The opinion in this case held that the power granted by the Wilson-Gorman Tariff Act of 1894 to collect an income tax on interest, dividends and rents was unconstitutional. The opinion set forth in Pollock was effectively nullified by the 16th amendment, but if not for this amendment Pollock certainly would be regarded among one of the most important decisions in U.S. history. Given its significance as a historical matter, let’s look at the Pollock case in greater detail.
Pollock v Farmers Loan & Trust Co: The Case
As we learned previously, the Wilson-Gorman measure imposed a 2% tax on income above $4,000. This tax was implemented in order to cover the deficit created from the reduced tariff rates. After the measure was passed, the Farmers’ Loan and Trust Company (the defendant) announced to its shareholders that, in addition to paying the tax required by the law, it would furnish the names of the shareholders liable for the tax to the collector. Pollock (the plaintiff) owned only ten shares of stock in Farmers’ Loan, but he brought suit against the company to prevent the company from paying the tax.
What’s the Law Say?
Article 1, Section 2, Clause 3 of the U.S. Constitution holds that direct taxes are permissible but they must be apportioned among the states of the union based on population. If a tax is found to be classifiable as direct, then it must contain a provision to be properly apportioned in accord with this rule.
Court Rules in Favor of Pollock
While the lower courts turned him down, the Supreme Court ultimately sided with Pollock — though it was not a popular ruling and narrowly split the ruling 5-4. This ruled that the income tax imposed by the Wilson-Gorman act was a direct tax because of its substantial impact on personal property (i.e. stocks, bonds, etc.). Since it was a direct tax, it needed to be apportioned consistent with constitutional requirements. And because it was not apportioned in this manner it was invalid.
Pollock was an extremely important opinion because, in effect, it substantially curtailed the taxing power of congress. If every tax on income derived from property is regarded as a direct tax, then the rule of apportionment would need to be abandoned entirely to collect any tax other than excise taxes. This is precisely the function served by the 16th amendment which holds that direct taxes need not be subject to the traditional rule of apportionment.
Photo by Marga Santoso