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NATIONAL MEDIATION BOARD
OTTO S. BEYER, CHAIRMAN
GEORGE A. COOK
DAVID J. LEWIS
W ASHINGTON
November 18, 1939*
r o b e r t f . c o l e , sec retary
Honorable Marriner S. Eccles, Chairman,
Board of Governors, Federal Reserve System,
Washington, D, C.
Dear Mr. Eccles:
I am glad to note that you are calling public
attention to the grave duty that the Congress is under to
provide adequate revenue to balance the budget.
As a Democratic Member of the Ways and Means
Committee during eight years, I, myself, recognized that
the situation was perilous as you will note by a glance
at the enclosed address some of the marked paragraphs of
which may interest you.
May I request the privilege of reading a copy
of your statement on the subject.
Very jsincerely yours,
7^7
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David J. Lewis
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(W of printed at Government expense)
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SEVENTY-FIFTH CONGRESS, FIRST SESSION
W H A T IS W R ONG WITH THE REVENUE?
SPEECH
OP
HON. DAVID J. LEWIS
OF M A R Y L A N D
I N T H E H O U SE O F R E P R E S E N T A T IV E S
J u ly 6,1937
M r. L E W IS of M aryland. Mr. Speaker, in presenting this
rather complicated subject today, I am going to take ad
vantage o f a suggestion once made by a well-known pro
fessor. He said that if you have a public subject to discuss,
its elucidation would be aided by presenting it as in answer
to four questions: First. W h at is it? Second. W h y is it?
Third. W h a t of it? Fourth. W h at are you going to do
about it?
I. W H AT IS IT?
W ell, sir, the subject concerns our lack of public revenues
to m eet what we conceive to be im perative expenditures.
W h y this lack in the most richly endowed country in the
world? “ Oh, it is the depression and its extraordinary ex
penditures.” I do not consider this the right answer.
O ther countries, not so richly endowed, like England, have
paid th eir w ay through this same depression. But the
United States expended $6,605,000,000 during the years 1933,
1934, 1935 to relieve social distress. W ell, G reat Britain
expended $10,815,000,000 during the same years, in terms o f
our population, fo r social relief. And the treasury o f Eng
land is not in the “ red.” T h e British budget rides as se
curely above the waves o f the depression as its men o f war
ride over the seas.
W hat, then, is the occasion fo r our continued deficits?
I answer, it is the delinquent taxpayers o f the U nited States.
Delinquent taxpayers* list
R e p u d ia tio n incom e tax, 1894, 18 years_______________ $1,500,000,000
E xem p tio n p u b lic securities____________________________
2, 000,000,000
E xe m p tio n employees, officers o f counties, cities,
S t a t e s ____________________________________________________
1,000,000,000
T a x exem ptions, com m un ity property, 8 years______
200,000,000
E xem p tio n incom e o f com pan ies fro m S tate-leased
oil la n d s _________________________________________________
3,000,000,000
E xe m p tio n incom e fro m stock dividends, 16 y e a r s ..
1,060,000,000
E vasion o f surtaxes, 16 years___________________________
7,000,000,000
T o t a l------------------------------------------------------------------ 15,760,000,000
Sir, the above list o f delinquent ta x payments repre
sents a sum o f about $16,000,000,000, or one-half the net
national debt. Consider please, the implications o f some
o f the items. Consider, first, the exemption o f non-Federal
public employees in the United States who number 2,500,000,
who receive aggregate salaries reaching the tremendous total
o f $3,250,000,000 yearly, who are not now taxable on their
salary income. Second, consider the fo rty-five billions of
Federal and State bonds, the income from a large part of
which is not taxed by the Federal Governm ent, and a larger
part exem pt as against 28 States which have incom e-tax
laws. T h e bonds exempt represent a sum more than twice
enough to build the railways. A nd third, consider the
income o f stockholders, distributed to them in the form o f
stock, nine billions in the last 12 years, income not fu lly
taxed under Federal or State incom e-tax laws. Sir, the
income o f public employees and public bonds which goes
untaxed, represents the steadiest income throughout the
years o f the depression. These public bonds more than equal
one-third o f the outstanding bonds o f the country, including
public and private bonds.
2498— 14083
M r. Speaker, it is apparent that an immense proportion
o f the income resources o f the United States is not now
taxed and is escaping taxation.
II. W H Y IS IT?
M r. Speaker, why, indeed, this delinquent list o f income
resources not exempted in any other income-tax system of
the world? H ow does it come? Is the Congress to blame?
No, sir; not ours the guilt. These egregious delinquencies
have their origin not here but in the courthouse.
I wish to begin with that most revolutionary decision
holding the incom e-tax provisions of 1894 unconstitu
tional, the Pollock case (1 ). T h e incom e-tax principle rep
resents the fairest form o f taxation. This truth there is
none to dispute. Unlike the sales tax, which taxes
people according to their needs, the income-tax standard
assesses them according to their ability to pay; that is, ac
cording as Providence and civilization shall have blessed
them. W e levied such a tax in our Civil W a r days, and
it was upheld by the Supreme Court as constitutional in a
series o f cases (2 ). These C ivil W a r acts, like the income
tax o f 1894, taxed all types o f income— rental from real
estate, products of personal property, and the very question
o f whether the income tax was a direct tax was then con
sidered by the Court and was disposed of favorably to the
Government. T h e Court then thought that the direct taxes
contemplated by the fram ers o f the Constitution were capi
tation taxes and taxes on lands and followed its early deci
sion in the H ylton Carriage case (3 ), upholding a tax levied
on carriages, without apportionm ent according to population.
This also had been the view taken o f the Hylton case by
such writers and historians as K en t, Story, Cooley, Miller,
Bancroft, Pomeroy, Hare, Burroughs, Ordoneaux, Black,
Farrar, Flanders, Bateman, Patterson, and Von Holst.
Although, Mr. Speaker, the income tax of 1894 was iden
tical w ith the Civil W a r acts, upheld form erly by the Court,
yet the Court held the tax o f 1894 invalid as a direct tax
insofar as it taxed the income from real property. Th e
Court also held that the Federal Government could not
tax the salaries o f county, city, or State employees, or income
from public securities held by persons or corporations when
issued by any city, county, or State and also announced
the doctrine that the salaries o f Federal judges could not
be made subject to the income tax. On a rehearing of the
Pollock case the Court by a 5-to-4 decision not only adhered
to its form er opinion but also held that the tax was invalid
as a direct tax insofar as it taxed the income of personal
property.
Sir, because o f this nullifying decision, the United States
alone among the great countries o f the world was condemned
to go without an income tax fo r 18 years. As a result the
Governm ent during this period, even under the small income
tax levied by the act o f 1894, lost in revenue at least $1,500,000,000. This loss o f revenue cannot be laid to the door
o f Congress in passing the statute. Congress was legislating
within its constitutional power to levy and collect taxes and
follow ing the Court in enacting the Income T a x Act of 1894.
In pointing out the disastrous effect of outlawing the act,
M r. Justice W hite, dissenting, said:
T h u s, fro m th e change o f v ie w b y th is Court, it h appen s th a t
a n act o f Congress, passed fo r th e p urp ose of raising revenue, in
strict con fo rm ity w ith the practice o f the G overnm en t fro m the
earliest tim e a n d in accordance w ith the oft-repeated decisions
o f th is C ourt, fu rn ish es the occasion fo r creating a claim against
th e G ov ern m en t fo r h u n d re d s of m illion s of dollars.
And in a dissenting opinion upon reargument he added:
I t is, I su bm it, greatly to b e deplored that, after m ore th a n 100
years of ou r n atio n al existence, afte r th e G overnm ent h as w ithstood
CONGRESSIONAL RECORD
2
the strain o f foreign w ars a n d th e dread ordeal o f civil strife, an d
its people have becom e u n ite d a n d p ow erfu l, th is C ourt sh ou ld
consider itself com pelled to go back to a lo n g-rep u d ia te d an d re
jected theory o f th e C on stitution, b y w h ich th e G ov ern m en t is
deprived of a n in h eren t a ttribu te o f its being, a necessary p ow er
of taxation.
M r. Speaker, Members o f the House, I ask you: W as this
conservative judicial action? W as it liberal judicial action?
I t was not judicial action at all. I t was an act of bald
usurpation only, through which a bare m ajority of the
judges, repudiating the Court’s form er unanimous decisions,
added the follow ing prohibitions to the Constitution. T o
Congress they said:
(1) Thou shalt not oblige Federal judges to include their
salaries as a part o f their income in computing their income
tax.
(2) Thou shalt not oblige the owner o f any bonds issued
by a county, municipality, or State to include in his income
the interest he receives from any such security.
(3) . Thou shalt not oblige the employee or officer o f any
county, municipality, or State to include in his income his
salary, however great the salary.
And to the 48 States this 5-to-4 tribunal has issued the
following enjoinder:
(4) Y e States shall not oblige any o f your resident citizens
to include his salary as an officer or employee o f the Federal
Government as a part o f his income.
