Committee on Economic Security (CES)

Volume VI. Social Insurance

A. Constitutional Issue


Prepared by Attorney General's Office at the request of the Committee of Ways and Means

The purpose of this memorandum is to discuss the constitutional aspects of the Social Security Bill now pending before the Congress; to explore the legislative powers under which its enactment is proposed; and to weight the objections to its validity, which I understand have been informally advanced in the discussions of this measure. Before entering on a detailed analysis of the bill and the minute consideration of the constitutionality questions which it involves, it seems desirable to advert to some basic fundamental principles of constitutional construction, which are sometimes overlooked, but which must always serve as a guide in determining of constitutional law.

The formula laid down by Chief Justice Marshall in McCulloch vs. Maryland, 4 Wheat. 316, 407, must always be borne in mind in testing the constitutionality of an act of Congress. His famous words have been often repeated, but may well be reiterated. They are as follows:

"A constitution, to contain an accurate detail of all the subdivisions of which its great powers will admit, and of all the means by which they may be carried into execution, would partake of the prolixity of a legal code, and could scarcely be embraced by the human mind. It would, probably, never be understood by the public. Its nature, therefore, requires that only its great outlines should be marked, its important objects designated, and the minor ingredients which impose those objects, be deduced from the nature of the objects themselves. That this idea was entertained by the framers of the American constitution, is not only to be inferred from the nature of the instrument, but from the language. Why else were some of the limitations, found in the 9th section of the 1st article, introduced? It is also, in some degree, warranted, by their having omitted to use any restrictive term which might prevent its receiving a fair and just interpretation. In considering this question, then, we must never forget that it is a constitution we are expounding."

Three years previously Mr. Justice Story had enunciated the same principle in somewhat different language. Martin vs. Hunter's Lessee, 1 Wheat. 304, 326:

"The constitution unavoidably deals in general language. It did not suit the purpose of the people, in framing this great charter of our liberties, to provide for minute specifications of its power, or to declare the means by which those powers should be carried into execution. It was foreseen, that this would be perilous and difficult, if not an impracticable, task. The instrument was not intended to provide merely for the exigencies of a few years, but was to endure through a long lapse of ages, the events of which were locked up in the inscrutable purpose of Providence. It could not be foreseen, what new changes and modifications of power might be indispensable to effectuate the general objects of the charter; and restrictions and specifications, which, at the present, might seem salutary, might, in the end, prove the overthrow of the system itself. Hence, its powers are expresses in general terms, leaving to the legislature, from time to time, to adopt its own means to effectuate legitimate objects, and to mould and model the exercise of its powers, as it own wisdom, and the public interests, should require,"

In entering upon a discussion of the particular measure here under consideration, it is desirable first to analyze its provisions. The Social Security Bill consists of a number of distinct titles. Title IX proposes to impose an income tax on the wages of certain classes of employees, and an excise tax on certain classes of employers, measured by specified percentages of the wages paid by the employers to whim the tax is applicable. Title X imposes another excise tax on employers employing ten or more persons, the tax again being measured by specified percentages of the wages paid by the employer.

Title I of the bill provides for grants to the State for old age assistance. In order to qualify for such grants, a State is required to adopt an old age assistance plan, meeting certain standards laid down in the bill, and to appropriate funds to match the Federal contribution. Title II seeks to appropriate money from the payment of old age benefits to certain groups of employees upon their attaining the age of sixty-five. Title IV proposes to make grants to States for the administration of unemployment compensation, provided the State adopts an unemployment compensation law complying with certain standards laid down in the bill. Title V provides for Federal grants to the States for aid to dependent children, while Title VI makes similar grants for maternal and child welfare. Title VII makes certain appropriations for the purpose of extending and improving public health service.

Title III authorizes the Secretary of the Treasury to issue securities to be known as "United States Annuity Bonds".

There will first be considered the validity of the tax features of the bill contained in Title IX and Title X.

