True or false congress lacked the power to tax and couldnt pay its debts

The United States takes full financial responsibility for all the debts accrued and money borrowed under the authority of the Second Continental Congress during the American Revolution. The United States solemnly pledges to repay all these debts.

Commentary

In an attempt to maintain the good credit of the United States in the eyes of foreign nations and creditors, the Confederation Congress guaranteed that all debts contracted by the Continental Congress would be repaid. However, this commitment to repay debts is not matched in the Articles by any articulated means of repayment.

Other than the taxes that the states were supposed to supply, Congress had no independent source of revenue with which to repay its creditors. Because many individual states had their own debts from the war, they were typically more inclined to pay those first before contributing to repayment of the national debt. These issues were compounded by the fact that each state printed its own paper money and established its own set of commerce regulations. Furthermore, inflation raged out of control in both the national and state currencies.

Given the limited range of authority in matters of finance, it is amazing that the U.S. Congress managed to stay financially afloat at all. Much of this could be contributed to the abilities of the first Secretary of Finance, Robert Morris, who tried to work within the confines of the system as much as possible. In 1782, he established the Bank of North America. Although this was suspected by some to be an illegal extension of the authority of Congress, it passed Congress and greatly assisted in financial stability. However, his attempts, along with Alexander Hamilton, to pass an amendment empowering Congress to collect a 5% impost failed in both 1781 and 1783.

Without an established source of revenue, Congress also could not pay the soldiers in the Continental Army. This moved troops close to mutiny on two separate occasions. At Newburgh in March of 1783, troops protesting their lack of pay came close to mutiny until George Washington intervened. In Philadelphia in June 1783, another group of mutinous troops demanding pay forced Congress to retreat to Princeton. During this year, Robert Morris resigned from the position, haunted by accusations of corrupt politics and inability to perform his job due to the limitations of Congress.

The issue of debt repayment deeply worried individual states as well. Massachusetts levied high taxes and imposed strict regulations about debt repayment after the war. In 1787, these taxation methods resulted in an armed protest of Massachusetts farmers, led by Daniel Shays, a former captain in the Continental Army. The Massachusetts legislature's unyielding attempts to immediately repay its debts abused the rights of citizens in much the same way as the British Parliament had a decade earlier: the Massachusetts farmers rallied under the same cry as the American Revolutionaries, "no taxation without representation," and relied on similar military tactics.

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Without the power to tax, a government will have few resources to do anything. It cannot effectively police its citizens, protect its people from foreign invaders, or regulate commerce because it cannot pay the associated costs. Discarding the Articles of Confederation—which merely allowed Congress to ask states for money—the drafters effectively adopted a taxing document – the U.S. Constitution. The Constitution gave Congress the power to lay taxes and also to collect them. Taxes—more precisely, the money they provide—make all other government actions possible. One might think about that in relation to present-day loose confederations such as the United Nations, NATO, and the European Union. Without the enforceable power to tax, they are necessarily subject to the potentially fleeting willingness of members to contribute.

The U.S. taxing power, while very broad, has important limitations. First, direct taxes must be apportioned, a very difficult requirement. Second, duties, imposts, and excises must be uniform—an easy-to-meet standard, but one which, if ignored, can be fatal to a statute.   See, Steven J. Willis & Hans G. Tanzler IV, Affordable Care Act Fails for Lack of Uniformity, 27 U. Fla. J. Law Pub. Pol’y 81 (2016). Third, bills for “raising revenue” must originate in the House. Although “raising revenue” and “taxing” are not fully the same, the overlap is substantial and can have important consequences. See, Steven J. Willis & Hans G. Tanzler IV, The Wrong House: Why “Obamacare” Violates the U.S. Constitution’s Origination Clause, Wash. Leg. Found. Critical Legal Issues Number 190 (2015).

Fourth, under the Sixteenth Amendment, “income taxes” apply only to “income” “derived” “from a source.” What constitutes an “income tax,” let alone “income,” and what “derived” “from a source” means have been subject to more than one hundred years of debate. Essentially, a taxpayer must experience an “accession to wealth” from an event such as a sale, exchange, or receipt.   See, Steven J. Willis & Nakku Chung, Of Constitutional Decapitation and Healthcare, 128 Tax Notes 169, 189-93 (2010). A mere increase in value is not “income” and thus cannot be taxed to humans. For entities, such as corporations, however, a tax on value increases is not an income tax; instead, it is an excise subject merely to uniformity. Flint v. Stone Tracy Co. (1911). To summarize: the power to tax humans differs substantially from the power to tax entities.  

Fifth, taxes exist in the presence of various power limitations and personal rights found in the Constitution. Although the application of a tax surely cannot violate the Equal Protection Clause, the Supreme Court has more generally held that the Due Process Clause does not restrict the taxing power. A. Magnano Co. v. Hamilton (1934) (“Except in rare and special instances, the due process of law clause contained in the Fifth Amendment is not a limitation upon the taxing power conferred upon Congress by the Constitution.  Brushaber v. Union Pacific Railroad Co. (1916). And no reason exists for applying a different rule against a state in the case of the Fourteenth Amendment.”) Recognizing the lack of constitutional due process protections, Congress statutorily created “collection due process” limitations.   See, Steven J. Willis & Nakku Chung, No Healthcare Penalty? No Problem: No Due Process, 38 Am. J. Law & Med. 516 (2013). Those important protections, however, are subject to the whim of future Congresses.

This essay is part of a discussion about the Taxing Clause with Neil S. Siegel, David W. Ichel Professor of Law and Professor of Political Science, Duke Law School. Read the full discussion here.

Sixth, arguably taxes must be imposed “for the general welfare.” A close reading of Article One, Section Eight suggests the limitation actually restricts the spending power rather than the taxing power. Interestingly, in NFIB v. Sebelius (2012), Justice Ginsburg spoke of the general welfare restriction as applying both to taxing and spending. In contrast, Chief Justice Roberts twice discussed the restriction, but only in terms of the spending power. In any event, this restriction is easily met and thus largely inconsequential.       

Lastly, the reach of taxing power limitations remains partially unclear, even 225 years after the adoption of the Constitution. The Federalist Papers spoke of two broad tax categories: direct and indirect, with direct being subject to apportionment and indirect being subject to uniformity. The Constitution, however, does not quite say that. Instead, it first grants Congress broad taxing power. It then requires that direct taxes be apportioned. Next, it requires that duties, imposts, and excises be uniform. It never uses the term “indirect.” This leaves open the question of whether some other type of tax is possible, which need be neither apportioned nor uniform. In 1796, the Supreme Court suggested, but did not hold, that any such “other” tax must be uniform. Hylton v. United States (1796) (Chase, J.). Over the past two hundred years, the Court has routinely spoken of taxes as being either direct or indirect; however, it has yet to consider a case holding “indirect taxes” as encompassing duties, imposts, and excises and nothing more. As a result, the question remains at least technically unresolved. 

Arguably, the Affordable Care Act tax is just that: a newly found type of tax. In NFIB, the Supreme Court held it was a tax, but not a direct one. Traditionally, duties, imposts, and excises each involve some activity: duties and imposts involve imports and transactions, while excises involve an activity, the use of something, or the exercise of a privilege. Not having health insurance does not seem to fit within any of those categories because it involves not doing something rather than doing something. The commerce clause holding in NFIB rested on inactivity not being “commerce.” Whether the Court will apply analogous reasoning to the meaning of “duties, imposts, and excises” is uncertain but plausible. The ACA tax on the lack of insurance need not be apportioned because the Court said so in 2012. The tax appears not to be uniform; however, whether it must be uniform is less clear and remains to be litigated.