(5) Y e shall not oblige the owner o f any bonds, issued by
the Government to include as part of his income the interest
he receives from any such bonds.
Sir, no king in history that I know o f has ever had his
revenues placed under such restrictions, however great the
revolt against his rule.
REPUDIATION OP SIXTEENTH AM ENDM ENT
Y et, sir, the people bowed to this ruling; this 5-to-4 out
lawry o f a governm ental power repudiating the Court’s
form er decisions, and proceeded to secure the ratification of
a constitutional amendment to overcome the ruling. I t re
quired 18 years. T h eir amendment read as follow s:
T h e Congress sh a ll h ave p ow er to lay a n d collect taxes on in
come fro m w h ate ve r source derived, w ith o u t app o rtio n m en t
am on g the several States.
The ratification o f this, the sixteenth amendment, was a
clear repudiation o f the Pollock decision. I t provided that
Congress could tax income from whatever source derived
without apportionment. I t was to save the necessity o f
going back in any case and looking at the source from which
such income was derived, thereby giving the Congress the
power to tax a ll income, regardless o f its source.
JUDGES EXEMPT THEIR SALARIES
Mr. Speaker, unfortunately, one o f the first cases involving
the amendment related to the taxation o f the income of a
Federal judge. In this case the judges themselves were
financially interested, fo r a decision would also affect the
taxability of the salaries o f the Supreme Court judges. Y e t
they sat. Th ey need not have done so, if they had follow ed
precedent— I re fe r to the example o f Justice Taney, who
wrote a letter to the Secretary o f the Treasury complaining
about the income tax o f the Civil W ar Acts, and stating that
this was the only w ay in which the m atter could be brought
to the attention o f the proper authorities, as the Court itself
could not pass upon a question which directly affected the
judges themselves. But subsequent members o f the Court did
not show the same delicacy, nor did five o f them show any
hesitancy in deciding the question in their own favor. This
was in the Evans case (4 ). T h e Court held, in spite o f the
language o f the sixteenth amendment giving the Congress
the power to ta x income “ from whatever source derived” ,
the amendment did not include Federal judges.
This was sheer nullification o f the sixteenth amendment,
and exempted them from paying, as citizens, th eir just tax
on their income.
Mr. Justice Holmes, dissenting, disposed o f th eir argu
ments. He stated:
I th in k th at th e clause p rotectin g th e com pen sation o f ju d g e s h as
no reference to a case like this. T h e exem ption o f salaries fro m
d im in u tio n is in ten d ed to secure th e independence o f th e ju d ges, on
th e groun d , as it w a s p u t b y H a m ilto n in th e F ed eralist (N o . 79)
th a t “a p ow er over a m a n ’s subsistence am o u n ts to a p o w e r over h is
w ill.” T h a t is a very good reason fo r p re ven tin g a tte m p ts to d eal
2498— 14083
w ith a ju d g e ’s sa lary as such, b u t seem s to m e n o reason fo r exon er
a tin g h im fro m th e o rdin ary duties o f a citizen w h ich h e sh ares
w ith a ll others. T o re q u ire a m a n to p ay th e taxes th a t aU oth er
m en h ave to p a y c an n o t p ossibly be m ade a n in stru m en t to attack
h is in dependence as a ju d ge . I see n o th in g in th e purpose o f th is
clause o f th e C on stitu tio n to in dicate th a t th e ju d g e s w ere to b e a
privileged class, free fro m b e arin g th eir sh are o f th e cost o f the
in stitu tio n s u p o n w h ich th eir w e ll-b e in g if n o t th e ir life depends.
And, then, holding such a tax valid, he said:
I do n o t see h o w ju d g e s c an claim a n ab ate m e n t o f th eir incom e
ta x on th e g ro u n d th a t a n item in th eir gross incom e is salary, w h e n
th e p o w e r is g iv en expressly to tax incom es fro m w h ate v e r source
derived.
Mr. Justice Brandeis concurred w ith Judge Holmes.
Sir, despite 18 years o f sacrifice o f just and necessary reve
nue and the labor the Nation and State have expended to
amend the Constitution, the Court, in the Evans case, replied,
in effect: “ T h e sixteenth amendment to the Constitution in
this Court henceforth shall read as follow s: ‘T h e Congress
shall have power to lay and collect taxes on income from
whatever source derived, except from the income o f judges
o f the United States, which shall be exempt.’ ”
Ladies and gentlemen, we are held responsible, and justly
so, fo r the acts o f Congress; and th at responsibility is de
termined by looking at the “ aye and nay” votes. W h o among
the present members o f the Court voted “ aye” and who voted
“ nay” in the case o f Evans against Gore.
McReynolds, “ aye” ; Brandeis, “ nay.”
EXEMPTION OP STATE OFFICERS AND EMPLOYEES
Mr. Speaker, again in spite o f the express language o f the
sixteenth amendment, giving the Congress the power to
tax incomes from whatever source derived, the Court has
prevented the Congress from taxing the salaries o f em ploy
ees and officers of counties, cities, and States if such officers
and employees are engaged in what the Court determines to
be an essential governm ental function. I cannot refrain
at this point from again referring to th e crushing logic o f
Justice Holmes in the Evans case:
T o requ ire a m a n to p ay taxes th a t a ll oth er m en h ave to p ay
can not p ossibly be m ade an in stru m en t to a tta ck h is in dependence
as a ju d ge .
B y the same token, to require officers or employees o f such
counties, cities, or States to pay the same tax on their sal
aries applied to all other citizens cannot interfere w ith the
functioning o f a State.
The number of such employees is reported as 2,500,000,
while the Federal list is given as 800,000, excluding soldiers
and sailors. T h e loss o f this immense revenue lies at the
door of the Supreme Court in disregarding the express lan
guage o f the sixteenth amendment. Conservative estimates
place the loss at at least $1,000,000,000, computed from 1913,
the date o f the first incom e-tax act under the sixteenth
amendment.
Actually, as M r. Brabson says, the effect has been to create
a favored class o f people who in m any cases contribute noth
ing to the support o f the Governm ent which directly or in di
rectly gives them their employment. H e quotes from M r.
Pegler:
T h e G o v e rn o r o f N e w Y ork , fo r exam ple, h ead s a lo n g list o f
h ig h -s a la rie d p u b lic officials w h o do n o t h ave to p a y a n y ta x on
th eir p u b lic salary. T h e G ov e rn o r gets $25,000 a year, a figu re
w h ich w o u ld m ake a m a rk e d m a n o f h im if h e w ere w o rk in g fo r
a p rivate em ployer. T h e L ie u te n a n t G o v e rn o r a t $10,000 a year
enjoys th e sam e im m u n ity , a n d so do th e ju d g e s o f th e co u rt o f
appeals, th e a pp ellate division, th e su prem e court, th e co u rt o f
claim s, th e c ou rt o f special sessions, a n d th e surrogates.
T hese lea rn ed a n d p u b lic -sp irite d ornam en ts o f th e State g ov
e rnm en t d ra w fro m $15,000 to $22,500 a year a n d keep it a ll,
w h ereas a s in g le -h a n d e d clerk or m ech an ic em ployed b y a business
firm a t $150 a m o n th is expected to sh ow er d o w n to b o th N a tio n a l
a n d State T reasuries. T h e m em bers of th e N e w Y o r k L eg isla tu re
receive $2,500 a year, or ro u g h ly tw ice as m u c h fo r th e ir p a r t tim e w ork as th e ta x p ay in g $100 a m on th , b u t they, too, are con
stitu tio n al officers a n d th erefore exem pt.
Mr. Brabson continues:
Stran gely enough , th e w id esp read character o f these exem p tions
a n d th e extent o f the loss in th e F ederal reven ue is n o t gen erally
appreciated.
I t is very d o u b t fu l if the average taxp ayer in N e w
Y o rk City, fo r exam ple, h a s the least idea o f h o w m a n y o f h is feU o w
citizens w ith su b sta n tial incom es are exem pted fro m c o n trib u tin g
one cent directly to the su p p o rt o f th e F ed eral G ov ern m en t.
M r. Brabson presents a table— inserted in the appen
dixes— in which he calls attention to the serious fa c t th at
CONGRESSIONAL RECORD
the percentage of taxable returns has fallen from 26 to the
1,000 o f population in 1917, to 14 in the year 1935.
Interpreting the table, M r. Brabson says:
I f w e exam in e th e above figu res carefu lly , w e fin d th a t th e ratio
o f n o n ta x a b le incom es to ta x ab le incom es in th e U n ite d States is
a p p a llin g . F o r exam ple, w e h ave u p o n a u th o rity o f th e B u re a u
o f L a b o r Statistics th a t in 1933 th ere w ere a p p ro xim a tely 41,000,000
persons g a in fu lly em ployed in th e coun try. A d d to th a t 10,000,000,
the n u m b er, b y conservative estim ate, w h o are n o t em ployed b u t
received incom e fro m variou s sources. T h e to tal is 51,000,000
su b je c t to tax. O u t o f th a t to tal o f p o te n tia l taxp ayers in 1933
w e fin d t h a t less th a n 2,000,000 a ctu ally p a id a n y F ed e ral incom e
tax; th a t is, on ly 1.39 percent o f o u r citizens are p a y in g a direct
ta x in su p p o rt o f th e F ed e ral G ove rn m e n t.