The first tax sought to be imposed by the bill is that found in Title IX, Sections 901-903. It is an income tax on the wages of certain classes of employers. The power of the Congress to levy an income tax is undisputed. Suffice it to advert to the Sixteenth Amendment, which reads as follows:

"The Congress shall have power to lay and collect taxes on income, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration."

In levying an income tax, the Congress may exempt certain classes of persons or certain types of income, as well as levy varying rates of tax on incomes of different sizes. Brushaber vs. Union Pacific Railroad Company, 240 U.S. 1. The validity of the tax imposed by these provisions of the bill, standing alone, is undoubtedly not subject to question.

Title IX, Sections 904-911, and Title X provide for excise taxes on wages paid by certain classes of employers as defined in the bill.

The grant of power to the Congress to levy excise taxes is found in Article I, Section 6, Clause 1 of the Constitution, which reads as follows:

"The Congress shall have Power to Lay and Collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States."

More comprehensive and sweeping language can hardly be imagined. The Supreme Court in Brushaber vs. Union Pacific Railroad Company, 240 U.S. 1, 12, stated that the authority conferred upon the Congress by thus provision "is exhaustive and embraces every conceivable power to taxation."

The only limitations on this power is that contained in the constitutional provision, namely, that "all duties, imposts and excises shall be uniform throughout the United States." The uniformity required by the Constitution has been invariably held to be merely a geographical uniformity. Thus, it was said in Billings vs. United States,232 U.S. 261, 282:

"It has been conclusively determined that the requirement of uniformity which the Constitution imposes upon Congress in the levy of excise taxes is not intrinsic uniformity, but merely a geographical one. Flint vs. Stone-Tracy Company, 220 U.S. 107; McCray vs. United States, 195, U.S. 27; Knowlton vs. Moore, 178 U.S. 41. It is also settled beyond dispute that the Constitution is not self-destructive. In other words, that the powers which it confers on the one hand it does not immediately take away on the other; that is to say that the authority to tax which is given in express terms is not limited or restricted by the subsequent provisions of the Constitution or the amendments thereto, especially by the due process clause of the Fifth Amendment."

The same doctrine was enunciated in United States vs. Doremus, 249 U.S. 86, 93:

"The only limitation upon the power of Congress to levy excise taxes of the character now under consideration is geographical uniformity throughout the United States. This court has often declared it cannot add others. Subject to such limitation Congress may select the subjects of taxation, and may exercise the power conferred at its discretion. License tax cases, 5 Wall. 462, 471. Of course Congress may nor in the exercise of federal power exert authority wholly reserved to the States. Many decisions of this court have so declared."

It is understood that there has been no attempt to challenge the constitutionality of the foregoing provisions of the bill standing alone. It is not understood that it is disputed that the Congress is clothed with the power to impose the taxes provided by the pending bill. However, it has been said that the real purpose of these tax measure is not to raise revenue but to establish a nation-wide scheme for unemployment insurance and old age benefits; that the consequently, since there is no express provision in the Constitution granting to the Congress the power to legislate on the subject of old age benefits and unemployment insurance, these tax provisions must be deemed invalid.

This reasoning completely overlooks the principle frequently enunciated and as frequently applied by the Supreme Court, to the effect that in passing upon the validity of a statute, which on its face, purports to be a tax measure, the courts will not consider the question whether the motive of the legislative body was some other than that to raise revenue. This rule has been formulated on a number of occasions and led to upholding the validity of statutes, which, while ostensibly revenue measures, were obviously intended to accomplish an entirely different purpose. Thus, in 1866, the Congress passed a act levying a 10% tax on bank notes issued by state banks. The real purpose of the authors of this measure was not to raise revenue, but to eliminate state bank notes from circulation. So effectively was its real purpose accomplished, that little, if any, revenue was ever collected under this Act The validity of the statute was challenged on the ground, among others, that it was not a true revenue measure. Its constitutionality was, however, upheld in Veazie Bank vs. Fenno, 8 Wallace 533. Another striking case is that involving the oleomargarine tax. An Act adopted in 1902, levying a tax on oleomargarine imposed a low tax on white oleomargarine and a much higher tax on yellow oleomargarine with the obvious purpose of driving yellow oleomargarine out of the market, in view if the fact that its was frequently sold to the public as butter. The validity of the measure was questioned, and it character as a tax measure was assailed, but without success. McCray vs. United States, 195 U.S. 27, 50. Holding that the Act was a valid exercise of the taxing power, Mr. Justice White stated:

"Undoubtedly, in determining whether a particular act is within a granted power, its scope and effect are to be considered. Applying this rule to the acts assailed, it is self-evident that on their face they levy an excise tax. That being their necessary scope and operation, it follows that the acts are within the grant of power."

He swept to one side the argument that the real motive of the Congress was not to raise revenue, but to drive yellow oleomargarine from the market by imposing a prohibitive tax upon the sales of that commodity.

Perhaps the outstanding case sanctioning the use by the Congress of the taxing power for purpose other than to raise revenue is United States vs. Doremus, 249 U.S. 86, which upheld the constitutionality of the Harrison Narcotic Drug Act. Under the guise of a revenue measure, the Congress placed all dealings in narcotics under severe and stringent restrictions. It was urged again that the statute was not a true tax measure, and, consequently, beyond the constitutional power of the Congress to enact, and again this contention was overruled. The court stated that an "act may not be declared unconstitutional because its effect may be to accomplish another purpose as well as the raising of revenue. If the legislation is within the taxing authority of Congress - that is sufficient to sustain it." (p, 94)

The latest expression of the Supreme Court upon this point is found in the case of Magnano vs. Hamilton, 292 U.S. 40, 47, decided on April 2, 1934, in which the court made the following significant statement:

"From the beginning of our government, the courts have sustained taxes although imposed with the collateral intent of effecting ulterior ends which, considered apart, were beyond the constitutional power of the lawmakers to realize by legislation directly addressed to their accomplishments."

The conclusion is inescapable that the motive of the Congress in enacting a law, which, on its face, purports to be a revenue measure, is immaterial and will not be considered by the courts in passing upon its validity. If a statute is ostensibly a valid exercise of the taxing power, the fact that such authority is invoked to accomplish an object other than to raise revenue, has no effect upon the constitutionality of the act. It necessarily follows that the fact that the taxes sought to be imposed by the Social Security Bill may constitute an inherent part of a legislative scheme for old age benefits and unemployment insurance, in no way detracts from their validity.

Those who advance a contrary view rely on the decisions of the Supreme Court in the Child Labor Tax Case, 259 U.S. 20, and Hill vs. Wallace, 259 U.S. 44. Upon close analysis, however, they will find but little solace in these decisions. It is only by giving them implications far beyond their actual holdings and by construing them as overruling the line of cases, which have been just discussed that any support can be found in them for the suggestion that the Social Security Bill may possibly be invalid.

In the Child Labor Tax Case, the Supreme Court held unconstitutional an act of Congress, which imposed a tax equal to 10% of the net profits realized by any employer, who employed child labor, knowing the children to be below a certain age. The Supreme Court held that this law did not impose a tax, but exacted a penalty. It emphasized the fact that the provision, which imposed the so-called tax only on a person who knowingly departed from a prescribed course of conduct, made the impost a penalty rather than a tax. Chief Justice Taft remarked that "scienter is associated with penalties not with taxes". He expressly adverted to the line of cases to which reference has been made in this memorandum and reiterated their holdings as sound law.

Likewise in Hill vs. Wallace, that court declined to uphold a measure seeking to impose a so-called tax on dealings in grain futures, except as to contracts executed through a number of Board of Trade designated by the secretary of Agriculture and complying with prescribed requirements. The court ruled that the so-called tax was a penalty exacted for failure to comply with the requirements of the law (p. 66).

