Income “is the gain derived from capital, from labor, or from both combined.” 3 However, Congress is not authorized to tax as "income" every sort of revenue a taxpayer may receive. 4 A tax on gross revenue, such as the federal income tax, taxes both capital and income, and is, therefore, not an income tax. 5 Insofar as it taxes capital, it is a direct tax that must be apportioned, the Sixteenth Amendment notwithstanding. 6 “Taxable income” is all gain from activities that are within the authority of the federal government to tax. The federal income tax “cannot be applied to any income which Congress has no power to tax.” 7 The right to work is an example of an activity that is outside of federal taxation authority because it is a fundamental right. 8
The federal income tax is also limited as to whom it applies. It only applies to “taxpayers,” and not to “nontaxpayers.” 9 26 U.S.C. § 1 imposes a tax on the taxable income of certain individuals, such as partners, certain large partnerships, foreign corporations, withholders of taxes on nonresident aliens and foreign corporations and those employers required by Chapter 24 of Subtitle C to withhold taxes on employees.
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Direct taxes are subject to the Constitutional restraint of apportionment, the Sixteenth Amendment notwithstanding. 14 The U.S. Constitution art. I, § 2, cl. 3 mandates that “...direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers...” In addition, Art. I, § 9, cl. 4. “[n]o Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken...”
In contrast, “indirect taxes are levied upon the happening of an event or an exchange."15 It is voluntary upon and avoidable by the citizen, i.e. the tax can be avoided if one chooses not to engage in the taxed activity. 16 “[T]he requirement to pay such taxes [excises (indirect tax)] involves the exercise of privileges, and the element of absolute and unavoidable demand is lacking.” 17
Indirect taxes, including excise taxes, are required by the Constitution to be uniformly laid. 18 The Constitution Art. I, § 8, cl. 1 declares that “[t]he Congress shall have Power To lay and collect Taxes...and Excises... but all...Excises shall be uniform throughout the United States...” “Uniformity of taxation” is defined by Ballentine’s Law Dictionary as “[a] general principle that taxes should be levied in accord with some reasonable system of apportionment...it means that such taxes may only be levied with geographical uniformity...requiring the same plan and the same method to be operative throughout the United States.” 19
The federal income tax can be characterized as an indirect tax or an excise. An excise tax (or privilege tax) is a tax “laid upon the manufacture, sale or consumption of commodities within the country, upon licenses to pursue certain occupations, and upon corporate privileges.” 21 The first income tax, which was enacted in 1861, imposed a tax on all income derived from property. It was generally considered to be an indirect excise tax on the use of the property for gain. The tax was referred to in Brushaber v. Union P. R. Co., 240 U.S. 1 (1916) as an excise tax. 22
...[N]either under the Sixteenth Amendment nor otherwise has Congress power to tax without apportionment a true stock dividend made lawfully and in good faith, or the accumulated profits behind it, as income of the stockholder. The Revenue Act of 1916 [successor of the 1913 income tax], in so far as it imposes a tax upon the stockholder because of such dividend, contravenes the provisions of Article I, § cl. 3, and Article I, § 9, cl. 4, of the Constitution, and to this extent is invalid notwithstanding the Sixteenth Amendment. 33