T h e question o f what is an essential governm ental func
tion, according to the Court, cannot be stated in terms of
universal application. F or this reason the Law Reports are
filled w ith decisions resulting in confusion and enormous
adm inistrative expense to the Treasury. Th e decisions of
the Court itself are not consistent. In the F lin t case (5)
the Court held that the supplying o f water by a city was not
a governm ental function. In the Brush case (6) the Court
held th at the supplying o f water was a governm ental function.
ORIGIN OP SOVEREIGNTY FICTION
M r. Speaker, why this courthouse exem ption of public sal
aries, despite the specific declaration o f the sixteenth amend
m ent; well, the courts still hark back to a century-old de
cision to exem pt such officeholders and the income from
public bonds. T h ey unjustly attribute their conclusion to the
authority o f Judge M arshall.
“ T h e power to tax is the power to destroy” , said Judge
M arshall. But when did he say it, and what was the subject
before the Court? T h e judge said this in 1819, nearly a
century before the adoption o f the sixteenth amendment.
And what kind o f a tax was he considering? W as it a nec
essary ta x laid im partially on all? Certainly not. I t was a
discrim inating tax designed to obstruct the Treasury opera
tions of the Governm ent, and not to secure revenue.
M r. Speaker, we are all fa m ilia r w ith the bitter struggle
which attended the establishment o f the first United States
Bank, judged necessary to the functioning o f the Govern
ment. In 1816 its charter was renewed. I t was authorized
to issue bank notes which should be legal tender in payment
o f Governm ent debts, and to establish branches. I t estab
lished such a branch in Baltim ore. Now, sir, the old privilege
enjoyed by private banks o f issuing notes which functioned
•as a paper currency was a highly profitable privilege. P r i
vate bankers within the States opposed these Federal bank
branches w ith their crowning advantage o f issuing such
legal-tender currency. T o the State legislature these dis
appointed bankers w ent and secured the passage in 1818 of
the follow ing act:
B¿ it enacted by the General Assembly of Maryland, T h a t i f any
b a n k h a s established, o r sh a ll w ith o u t au th o rity fro m th e State
first h a d a n d obtain ed, establish a n y b ra n c h , office o f discount
a n d deposit, or office o f p ay a n d receipt, in a n y p a rt o f th is State,
it sh a ll n o t b e law ful* fo r th e said b ra n c h office o f discou n t and
deposit, or office o f p a y a n d receipt, to issue notes in a n y m a n
n er, o f a n y other d en om in atio n th a n $5, $10, $20, $50, $100, $500,
a n d $1,000, a n d n o n ote sh a ll b e issued except u p o n stam ped
p a p e r o f th e fo llo w in g den om in atio n s; th a t is to say, every $5
note sh a ll b e u p o n a stam p o f 10 cents; every $10 n ote u p o n a
stam p o f 20 cents; every $20 n ote u p o n a stam p o f 30 cents;
every $50 n ote u p o n a stam p o f 50 cents; every $100 note u p o n a
stam p o f $1; every $500 n ote u p o n a stam p o f $10; a n d every
$1,000 n ote u p o n a stam p o f $20, w h ic h p ap e r sh a ll b e fu rn ish e d
b y th e tre a su re r o f th e w estern shore, u n d e r th e d irection o f the
G o v e rn o r a n d coun cil, t o b e p a id fo r u p o n d elivery : Provided
always, T h a t a n y in stitu tio n o f th e above d escription m a y relieve
itself fro m th e o p e ra tion o f th e provisio ns afo resaid b y p ay in g
a n n u a lly , in advance, to th e treasu rer o f th e w estern shore, fo r the
use at th e State, th e su m o f $15,000.
Sir, it is obvious th a t the act was intended to drive the
U nited States branch bank out o f Baltim ore, and that the
act was not intended to raise revenue fo r the State.
Said D aniel Webster, in discussing the act:
T h e s u m c alled fo r is n o t assessed on p rop e rty n o r deducted
fro m p rofits or incom e. I t is a d irect im positio n o n th e power,
privilege, o r fran c h ise o f th e corporation.
T h e act was not applied to banks generally,
banks not chartered by the State of M aryland.
tion to the United States bank and its branches
was just what its application would be today to
2498— 14083
but only to
Its applica
in th at day
the Federal
3
Reserve banks, a direct assault on the operation of a Govern
m ent function. W h at else could Marshall have done? Th e
State banks were endeavoring, in 1818, to do to the United
States banks just what the Government found it necessary
to do later to issues of bank-note currency by the private
State banks, w ith its 10-percent tax, namely, tax such
currency to death.
EXEM PTION OP INCOMES— PUBLIC BONDS
I shall now discuss the losses o f revenue resulting from the
Court’s exem ption o f incom e-tax payers from the inclusion
in their taxable income o f income they secure from interest
on county, city, or State bonds. I t is estimated that the loss
of revenue from this source (1913-37) amounts to at least
$2 ,000 ,000 ,000 .
H ow comes this exemption? W ell, sir, despite the six
teenth amendment the Court has held that the Federal
Governm ent has no authority “ to lay and collect taxes upon
income from w hatever source derived” , if the source was a
county, city, or State.
M r. Speaker, m ay I say that the present Chief Justice,
whose great ability inspires the respect of his countrymen
o f all classes, had him self pronounced judgment on that sub
ject. H e was Governor o f the State of New Y ork when the
incom e-tax amendment was submitted fo r ratification to the
States. W h at did he say? Speaking specifically o f the in
come from county, municipal, and State securities, Governor
Hughes in his message of January 5, 1910, declared:
I t is certainly sign ifican t th a t th e w ords “fro m w hatever source
d erived ” , have been in trodu ced in to the proposed am endm ent as if
it were the in tention to m ake it im possible fo r the claim to be urged
th at the incom e fro m any property, even th ough it consist o f the
b o n d s o f the State or o f a m u n ic ip ality organized b y it, w ill be
rem oved fro m th e reach o f the ta x in g pow er o f the Federal G o v
ernm ent.
T h e Court’s latest pronouncement on this question was in
the Ashton case M ay 25, 1936, in which the Court said (7 ) z
N o tw ith s ta n d in g th e b ro a d g ra n t o f pow er “to levy and collect
taxes, o u r o p in io n s here p la in ly sh o w th a t Congress could not levy
a tax on th e b on d s issued b y resp on d en t or u p o n incom e derived
th erefrom .”
Th is decision created a class o f tax-exem pt citizens and
securities which runs into the billions. H ere again, sir, the
sixteenth amendment has been “ altered” to read:
C ongress sh a ll h ave p ow e r to la y a n d collect taxes on incom e
fro m w h atev er source d erived : Provided, however, T h a t th e salaries
o f em ployees o r officers o f city, county, or State sh a ll n ot be
in clu d e d as a p a rt o f th eir incom e, n or shall the interest derived
b y a n y citizen or corp oration fro m a n y b o n d o f a n y county, city,
or State b e in clu d e d in h is incom e fo r th e purpose of taxation.
M r. Speaker, it is a favorite m axim of the courts that men
must be held to intend the natural consequences o f their
acts. I f this be so as to judges, as it is to us, who a fe
the judges who pronounced this judgm ent vetoing in effect'
the higher brackets in the incom e-tax law as applied to the
swollen incomes o f the country. L et us read the yeas and
nays o f this Ashton case.
YEAS
M cR e y n o ld s
S u th e rla n d
H ughes
B u t le r
R o b e rts
V a n D ev a n ter
NAYS
Cardozo
B ran d eis
Stone
T h e facts force the statement that a m ajority behave
as if they had entered the lists fo r the vendetta against the
incom e-tax principle declared by Justice Field. H ear him
in the Pollock case:
T h e in c o m e -ta x la w u n d e r con sideration is m arked b y discrim i
n a tin g fe a tu re s w h ic h affect th e w h ole law . I t discrim inates b e
tw e en those w h o receive a n incom e o f $4,000 a n d those w h o do
n ot. *
*
* W h e re is th e course o f u su rp atio n to end? T h e
p resent a ssa u lt u p o n cap ital is b u t th e begin n in g. I t w ill be b u t
th e step p in g stone to others, large r a n d m ore sw eeping, u n til o u r
p o litica l contests w ill becom e a w a r o f th e poor again st the rich;
a w a r c on sta n tly g ro w in g in in ten sity a n d bitterness.
