Crackpot Tax Protesting: It’s Not Just For A Minority of the Libertarian Party Anymore

To given an indication of how much worse things could get, a veritable Federalist Society All-Star panel of judges on the D.C. Circuit (Douglas Ginsburg–who, if I he [much as I’d like to take credit for that–ed.] didn’t smoke pot with his students would probably be on the Supreme Court today– Judith Rogers, and Janice Rogers Brown) held that the federal government doesn’t have the authority to tax damages gained in a suit by a whistleblower after she was blacklisted, arguing that such damages are not “income” and hence beyond the scope of the 16th Amendment. Reaction from tax law profs has been overwhelmingly hostile; see also Marty Lederman and Stephen Bainbridge (“Let a 1000 lawsuits bloom. Every tax nut in the country is probably getting ready to file suit challenging some tax or another using Murphy as a template.”) At TaxLawProfs, Steve Bank explains the peril of law office “originalism”:

This is an odd application of original intent or even original meaning analysis (assuming you agree that either is relevant). The court acknowledges that there were a number of revenue acts before Congress even addressed damage recoveries, thus providing at least five years of separation from the ratification of the Sixteenth Amendment to any opinion on this issue. Five years is not long, but the onset of World War I in the intervening years, plus the dramatic increase in the top marginal rates from 6% in 1913 to 65% in 1918, radically changed the landscape under which the issue was considered. That renders the 1918 view of the situation hardly the final word on what was the commonly understood meaning in 1913, prior to World War I. Even then, the opinion was from the Attorney General and not from Congress or any committee of Congress. More importantly, during this period, the definition of income was far from settled. The income tax was only five years old and Congress was borrowing from economic definitions, legal definitions, and popular definitions. The economic understanding of the term “income” at the time was arguably evenly split between those advocating an accretion tax notion of income (e.g., Haig) and those advocating a consumption tax notion of income (e.g., Fisher). The latter would not have supported a tax on capital gains, although the Supreme Court held that it was permissible in a 1921 decision. As I have argued in the context of tax-free reorganizations, the provisions adopted in 1918 were an attempt to compromise between these conflicting definitions of income so as to assure a proper revenue to pay for war expenses while still maintaining the appearance of fairness and responding to heavy lobbying from business and the wealthy. The notion of taxing people who recovered damages during this war period may have violated our sense of fair play when war profiteers were seeking to avoid paying tax on their bounty.

Under the Murphy Court’s analysis, it is not clear whether stock dividends should be taxable (since Treasury held them to be so soon after the 16th amendment was ratified in 1913) or not (since the Supreme Court held their taxation to be unconstitutional – in the only instance in which a tax statute was struck down as unconstitutional – in 1920 in Eisner v. Macomber). There are many other examples, including examples of Treasury flip-flopping on its own positions. The law was in flux in part for the very reason that there had been no “commonly understood” definition of income for tax purposes at the time the 16th amendment was ratified.

Of course, even if the historical analysis were less cursory than what Ginsburg’s, this demonstrates one of the fundamental problems with originalism: attributing a fixed, singular meaning to broad, ambiguous concepts whose definition is often a point of significant political contestation. For most constitutional questions of any interest, this is simply impossible, and assertions of centrainty generally represent policy choices on the part of the judge.