To most contemporary Americans, exploitative child labor practices seem like an ancient, prehistoric phenomenon far removed from the context of advanced civilization. But, crazy though it sounds to modern ears, such practices have occurred in the not too distant past of our society. In fact, our society was grappling for ways to combat this problem less than 100 years ago. In 1919, Congress addressed this issue through its Child Labor Tax Law. The law imposed a tax of 10% on the net profits of companies which employed children (as defined by the age limits of the law).
With the Child Labor Tax Law, Congress was attempting to curtail child labor by regulating business through its taxing power. In effect, Congress was “punishing” businesses for exploiting the labor of children through the tax.
One curious result of constitutional restrictions on government power is that occasionally good laws are thrown out. Obviously, no one in 1919 disputed the desirability of a law which aimed to prevent abusive child labor practices; the issue which arose in Bailey v Drexel Furniture Co. (1922) was whether Congress went beyond the bounds of its constitutionally delineated authority by using a “tax” to stop unethical behavior.
The Bailey case illustrates the difficulty involved with maintaining restrictions on government power even when such power is being tailored for good ends.
Bailey V Drexel Furniture Co: The Case
Drexel (plaintiff in original suit and respondent in appellate case) was a furniture manufacturing company which employed a child under the age of 14 during the 1919 tax year.
In agreement with the Tax Law, Bailey (the tax collector for the government) assessed a tax of $6,312.79 for such behavior. Drexel paid the full amount and then sued for recovery.
Drexel argued that the tax was a covert “penalty” designed to punish undesirable behavior and that the law was therefore an unconstitutional attempt to regulate business. The government argued that the levying of the tax was fully consistent with its broad taxing powers as prescribed by Article One of the Constitution.
What’s the Law Say?
Congress has the power to lay and collect taxes as outlined by the Constitution. However, this power is not unlimited and when Congress attempts to step beyond its bounds such attempts must be struck down.
Court Rules in Favor of Drexel Furniture Co.
The Supreme Court ruled in favor of Drexel (as did the lower court). Although no issue was raised as to the desirability of the Tax Law, the court reasoned that the tax created by the law was in fact a disguised penalty and it was therefore impermissible.
The court defined a “tax” as a source of revenue for the government, while a penalty is a punishment intended to deter certain behavior. Penalizing unethical behavior is not a function of the taxing power of the Congress but should be addressed through the criminal law of individual states.
The decision in Bailey was controversial in part because other taxes aimed at curtailing (or in some sense penalizing) certain behavior had been upheld.
For instance, excise taxes on drugs and firearms have not been regarded as improper attempts by the Congress to regulate business. But the court in Bailey recognized that an overly broad reading of Congress’ taxing power could result in the obfuscation of its proper function and unfairly reduce the power of the states.
Bringing this trial into the modern era
It’s hard to imagine a time when child labor was a widespread practice. Yet, less than a century ago, Congress grappled with this issue through legislation. The Child Labor Tax Law of 1919 aimed to curb this exploitative practice by imposing a 10% tax on the net profits of businesses employing child labor.
This law, however, faced a constitutional challenge in Bailey v. Drexel Furniture Co. (1922). The Supreme Court ruled that the tax was essentially a penalty disguised as a tax, exceeding Congress’s constitutional authority. The Court argued that while Congress has the power to tax, it cannot use this power to regulate industries that fall under state jurisdiction.
This case highlights the delicate balance between federal and state powers, and the limitations on Congress’s taxing authority. While the intent of the Child Labor Tax Law was noble, the Supreme Court’s decision underscores the importance of adhering to constitutional principles, even when addressing pressing social issues.
Lessons for Contemporary Businesses
While the Child Labor Tax Law is a historical relic, its implications for modern businesses remain relevant. As businesses strive to comply with complex tax laws and regulations, it’s essential to understand the limits of government power and the potential consequences of overreaching legislation.
For business owners, particularly those in industries with specific regulatory challenges like healthcare, law, and real estate, seeking expert advice is crucial. A specialized accountant can help navigate the complexities of tax laws, identify potential risks, and implement strategies to minimize tax liabilities.
By understanding the historical context of tax law and seeking professional guidance, businesses can ensure compliance and optimize their tax strategies.
Photo by Angelina Litvin