T h is defiance o f the sixteenth amendment provides large
incomes w ith an election to veto the higher tax rates when
applicable to them. W ould the public budget maker o f any
other country submit to such vetoes of his tax measures
a fter approval by the legislative authority? How about the
B ritish Prem ier? Can the resident o f England slip his in
vestments into colonial bonds to escape the payment of
CONGRESSIONAL RECORD
4
income taxes? W ill any B ritish judge assume to stay the
arm o f the British collector fo r such a purpose? W h a t should
happen to the British budget if he did? Nay, rather, you
ask, W hat would happen to the B ritish judge? H e knows
too well th$t he would find him self the scorn o f Dem o
crats and Tories throughout the Empire, his office vacant,
too, and his judicial robes torn from his back.
Business
N et
income
Physicians, lawyers, editors, authors.
R ailw ay presidents________________
Presidents, large corporations______
M ovie actors_____________________
$10,500
52,500
102,000
202,500
Tax in
the 40
States
Saving by
Split tax
splitting
return in
the 8 States tax return
$458
9,664
33.944
96.944
$278
6,028
19,288
67,888
$180
3,616
14,656
29,056
OK LAHO M A STATE LEASE CASES
Sir, a most im portant example o f the misuse o f the State
sovereignty fiction is shown in the Coronado O il and Gas
Company case (8 ). In that case lands granted by the United
States to the State o f Oklahom a fo r the support o f common
schools and dedicated to that purpose by the State consti
tution were leased by the State to a private company fo r
extraction of oil and gas, the State reserving a part of the
gross production, the proceeds o f which were paid in to public-school fund, and the lessee taking the remainder. The
Supreme Court held that under this lease the Coronado O il
& Gas Co. was an instrum entality o f the State exercising
a governmental function and that the Governm ent had no
right to tax the income derived through the lease. This was
true, the Court concluded, although the income received by
the private corporation did not inure to the benefit of the
State but inured entirely to the benefit o f the private cor
poration. I t booted not that the corporation entered into
this lease fo r its own profit in a purely priyate business
undertaking. M r. Justice Brandeis pointed out that vast
private incomes were being given im m unity from State and
Federal taxation by this decision. M any o f the large cor
porations o f the country have been leasing State lands which
contain minerals and have made enormous profits. I t is cer
tainly unnecessary and unjust to exempt, Justice Brandeis
points out, this vast private income from taxation. Th e
decision resulted in discrim ination against com peting cor
porations and it has been estim ated has already cost the
Government almost $3,000,000,000 in revenues. (C .)
C O M M U N IT Y PROPERTY EVASIONS
M r. Speaker, we are all fam iliar with a clause in our
Constitution most fundam ental to the existence of the
Union. I t is the clause granting supremacy to the Federal
statute in case o f a conflict w ith a State act or even a State
constitution. I t reads as follows:
T h e C on stitu tio n a n d th e la w s o f th e U n ite d S tates *
*
*
sh a ll be the su prem e la w o f th e la n d ;
*
*
* a n y th in g in th e
con stitution or la w s o f a n y State to th e con trary n o tw ith stan d in g.
T h e Constitution also provides that all—
Excises (in com e t a x )
States.
sh a ll be u n ifo rm th ro u g h o u t th e U n ite d
Mr. Speaker, the Congress, in its incom e-tax law o f 1926,
provided a schedule o f rates which was im partially uniform
as to the incomes o f its citizens. This statute came into
conflict with contentions set up under State laws, and the
Court in disregard of both the supremacy and uniform ity
requirement o f the Constitution gave supremacy to the taxevading contentions under the State law. I refer to decisions
relating to “ com m unity-property” income.
A married M em ber o f Congress w ith no dependents, from
any one o f 40 o f the States, whose total net income consists o f
his salary, $10,000, would deduct an exem ption of $2,500, and
under the present law pay an income tax of $415. But in dis
regard of both the rule o f supremacy and the rule o f uniform
ity, the Court m ajority has held th a t i f he comes from any
one o f eight States in the Union that have an inherited pecu
liar Spanish or French law applicable to m arried persons, he
6an split his return and attribute on e-h alf o f his salary to
his wife, so that each w ill have an incom e o f $5,000. W hen
they both deduct their exemptions, each o f them w ill pay
$130, that is a total o f $260, or $155 less than his colleague
from Virginia. T h e eight States are as follow s: W ashington,
New Mexico, California, Arizona, Texas, Idaho, Louisiana,
and Nevada. W h a t the Congressman m ay do w ith his salary
in those eight States, m ay be done, because o f these Court
interferences, by any salaried m arried m an in such States
not m erely as to his salary but to all his income, though it
runs into the millions. A nd here, sir, are some fu rth er
examples o f the discrim ination:
2498— 14083
Com m enting generally on the abuse of splitting o f incom eta x returns by husband and w ife in all the States the Secre
tary also stated:
I t is evid en t th a t th is situ a tio n is th e d irect cause o f n u m ero u s
tran sfers, sales, assignm ents, a n d o th er arra n g em e n ts b e tw ee n h u s
b a n d s a n d w ives w h ic h h ave n o re al b a sis a n d are m ade because
o f a desire to av oid incom e taxes otherw ise due. F o r exam ple,
prop erty w h ic h h a s app reciated in v a lu e is tra n sferred to th e
spouse w h o c an sell it w ith th e least ta x lia b ility . A g a in , p rop erty
w h ic h h as depreciated in v a lu e is tra n sferred t o th e spouse w ith
th e large r incom e, in order th a t he m ay realize th e greatest benefit
fro m sale a t a loss. M oreover, th e p resent la w en courages sales b y
one spouse d ire ctly to th e other, a n d th e courts are p resented w ith
th e difficult a n d even im possible p ro b le m o f d eterm in in g w h eth e r
su ch sales w ere b o n a fide o r fra u d u le n t. I n th e m ost n oto riou s
recent case, th e ju r y a c q u itte d th e h u s b a n d fro m a c rim in al
charge in su ch a situ ation . T h e incom e taxes w h ic h th e h u sb a n d
so u g h t to avoid in th is m a n n e r a m o u n te d to over $1,000,000.
W ell, M r. Speaker, the Governm ent attem pted in a series
o f cases to apply its tax uniform ly as required by the Con
stitution and force the spouse earning the income or h av
ing the beneficial control o f it to report it fo r tax purposes,
and the m atter was carried to the Supreme Court. In the
Poe case and others (9 ) the Court ruled against the G overn
m ent and gave supremacy to the State law fo r these tax
evaders o f the Federal Constitution and incom e-tax statute.
T h e Court said th at the F ederal statute, which taxed the “ net
income o f every person” taxed the income as determined by
State law though the compensation was earned by the spouse
the Governm ent was tryin g to tax; though the Court ad
m itted that under the State law he could deal w ith it prac
tically as his own. In the Hopkins case the Court said in
referrin g to the Texas laws:
T h ey provide, as is u s u a l in States h a v in g ttie co m m u n ity
system, th a t th e h u s b a n d sh a ll h ave p ow e r o f m a n a ge m e n t a n d
con trol su ch th a t h e m a y d eal W ith c o m m u n ity prop erty very
m u c h as i f it w ere h is ow n .
Th e incom e-tax law justly requires the spouse earning
such income to return it as his- own. In no other w ay could
the incom e-tax liability o f earners o f income be m ade uni
form throughout the United States. I feel that the Court’s
decisions violate both the statute and the Constitution. T h e
Court rulings have already resulted in a loss o f revenue o f
over $200,000,000.
EXEMPTION OF STOCK DIVIDENDS
Speaking o f loopholes, M r. Speaker, the loophole opened
by the Eisner decision is a loophole big enough to swallow
the Bank o f England. I t is, besides, the monstrous m other
o f all the great loopholes which your committees are now
investigating, in an effort— and I hope not a vain effort— to
save the just and essential revenues o f the U nited States.
Ladies and gentlemen, suppose yourselves as members o f
the W ays and Means Com m ittee and a case like this were
presented: A law yer has been working fo r a realty company
fo r a year, which owes him, say, $2,500 fo r his services. A t
the end o f the year the company’s president persuades the
lawyer to take paym ent o f his fee by way o f a deed fo r one
o f its lots fo r which it paid $2,500. W ould you say that the
value o f the lot should not be counted as part o f the attor
ney’s income fo r that year?
O r suppose a case o f another corporation which owed its
attorney $5,000 fo r services and elected, w ith his consent, to
make payment by assigning him 50 shares o f its stock having
the m arket value o f $5,000. W ould you not fe e l that the m ar
ket value o f this stock should be counted in the income o f
the attorney? Th ere can be but one answer to this question.
T h e W ays and Means Com m ittee gave th a t answer when it
provided that such payments o f income by w ay o f property
transfer should be considered as part o f the taxable income.
Now, let us suppose, as members o f the committee, you
found that sometimes in corporate financing the stockholders
CONGRESSIONAL RECORD
preferred to take their dividends in the form o f paid-up stock
leaving the cash itself in the company treasury fo r extension
o f the plant. W h a t would be your disposition? You prob
ably would not wish to deny the stockholders and the cor
poration this m ethod o f securing additional capital; but
certainly you would not feel disposed to say that this
m ethod o f paying the dividend should excuse the profiting
stockholder from including this actual earned income as
part o f his income fo r taxation. Y ou would say that the
shareholder should be treated just as you had treated the
law yer in the above examples, just as the member o f a part
nership, as to undistributed profits; and that the value of the
property received be entered as a part o f his taxable income.
