes a tax upon "taxable income", a term defined in §63 in terms of "gross income", a term defined in §61 in terms of "income." Since the latter is undefined and undefinable, the appearance of a tax imposition in §1 is an illusion: a tax is imposed on something whose nature is unknown and un-knowable!
Before we set that astonishing conclusion about Subtitle A in stone, let's consider why "income" is not a term with a common, unambiguous meaning, clear to any ordinarily intelligent person. Reflect on how the word is used in four contexts: everday, legal, political, and judicial speech.
Everyday SpeechMost often, "income" is a term used interchangeably with "salary" or "wages". A person earning $1,000 a week may be said to have an income of $52,000 a year. Also, however, a business may be said to have an "income" of so many million dollars per quarter, or per year, and it may issue a quarterly or annual "income report." There, the term is used interchangeably with "profits" or "earnings" - meaning, profits. Both these kinds of everyday use were current in 1913 as today - with the latter more frequently than now.
Note the confusion between those two groups of usage. If a person has a salary and that's called "income", then the higher the salary the higher the income. However if a company pays salaries to employees, the higher the salaries the lower the profits - the effect is opposite. To a person, wages always add to income; to a business, wages always reduce income (except when it hires out contract labor, see below.)
Further, in everyday speech "income" might sometimes refer to "everything that comes in" and in the case of a person that might be close or identical to his salary - but in the case of a company "everything that comes in" would normally be many times greater than its income or profit. For that reason it's more usually called "sales revenue". Note also the difference between the parties doing the earning: if "income" means wages it can be earned only by individuals, whereas if it means "profits" it can be earned only by businesses; the definition therefore directly determines who is being taxed and who is not.
Conclusion: in everyday speech there are striking differences among several alternative ways in which the term "income" is used. If it's to be used in the law, the exact meaning there must be spelled out because no single "ordinary, common meaning" exists.
Legal SpeechBouvier's Law Dictionary defines "income" as "The gain which proceeds from property, labor, or business; it is applied particularly to individuals; the income of the government is usually called revenue." The aspect of gain seems pre-eminent and is troubling. Clearly a business can receive gain, by trading; that's what it's there for, to produce profit for its shareholders. But can an individual receive gain, for his labor? Is not his labor provided in a straight exchange for wages or salary, with no profit or gain arising? Here are five court cases that clearly say that it is - and if there are others to contradict that, the contradiction further confirms that "income" is not a term with a "common, ordinary meaning" in legal speech.
However if it's said that a worker can derive a gain from a wage, then why would not the border between exchange and gain not be subjectively set in different places by two or more different workers? One may say Yes, I gained enough (profit, income) to take a 2-week vacation from my year's work - while another may say that his gain amounted only to the sum he was able to squirrel away; a third may recognize that his savings took the form of increased equity in the home on which he's paying a mortgage. It's a rats' nest of questions and uncertainties and indeed there may have been court cases that have ruled one way or another; the point is not to choose here between these but to remark that the meaning of "income" is by no means ordinary, common and singular.
There's more. Both Amendment 16 and 26 USC 61 use the curious phrase "income, from whatever source derived" and in the latter case 15 examples of sources are listed. This falls far short of a definition, but it does clearly say that "income" in the law is an entity "derived from sources." Among the examples of sources listed in §61 is "compensation for personal services" which is often taken to mean the same as "wages and salaries" even though that phrase was removed from that Section in 1954 - see below. If it does, then we have a statement that "income" can not consist of or include "wages and salaries" because, of course, nothing can ever be derived from itself; beer is derived from hops, but certainly does not include any or consist of them. In any case unlike corporations (see below) individuals cannot derive anything from a salary; they either receive it, or they don't.
Conclusion: in legal speech, the meaning of "income" is obscure as well as undefined, though these clues indicate it may have something to do with the profits earned by a corporation.
Political SpeechDuring the 1909 Congressional debates that drafted what was to become Amendment 16, it is clear that if any of the speakers knew what the term "income" meant, they were not about to say so. Their confusion is almost unintelligible, and is described here, notably on and from page 162. Note from pp 165-66 that Senators Cummins and Shively evidently knew that Congress was not empowered to define the term, and actually (but falsely) said that the task would be performed by the courts! So much for the Legislature crafting an unambigious law.
Did they understand that they were asking the States to grant permission to tax the earnings of ordinary working Americans? - very likely so, for it would become an incredibly lucrative source of government revenue. But what they said in debate certainly obscured that intention, possibly out of fear that it would, if exposed, ruin any chance of getting it ratified. So they may have deliberately obfuscated the matter, and instead of a forthright "Congress shall have power to tax wages, salaries and any other form of individual receipts..." they coined the phrase "...incomes, from whatever source derived." Perhaps they didn't define clearly what they meant because they didn't want it clearly understood. Or so, at least, we might speculate.
When Title 26 was extensively revised in 1954, the joint chairmen of the Congressional Committee charged with drafting the new §61 from the old §22 stated that it would use the term "income" in its "Constitutional sense" rather than its other or ordinary sense; the two Sections are shown here side by side.
They were not so helpful as to define what either of those "senses" meant (they probably realized that, as above, they had no power to define a term used in the Constitution) but they did at least confirm that there are (at least) two distinct ways in which "income" can be used.
In the same Section (#61) the confusion is deepened by the wording change that Committee made, when forming §61 from its predecessor, §22: the phrase "wages and salaries or" was deleted, as was the word "personal" in "compensation for personal services"! - so that it now says only that "income" is something "derived from... compensation for services..." Is such compensation meant to include wages, or is it distinct from them? It's hard to explain the removal of either of those deleted words if the intention was to include personal wages. Further, corporations can derive profits from such compensation when they hire out contract labor (in the consultancy and temp-help trades for example) at an agreed rate, higher than the wage they pay the worker - but individuals cannot derive anything from their own, received compensation except the compensation itself; there is no "derivation." The deletion seems only to conceal the contradiction and add to the confusion.
Conclusion: in political speech also there are several separate ways in which the term "income" is used - and in the very discussion that spawned Amendment 16 the lawmakers were badly confused about how many more there were and what they meant. Again: any term used in the law must either have a clear "ordinary, common meaning" or else a definition within the law. This has neither. Obvious consequence: the law is void for vagueness.
Judicial SpeechIn this context also, confusion reigns about the meaning of "income" in the law:
- Some lower courts have said that it includes salaries and wages, while the five court cases cited above say that it does not
- The Supreme Court has emphatically said (eg in Merchants' Loan) that it consists of corporate profit and that the income tax, far from being an unapportioned direct tax on individuals' earnings, is actually an excise tax on corporate profits
- Regardless of the varying opinions they gave, by the very act of attempting to define the term "income" all those courts clearly implied that it was in need of a definition - that is, that no coherent, ordinary, common meaning exists that would obviate such a need
- One Supreme Court decision (Eisner) pointed out that Congress has no power to define the term, yet failed to comment on the fact that those Supreme Court opinions had set out to define it! - as if courts had a mysterious power, not found in Articles 3 or 5, to amend the Constitution while Congress does not.
ConclusionUsage of the term "income" is very far from uniform and unambiguous, so it should not be used in law without a definition and only a new Amendment can legally produce one. Since in Subtitle A of Title 26 it has been so used anyway, that Subtitle - the entire alleged "income tax" - is based upon a literally meaningless term and is, therefore, void.