W ell, M r. Speaker, preposterous as it seems to common
sense, the processes o f courthouse ratiocination reached a
different conclusion as to stock dividends. T h e Court held
in the case o f Eisner against Macom ber that stock dividends
representing distributable net income retained by the com
pany should not be accounted as income as to the stock
holder; th at is, should not be subject to income taxes in his
hands, unless and until the stocks were sold by the stock
holder (10).
Follow ing the decision (1920), as we need not be surprised,
corporations in the United States in 1922 issued $3,348,050,000
in stock dividends (about the same as in cash dividends),
nearly a billion o f which sum represented dividend income of
the Standard O il Companies. In the years 1922-34 such
stock dividends, amounting to $9,631,207,000 have been
issued, on all o f which the shareholders have escaped paying
their surtaxes as individual members o f society.
W H A T DO THE BRITISH DO I N SUCH CASES?
M r. Speaker, in other countries like G reat Britain the
income or profit need not be distributed to the stockholder
or be in coin o f the realm. I f earned fo r the shareholder, it
is taxed as if earned by a partner in a partnership, and why
not? T h e amendment does not provide that the income must
be in cash. Congress properly— I should add wisely— pro
vided the real income o f th e citizen should be considered.
This income m ay take m any and varied forms. One of the
form s it has taken is the distribution o f income by a cor
poration to its stockholders, o f their profits, in the form of
paid-up stock in place o f the cash.
W ell, sir, the Court in the Eisner case, by a 5-to-4 deci
sion, held that dividends received in such paid-up stock were
not income. This decision has cost the Governm ent a loss o f
$1,060,000,000. I leave further comment to Justices Brandeis
and Holmes. M r. Justice Brandeis in his dissenting opinion
said:
I f stock divid en d s rep resen tin g profits are h e ld exem pt fro m
ta x atio n u n d e r th e sixteen th am en dm en t, th e ow n ers o f the m ost
successful businesses in A m e ric a w ill, as th e fa c ts in this case
Illustrate, be a b le to escape ta x a tio n o n a large p a rt o f w h at is
a c tu a lly th eir incom e. So f a r as th eir p rofits are represented by
stock received as dividends, th ey w ill p ay these taxes, not u p o n
th e ir incom e b u t on ly th e in com e o f th eir incom e. T h a t su ch a
re su lt w a s in ten d ed b y th e people o f the U n ite d States w h en a d o p t
in g th e sixteen th am en d m en t is inconceivable.
I n terse, com
p rehensive lan g u ag e , be fittin g th e C on stitutio n , th ey em pow ered
C on gress “to la y a n d collect taxes o n incom es, fro m w h atever
source derived.”
T h e y in ten d ed to in clu d e th ereby everything
w h ic h b y reason able u n d ersta n d in g c a n fa ir ly be regarded a s in
come. T h a t stock d ivid en d s rep resen tin g profits are so regarded,
n o t on ly b y th e p la in people b u t b y investors a n d financiers, a n d by
m ost o f th e cou rts o f th e coun try, is sh o w n be y o n d p eradventu re
b y th eir acts a n d b y th eir utteran ces.
A nd note the terse statement o f M r. Justice Holmes:
T h e k n o w n p u rp o se o f th is am en d m en t w a s to get rid of nice
question s a s to w h a t m ig h t be direct taxes, a n d I c an n o t d o u b t
th a t m ost people n o t law yers w o u ld suppose w h e n th ey voted fo r
it th a t th ey p u t a qu estion like th e p resent to rest. I am of o p in
io n th a t th e am en d m en t ju stifies th e tax.
But m ark you, in order to reach its 5-to-4 conclusions the
m ajority had to reverse a fu ll Court judgm ent in the case of
C o l l e c t o r v. H u b b a r d (12 W all. 1) where th e Court upheld the
righ t o f Congress, under the Civil W a r Incom e T a x Acts, to
ta x a stockholder’s interest in the accumulated earnings of
the corporation prior to the declaration of the dividend. T h e
Court, reversing itself, now holds in the Eisner case that its
decision in Collector against Hubbard must be regarded as
being overruled by its decision in the Pollock case holding
the income tax o f 1894 unconstitutional. But the people
expressly overruled the Pollock case by the adoption o f the
2498— 14083
5
sixteenth amendment. Because o f the Eisner case m a n y o f
our wealthy individuals tie up their incom e in corporations
and thus avoid the paym ent o f the surtaxes due, or take
their dividends in paid-up stock— that is, stock dividends—
and thus avoid the higher brackets. B y preventing us fro m
taxing this income to th e shareholder, when earned b y th e
corporation, the Court has diminished the revenues o f the
Government by at least $7,000,000,000.
EVASION OF SURTAXES
Ladies and gentlemen, one o f the m ost vicious form s o f
tax evasion has been the accumulation o f surplus in corpo
rations controlled by such taxpayers under the Eisner case
in order to avoid the paym ent o f their just shares o f sur
taxes. A ll this in virtue o f the Eisner case. I quote fro m
the President’s message o f M arch 3, 1936:
T h e a cc u m u la tio n o f s u rp lu s in c o rp oration s co n tro lle d b y ta x
payers w ith la rg e in com es is e n cou raged b y th e presen t fre e d o m
o f u n d istrib u te d corporate in co m e fro m surtaxes.
T h is m e th o d o f e v a d in g e x istin g su rtaxes c on stitu tes a p ro b le m .
T h u s the T re a s u ry e stim ates th a t d u r in g th e c ale n d a r y e a r 1936
over 4% b illio n d o lla rs o f corp orate in com e w ill b e w ith h e ld fr o m
stockholders. I n 1 year alo n e th e G o v e rn m e n t w ill b e d ep riv ed o f
revenues a m o u n tin g to over $1,300,000,000 *
*
*.
Now, M r. Speaker, i f th e Court would enforce our ta x
on these undistributed earnings o f shareholders like w e
tax the partners on th eir undistributed shares o f the profits
o f the partnership, we would not have this problem o f ta x
avoidance. T h ey do not have it in G reat Britain, in France,
and other countries. But neither do they have m eddling
courts to “ run amuck” w ith the revenues. Is there anything
in the Constitution th a t prevents the Congress froijpt taxin g
undistributed dividends as it taxes undistributed profits o f
members o f partnerships? Th ere is not. In fact, under the
same Constitution which w e have today and had before the
sixteenth amendment, the Supreme Court held in the C ol
lector Case th at this could be done.
W h y does a m an incorporate his yacht, putting his in
come, property, all his shares, and the like into the control o f
a yacht corporation? W h y does he do it? U nder the iSisner
case such incom e w ill all be paid to the yacht corporation.
The yacht corporation, o f which he is president, and the rest
o f his fam ily, the stockholders, w ill sim ply distribute back
in salaries to the president and subofficials as much o f his
income to the fam ily, during the year, as he finds desirable.
M eanwhile the undistributed income escapes taxation under
the higher brackets. H ere is a circular, F orty-seven W ays
to Save Taxes, issued by specialists in taxation, and m ost
o f those loopholes are loopholes traceable to th e C ourt’s de
cision in Eisner against M acom ber (1 0 ).
GIFTS I N
CONTEM PLATION
OF
DEATH AND
TAXES
IN
AVOIDANCE
OF
ESTATE
You know we have such an institution as an estate tax.
It is certainly a very liberal one in the lower brackets. N ot
until the estate reaches $50,000 is any ta x w hatever imposed.
In order, however, to avoid the estate tax under th e higher
brackets, scheming individuals were engaged in the practice o f
m aking gifts to th eir fam ilies. A n ticip atin g their deaths, they
made gifts to th eir heirs and thus escaped the estate taxes.
Very well. Congress filled th at loophole w ith an a ct pro
viding th at where th e g ift was m ade w ith in 2 years o f th e
death o f the decedent there should be a presum ption th at
it was m ade in contem plation o f death and th at the estate
tax should apply. W h a t had been the practice o f other
governments? Just the same as this o f ours. Qur adm inis
tration found th at w ith respect to those g ifts m ade in
actual contem plation o f death, w ithout th e h elp o f this
2-year presumption, the testim ony as to the decedent’s
purpose, his condition, his prospects o f life, was a ll locked
up with his fa m ily and fa m ily doctor; and I am told th a t in
those contests th e G overnm ent never succeeds in w in n in g
more than about 5 percent o f the controversies. T h e B ritish
lawmaker, fa cin g the same problem th a t we have to face,
met that situation by passing a law creatin g a presum ption
that any such g ift, m ade w ith in 3 years o f the actual death
of the decedent, should be treated as a g ift m ade in con
templation o f death; so th at the estate taxes should becom e
applicable. D id we have the same pow er to pass th a t act
and fo r the same purpose, th at the B ritish House o f C om
mons enjoys? Certainly. Our acts w ere perfectly constitu
CONGRESSIONAL RECORD
6
tional. I t is the decisions o f the courts that are uncon
stitutional.
England requires all gifts m ade within 3 years prior to
death to be subject to h er estate duty. But the Supreme
Court said our 2-year act violated the due-process clause of
the fifth amendment. T h e argum ent was that to levy a tax
upon an assumption o f fa c t w hich the taxpayer was fo r
bidden to controvert was arbitrary and unreasonable. Well,
a m an is presumed to know the law. Suppose he does not.
I s he allow ed to dispute the presumption?
In fact, this pro
vision was a necessary measure to prevent tax avoidance and
is a reasonable exercise o f the power to lay taxes. T o pre
vent us fro m taking steps to overcome avoidance of our taxes
is an arbitrary interference by the Court with the power
granted to levy taxes. And, since ta x experts have explained
to their clients th at this conclusive presumption has been
nullified, our “ contem plation o f death” provision can be
avoided w ith ease. T h is decision has cost us about $8,000,000
and w ill probably cost us considerable more in the future.
T h e Court has thus denied th e righ t o f both Government and
States to protect their estate-tax revenues by such provisions,
claim ing th at they violate the due-process clause of the
fourteenth amendment (1 1 ). M ark the entry o f old “ due
process” again, the courthouse Sanson o f nullification, whose
versatile ax is always handy when p rivilege demands the head
o f an offending statute.
IN J U N C T IO N S
AGAINST
COLLECTION
OP
TAXES
M r. Speaker, on top o f a ll this destructive attack on our
legislative functioning w ith respect to taxation, comes a
flagran t attack on the executive functioning by misuse
o f injunctions against its collection o f the taxes, and in
defiance o f a necessary statute, as was well stated by Mr.
Justice M iller in the famous Cheatham case (12).
I f th ere existed in th e courts, S ta te or N ation al, an y general
p o w e r o f im p e d in g o r c o n tro llin g th e collectio n o f taxes or reliev
in g th e h a rd s h ip in cid e n t to taxation , th e very existence o f gov
e rn m e n t m ig h t b e p lac ed in th e p ow e r o f a hostile judiciary.
But, sir, no such anticipatory interference by the courts
is necessary; the internal revenue laws give the taxpayer
the righ t to sue fo r a recovery o f a tax a fter payment, i f he
believes it not justly due.
Y e t th e courts still insist, in m any cases in defiance of
statute, in also givin g him a suit to prevent collection o f the
tatf, thereby creating an u n fair situation as to taxpayers
generally and also th w artin g the collection of the Govern
m ent revenues.
Th is injunctive interference is in violation o f an act en
acted in 1867 still on the books. I t reads as follows:
I n m y op in ion, R . S. 3224, w h ic h says th a t “N o su it fo r th e
purp ose o f re strain in g th e assessm ent or collection o f a n y ta x sh a ll
be m a in tain e d in a n y co u rt” , c an n o t rig h tly b e c on stru ed as p e r
m ittin g th e present suit, w hose sole p urp ose is to e n jo in th e col
lection o f a tax. E n acted in 1867, th is statute, fo r m ore th a n 60
years, h as b een consistently app lied as p re clu d in g relief, w h ate v e r
th e equities alleged.
How much more equitable it would have been if the
Court had required all the processing taxes to have been
paid into the Federal Treasury. W e could then have avoided
the w indfall tax and allowed refunds to those justly entitled.
This was the procedure the Court adopted in the childlabor cases. M ost o f the processors would have been glad
to pay this m oney into the Treasury because o f com petitive
conditions, retaining the goodwill o f their customers. T o a
large extent, the present unfortunate situation has been
created because of interference by injunctions issued by the
courts in defiance o f the above statute.
m . W H AT OP IT?
And now you ask, m y colleagues, “ W h at of it? ”
W ell, ladies and gentlemen, look at the chart and its
$16,000,000,000 o f delinquent revenue.
Loss in Federal revenue because of Supreme Court decisions
R e p u d ia tio n o f th e incom e ta x ________________________ $1,500,000,000
E x e m p tio n o f State securities___________________________
2,000,000,000
E xem p tio n o f State officers a n d em ployees__________
1,000,000,000
C om m u n ity p ro p e rty -ta x exem ption ________________
200,000,000
S tate lease cases_________________________________________
3,000,000,000
E xem p tio n o f stock d iv id e n d s___________________ .______
1,060,000,000
E v asion o f su rtaxes_____________________________ _________
7,000,000,000
S ta tu te o f lim ita tio n cases_____________________________
11,000,000
F oreign tax credits to fo re ig n p olitical su b d iv isio n s .
2,000,000
E x em p tio n o f real estate fro m F ed eral estate ta x ____
5,000,000
In v a lid a tin g conclusive p re su m p tio n as to g ifts in
con tem p lation o f d e a th (estate t a x e s )____________
000,000
E x e m p tin g fro m estate ta x tru sts in w h ic h gran to r
re ta in e d in terest_______________________________________
25,000,000
E sta te -ta x decisions o f 1935 exem p tin g fa m ily tru sts
25,000,000
1,017,000,000
In v a lid a tio n o f A g ric u ltu ra l A d ju s tm e n t A c t______
8,
T o t a l_________________________________________________
16,853,000,000
T h e tax situation created by the attitude o f the Judicial
Departm ent toward the Legislative and Executive D epart
ments cannot be fu lly commented on in a single address—
but one comment forces utterance: “ Verily, verily, the in
come tax is an unloved stepchild in th at Court.” T h e hate
o f Judge Field, father o f the “ due process” interpolation, the
Jeffreys o f Social Justice, rests like a blight upon it. T h e
m ajority judges seem ready to give it a beating fo r any
litigant. T h e record, I submit, justifies the statement that
w ith regard to the public revenue the Court cannot be re
garded as a conservative institution.
REVISED STATUTES, SECTION 3224
SUPREMACY OP A CLASS
N o su it fo r th e p u rp ose o f re stra in in g th e assessment or collec
t io n o f a n y t a x sh a ll b e m a in ta in e d in a n y court.
M r. Speaker, the most significant fa c t disclosed by the dis
cussion is that a single class— the courthouse barristers, have
assumed complete supremacy over the statutes o f State and
Nation. Th ey alone can speak unbidden in the courthouse.
Is there anybody here who would give such supremacy to a
single class? Is there any class wise enough, good enough?
W ould you give it to the lawyers alone? W h y not humanize
it w ith some doctors, and w ith clergymen, who w ill insist on
talking duties as well as rights— and the engineers, the men
who construct and w ho w ill count and measure to be sure the
machine w ill work. And would you omit men o f business,
farmers, and the N ation’s workers? Leave it to the lawyers
alone— the lawyer “ often in error, but never in doubt.”
Daniel W ebster surely was a great lawyer and this is what
he thought of his profession.
T h e reason fo r this statute is that, as courts are without
authority to equalize taxes or to m ake assessments, such
suits would enable those liable fo r taxes in some amount to
delay paym ent or possibly to escape th eir law ful burden, and
so to th w art the collection o f revenues.
Nevertheless this is w hat the Court is doing and inspiring
the low er courts to do. In the Pollock case the Court per
m itted Pollock, a com m on-share holder o f the Farm ers’
Loan & T ru st Co., to m aintain an action to restrain the
Farmers* Loan & Trust Co. from paying the income tax
assessed against it. M r. Justice W h ite pointed out that the
Court should n ot perm it the Federal statute to be thus
evaded in a subterfuge suit between a corporation and a
stockholder. Y e t the Court did, and is even extending the
practice to perm itting p referred shareholders to m aintain
such an action (1 3 ). T h e collection o f our first income tax,
under the act o f 1913, was ham pered by the Court perm itting
a stockholder to bring such an action to challenge its valid
ity (1 4 ). A n d h avin g decided to disregard this Federal
statute by indirection, the Court then proceeded to disregard
it directly by even p erm ittin g certain taxpayers themselves
to m aintain such a suit. I refer to the M iller and H ill
cases (15) sustaining the low er courts in injunctions prevent
in g the collection o f taxes. I t was M r. Justice Stone, in his
dissenting opinion in the O leom argarine case, who said:
2498— 14083
A ccuracy a n d diligence are m u ch m ore necessary to a law y er
th a n g reat com prehension o f m ind.
*
*
* H is business is to
refine, define, sp lit h airs, loo k in to auth orities, a n d com pare cases.
I f he w o u ld be a great law yer, he m u st first consent to becom e a
great d ru d ge.’*
I f the lawyer a century ago must have been a case drudge,
what now, since the cases reported have m ultiplied by more
than 10?
K eep in mind, ladies and gentlemen, that this supremacy
in Governm ent has been taken over by the courthouse where
only a single class m ay speak unbidden; only lawyers at the bar
or on the bench, only they, m ay speak unbidden in that forum.
CONGRESSIONAL RECORD
T h ey style themselves “ constitutional lawyers” , and would
make a great mystery, and have made a great mess o f our
beloved Constitution. I t is impossible fo r me to have con
fidence in the good judgm ent even if I do force confidence
in its honest intentions. “ T h ey cannot be bought” , it is said.
Certainly not. I do not believe these “ sea-green incorrup
tibles” could be bought w ith a mountain o f gold. But as
W oodrow W ilson once said o f another class: “ Th ey needn't
be bought— they already stand bought by their system.”
LEGAL FICTIONS— REVENUE
M r. Speaker, when you submit a subject to a courthouse,
you invite a w holly different m ental reaction from that
required o f the lawmaker's mind. Let me say there is such a
thing as lawyer sense that does not make common sense. In
saying that, I intend no sneer at the legal profession. I am
a lawyer myself. Assistant A ttorney General Jackson, the
other day, gave a good illustration of this. He said he was
the head o f some revenue bureau that desired to know at
just what tim e a man's m arriage changed his status fo r tax
ation purposes. Th e question was referred to a brilliant
young lawyer in the Bureau. He reported shortly. You
m ay know, we have two legal maxims that lawyers often re
sort to. One is that the law does not regard a fraction o f a
day. So the day o f the m arriage would be out. Th e second,
in giving notice, the day o f service is not counted. So the
young attorney reported, on that legal reasoning, that the
effective m arriage o f John and M ary did not occur until a
day and a night after the wedding. T h e A ttorney General
said that he could find no fau lt With the legal reasoning,
but he tore up the opinion.
One hundred years ago Judge Marshall, in M aryland
against McCulloch, dropped the follow ing gem : “ The power
to tax is the power to destroy.” T h a t sentence has since
become one o f our fictions o f the law. Now, there is another
fiction th at each State is a sovereign; the swami of the
courthouse accept both fictions literally.
Let me illustrate. T h e State o f M aryland is a sovereign
State, it is argued. Th ere you have a beautiful legal fiction
built on a half-tru th. W e all know, however, that no State
now a member o f the Am erican Union is a sovereign. None
o f them except Texas has ever been a sovereign, has ever
exercised the first attribute of sovereign power, the making
o f treaties, or th e conducting o f wars. W h a t is the virtue
o f these fictions in a courthouse? A tax litigan t comes in,
the owner o f a lot o f municipal, county, or State bonds:
“ Y ou must not count in m y income any income I get from
these bonds, M r. Federal Government. I f you start taxing
m y income from these M aryland bonds, maybe you w ill de
stroy the sovereign State o f M aryland.” Now, there is a
good example o f courthouse sense that is not common sense.
T o yield supremacy in the N ation to a tribunal made up
exclusively o f lawyers fills me w ith a feelin g o f dismay.
But I would not be misunderstood about lawyers. T h e
law yer acting as a pilot to steer his clients through the
pitfalls o f a greatly complicated system o f jurisprudence I
warm ly respect. H e is a w orthy servant o f society, but a
law yer hired to distort and defeat th e social will, to plan
escapes fo r m arauding clients, I despise.
A re there such clients? Listen to our leading financier,
J, P. Morgan, who is quoted as saying: “ Taxation is a legal
question pure and simple, and not a m oral one.” Apparently
the right o f society is to be nothing better than a struggle be
tween the United States and the superlawyers o f the wealthy.
MIDDLE CLASS VIRTUALLY EXEMPT FROM TAXATION
M r. Speaker, i f we m ay regard the m arried couple without
dependents as entering the middle class when the net income
reaches $4,000 a year and as em erging into opulency when
the net incom e reaches $25,000, then so trivial are the
incom e-tax rates imposed th at it is fa ir to say that the
m iddle class is virtually exempt from these taxes.
I am not one o f those who is carried away by the illusion
that we can rely on skyscraping rates on the skyscraping in
comes or fortunes as a sufficient source of revenue. I have no
patience w ith these Robin Hoods in taxation. Look, if you
will, at the skyline of New York. See its skyscrapers ju t out
like dragons' teeth, 100 stories, 75 stories, 50 stories. T h a t is
the visual im age you retain o f New Y o rk ; but New Y o rk is
not a 100-story town, it is not a 50-story town, it is not a
249$— 14083
7
20, not a 10-story town, and i f its budget makers had t o rely
on even skyscraper rates on its skyscrapers fo r revenue, the
schools would close, its firem en would drop their hose, and
the police resign. A skyscraper budget will n ot suffice. W e
cannot rely on it alone. A n d w hy should we? T h e very
rich are n ot the only debtors to society, even though they
are its ch ief debtors, judged by their often unearned or
disproportionate gains fro m social aid and protection. T h e
middle classes are also debtors and grossly delinquent debt
ors, too. I know how the $5,000, the $10,000 m an feels about
it. I know he says to him self, unless he is a very thoughtful
man, “ I earned this $5,000, this $10,000 m yself, earned it all
by m y foresight and persistency. I t is mine— all mine.” T h e
trouble w ith him is he forgets his big, silent partner— civili
zation, to whose prodigious aid he tru ly owes it nearly all—
without whose cooperation, if indeed he had survived at all
in the forest struggle, instead o f a $5,000 or a $10,000 income,
he would go hungry fo r his breakfast until he had caught an
unwilling fish or trapped a fearsom e rabbit. I t is n ot easy,
indeed, to fu lly picture our dependence on civilization in
nearly every minute o f our lives. O nly the rare man, an
Edison, a Lincoln, a W oodrow W ilson can render service to
pay the debt. A husband and w ife without children realizing
today an income o f $5,000 a year are getting m ore out o f
life than G eorge and M arth a W ashington did.
I do not say it fo r approval, but when I measure a ll the
debts I pay, in no instance is th e quid pro quo as great as
the services I receive through G overnm ent and its great gift,
civilization. I f all m y other payments were rew arded as
largely as m y paym ent o f taxes, in these benefits o f civiliza
tion, the m illionaire would seem insignificant in comparison.
[Applause.]
N ot self-p ity but a little sane counsel is w hat w e need.
Perhaps we w ill take it from Benjam in Franklin—
T h e taxes are, indeed, very heavy, a n d i f th ose la id b y t h e G o v
ernm ent w ere th e o n ly on es w e h a d to p ay, w e m ig h t m ore easUy
discharge th em ; b u t w e h a v e m a n y others, a n d m u c h m ore g rie v
ous to som e o f us. W e are ta x ed tw ic e as m u c h b y o u r idleness,
three tim es as m u c h b y o u r pride, a n d f o u r tim es as m u c h b y o u r
folly; an d fro m these taxes th e com m issioners c a n n o t ease or d e
liver us b y a llo w in g a n a b ate m e n t.
T o what, sir, do we owe all this, we, ourselves, the $10,000,
the $5,000, the $3,000 m an? I answer, to social order. A nd
whence, to what do we owe social order? T o governm ent
which supplies it and sustains civilization as the sun supplies
heat and ligh t to its planets.
W h at is the explanation o f the triv ia l m iddle-class brackets,
when we face an insolvent Treasury? T h ere is such a th in g
as unconscious class discrim ination, and I fe a r th a t the
human m aterial which composes our Congress has not shown
itself fu lly proof against its subtle tem ptations. I, m yself,
belong to the m iddle class, and wish only to belong to it.
I f I understand the class, I wish to say th a t it w ill not
thank its representatives in the G overnm ent fo r favors in
taxation secured by putting the G overnm ent in peril. R a th er
would they not repel us w ith disgust. T h ey know th a t this
is a world o f duties as w ell as o f rights, and th at th eir first
duty is to m aintain the great G overnm ent in w hich we are
partners. T h ey know th at skyscraper taxation w ill not suf
fice. A demagogue m ay cry “ R igh ts! R ig h ts !” but th ey
know that it is duties valian tly accepted w hich insure them
the benefits o f governm ent w ith th e civilization it alone can
advance and sustain. Sir, the m iddle class must do its p art w ith others. W e
have big board bills to pay to nature fo r the d rafts w e
have been m aking on our natural gifts— a denuded soil;
a tim berland destroyed; a flooded country to reclaim ; ex
hausted gas and oil dom ains largely due to the excessive
incomes w hich these decisions o f the Court excuse fro m
proper and necessary taxation. H ow great this b ill o f debt
is to nature which is now dem anding paym ent under penalty
o f flood and perhaps fam ine one can h ardly guess, but it is
not likely to be less than the cost o f our highways.
Nor do our obligations cease w ith such restorative work.
There is the great program o f social security— a program , I
predict, not likely to fa ll below a h a lf billion dollars annu
ally. Can any paym ent be longer stayed? O u r board bill to
Nature has long been overdue. Our duties w ith referen ce to
social security are pressing ever harder upon us because o f
8
CONGRESSIONAL RECORD
industrial vicissitudes; nor is the Federal Governm ent alone
concerned. Some 28 States have found it necessary to enter
th e incom e-tax field, creating severe problems in double ta x
ation. T h e slightest contact w ith this subject of double
taxation discloses enorm ities o f injustice against taxpayers
in some instances, which no w orthy governm ent can permit
to continue. In m y own view, it has become necessary that
taxpayers who do pay their taxes without evasion, should re
ceive rem edial consideration, and it is m y purpose on a later
occasion to bring to the attention o f the House a proposal un
der which the income taxes o f the N ation and the States and
perhaps some other excise taxes shall be levied as one tax, the
proceeds to be shared between the respective States and the
Federal Governm ent on some equitable principle.
M r. Speaker, I challenge the authorities versed in public
finance to say how a just and adequate budget can be form ed
in the U nited States under the destructive limitations of
these decisions. W h ere is the private financier who would
tolerate such interference w ith his business budget? I ap
peal to the private financiers o f the U nited States, who have
im portant budgets to fo rm and balance, whether they should
undertake their responsibilities i f their work after its com
pletion was to be made the subject o f such ex post facto
veto. Suppose th at having form ed their budgets based upon
th e necessary predicated prices o f th eir various products,
a fte r the expense o f production had been incurred and the
products delivered to their beneficiaries, it should still lie in
th e hands o f outside parties to determ ine whether such and
such o f their debtors should be exempted. W hat would be
com e o f U nited States Steel Corporation or the Bell T ele
phone Co. i f a t any tim e a ju n to o f legalists had the power,
on reasoning w hich w holly ignored the factors governing the
m aking o f th eir budgets, to thus n u llify all duty of payment
fo r large parts o f the expenditures involved? Sir, what
would become o f institutions so irresponsible in other lands,
even though they called themselves courts, which should
thus destroy the sustenance indispensable to government
and social order?
j
!
j
i
f
Congress. I t is not wiser. But suppose you act under article
I I I and the court sets your statute aside. W ould it be act
ing w ith more violence than it has shown in expunging the
welfare clause, adulterating the due-process clause, or in
exem pting themselves and others from paym ent o f income
taxes? Suppose it should set it aside; what then? You
have at last been brought up exactly to the point which
the President had to face— a sure constitutional solution of
the problem which courts could not nullify, and that is by a
revision of the number o f judges. I t is by that very method,
history shows us, that the House o f Lords has been controlled
through the centuries, and parliam entary democracy saved
in the United Kingdom.
M r. Speaker, it is apparent that the life of the Government
cannot be longer left subject to these destructive decisions.
There is no escape from their reconsideration and reversal by
the Court. I t is the only reasonable course open. T h e Con
stitution cannot be made clearer by amendment than it has
already been made by amendment. Then we must amend
the Court statute. I t Will be better to amend the Court
statute than to allow it to drive us to printing-press money,
wreck the public credit, and perhaps wreck the Republic.
Ladies and gentlemen, we must face the issue:
- I f we would have public employees pay taxes on their in
come like others, we must reform the Court and reverse
Brush Co. against M ichigan.
I f we would have income from public securities taxed like
income from private securities, we must reform the Court
and reverse National L ife Insurance Co. against United States.
♦ ^ If we would have those exploiting our gas, oil, and mineral
resources under State leases pay their taxes like others, we
must reform the Court and reverse the Coronado Gas Co. case.
I f we would put an end to the unjust discrimination be
tween the income taxes payable by m arried couples, we must
reform thé Court and reverse Poe against Seaborn.
^ I f the judges are to pay their taxes like others, we must
reform the Court and reverse Evans against Gore.
I f we would have the earned income o f stockholders taxed
IV. W H A T ARE Y O U GOING TO DO ABOUT IT?
like the earned income o f partners and other individuals,
> I confess, sir, as one mem ber o f the Committee on W ays
we must reform the Court and reverse the 5-to-4 decision in
and Means, charged w ith the duty o f initiating revenue
Eisner against Macomber, th at monstrous m other o f loop
measures, a feelin g o f com plete discouragement. The Court's
holes whose depredations have already cost the Treasury
revenue decisions make it impossible fo r me to draft a rev
more than all its expenditures to m eet the depression.
enue bill w hich does not grossly and unjustly discriminate
Let that eminent Court reverse these 5-to-4 decisions. I t
in fa vo r o f large classes able to pay, at the expense of other ; need not be taken as hum iliation on its part. Indeed, a
citizens whom I must make pay taxes fo r both. The recent I spirit o f hum ility is the surest sign o f wisdom, as has been
corporation incom e tax is an example, fo r it illustrates to
displayed often in the history of our own fortunate country.
w hat devices the public financier has been driven by the out- : If, M r. Speaker, they w ill cooperate w ith us, if they w ill
law ry o f our power to tax earned dividends to the shareholder.
reverse these death-dealing decisions on the public revenues,
Again, w hat are we going to do about it? The constitu
then a future of hope and splendor opens out fo r the judges,
tional am endm ent cannot be made clearer by constitutional
fo r ourselves, and our country. I f they refuse, M r. Speaker,
amendment; still it is suggested that we proceed by such a
if they deny to this Congress the powers it needs to exercise,
course. I f we can get tw o-thirds here, two-thirds in the
if at a tim e when, like a h alf dozen industrialized nations,
Senate, and then get three-quarters o f the States, then,
we are facing the most difficult problems the human fam ily
according to the suggested amendment, we should be author
has ever had to face, if still they shall obstruct us in the
ized to reverse a decision o f the Court declaring an act of
necessary program now, as a preceding decision obstructed
Congress unconstitutional provided we could get a two-thirds
our fathers on the subject of slavery, then the outlook is
vote in the House and Senate in fa v o r of such reversal as
dread indeed.
well. W h y not require that the vote be unanimous all
S pirit o f W ashington, save us from such a fate. [A p
around? Does anybody think th at under party government,
plause.]
which seems now to be the rule fo r democracy, two-thirds
REFERENCES TO CASES CITED
governm ent is possible in a legislative body? The curse of
(1 ) P o llo ck v. Farmers Loan (157 U . S. 429; 158 U . S. 601).
the country is not governm ent by m ajorities, but by such
(2 ) Pacific Ins. Co. v. Soule (7 W a ll. 433 ).
Springs v. V. S. (102 U . S. 586, 602).
one-third m inorities— generally mere recalcitrants.
(3 ) Hylton Carriage case (3 D allas, 171).
T h e next suggestion is one th at H am ilton and M arshall
(4 ) Evans v. Gore (253 U . S. 245).
both made— namely, th a t the Congress, like the British
(5 ) Flint v. Stone Tracy (220 U . S. 107).
Parliam ent, m ight reverse a legislative pronouncement of the
(6 ) Brush v. Commissioner Int. Rev., M a rc h 15, 1937.
(7 ) Ashton v. Cameron Co. Water Imp., M a y 25, 1936.
Court which rendered nugatory one of its statutes.
(8 ) Coronado Oil & Gas Co. case (285 U . S. 393 ).
Sir, a third suggestion is one I now make. I t is that the
(9 ) Poe v. Seaborn (282 U . S. 122).
Congress establish courts o f the exchequer to pass on all
Goodell v. Roch (282 Ü . S. 118).
U. S. v. Malcolm (282 U . S. 792).
questions o f law or fa c t relating to the internal revenue, with
Bender
v. Pfaff (282 U . S. 127).
original, exclusive, and fin al jurisdiction under article I II.
Hopkins v. Bacon (282 U . S. 122).
Th is is a court well known to the common law, still function
(1 0 ) Eisner v. Macumber (252 U . S. 189).
in g in England. Our legislative powers to tax are couched
(1 1 ) Schlesinger v. Wis. (270 U . S. 230 ).
(1 2 ) Cheatham case (92 U . S. 8 5 ).
in general but in indeterm inate phrases whose construction
(1 3) Ashwonder v. Tenn. (207 U . S. 288 ).
calls fo r legislative discretion. I t is the Am erican court
(1 4) Brushaber v. Union Pac. Ry. (240 TJ. S. 1 ).
alone th at assumes to substitute its views on such general
(1 5) Miller v. Standard Nut, etc. (284 U . S. 509).
phrases fo r th at o f the Parliam ent. I t thinks it is wiser than
Hül v. Wallace (259 U . S. 386 ).
2498— 14083
JO. S . G O V E R N M E N T P R IN T IN G O F F IC E ; 1937)
(')
November ¿1, 1939»
Honorable David J. Lewis,
National Mediation Board,
Washington, D. C.
My dear Mr. Lewis:
As Mr. Eccles is temporarily in the west
on a belated vacation, I wish to acknowledge receipt
of your letter of November 18 and to thank you for
calling attention to your speech in the House in re
gard to the budget. In accordance with your request,
I am enclosing a copy of the text of Mr. Eccles' recent
address in St. Louis.
This was delivered before a large group of
bankers and thus was addressed primarily to their con
cern about interest rates and hence bank earnings
rather than directly to the matter of the budget.
However, the Chairman again expressed his general view
of what the alternatives are and his frequently stated
conclusion that the budget should be balanced as
recovery proceeds.
Sincerely yours,
Elliott Thurston,
Special Assistant
to the Chairman.
enclosure
ET:b
@FedFRASER