It is manifest that these two cases are not germane to the present discussion. Surely no one will contend that the taxes sought to be imposed by the pending measure are in fact penalties.

It is also not without significance that in the Magnano case, supra, decided less than a year ago, the cases heretofore discussed by me were cited with approval by the Supreme Court and the Child Labor Tax Case explained as being based upon the proposition that the law which it held invalid, imposed, in fact, not a tax but a penalty.

Thus far there has been discussed the validity of the tax features of the bill in general. There is one specific provision that deserves additional consideration. Title X, which imposes a tax on wages paid by employers, also provides in section 1002, that the taxpayer may credit as against the tax, any contributions paid by him into an unemployment fund established under a state law, provided that the total credit shall not exceed 90% of the tax. This device was approved by the Supreme Court in Florida vs. Mellon, 273 U.S. 12, in connection with the estate tax imposed by the Revenue Act of 1926, which contained a provision that the tax should be credited with the amount of any estate taxes paid to any state, such credit not to exceed 80% of the tax. It was asserted that the tax was unconstitutional, in that its purpose was to act as an incentive to the states to enact inheritance tax legislation, and that it especially discriminated against the State of Florida, which levied no such tax, These objections received but scant consideration at the hands of the Supreme Court, which declined to hold the law invalid. Thus, the credit provisions of Title X constitute an expedient sanctioned by the Supreme Court.

The consideration heretofore discussed lead to the conclusion that the tax features of the bill are valid and constitutional. It is now desirable to pass to a consideration of those sections of the bill, which seek to appropriate money from the payment of old age benefits for the making of grants to the states for old age assistance, the administration of unemployment compensation laws, aid to dependent children and maternal and child welfare, and for the purpose of extending and improving public health services. The suggestion that the power of the Congress to appropriate money is in any way restricted or circumscribed is indeed a novelty. As we turn back the page of our history, we find that it has never been successfully contended that the authority of the legislative branch of the Government to appropriate money is limited to the specific purposes enumerated in Article I, Section 8 of the Constitution. The Congress has invariably by its own actions, placed a different construction upon this power. It has always been customary for the Congress to appropriate money for purposes not enumerated in the Constitution. To select but a few such instances at random, we may refer to grants made to agricultural colleges many years ago; subsided to transcontinental railroads; grants for maternity care exemplified by the Sheppard-Towner Act' appropriations for the extermination of pests, such as the boll-weevil and the Mediterranean fruit fly; appropriations for scientific research, and many other examples that could be multiplied without number. A construction consistently placed upon the Constitution by the legislative branch of the Government in a series of acts over many years _____ not to be lightly disregarded, as was remarked by Chief Justice Marshall in McCulloch vs. Maryland, supra, at age 401.

The Supreme Court has recently held that a taxpayer has no standing in the courts to question or attack the validity or the constitutionality of an appropriation made by the Congress. Massachusetts vs. Mellon, 262 U.S. 447, 486.

It follows hence these titles of the bill which seek to appropriate Federal funds for specific purposes may not be successfully assailed as to their validity.

There remains to say a few words in regard to Title III of the bill, which provides for the issue of a new type of securities to be known as "United States annuity bonds". A reading of that title clearly indicates that the provisions comprised within its scope are an exercise of the power of the Congress to borrow money, - a power which has been given an extremely broad constructed in McCulloch vs. Maryland, supra, and in the Legal Tender Cases, 12 Wallace 457.

The fact that by the pending bill it is sought to exercise the powers of the Congress in an unaccustomed manner, does not affect the validity of the measure. Powers heretofore dormant may be called into action and invoked to meet new contingencies arising in the progress of the life of the nation. The political, the economic and the social history of the United States is marked from time to time by new departures in Government, all of which were attached at the time as unconstitutional, but whose validity was eventually upheld as coming within the purview of the powers conferred upon the Federal Government by the Constitution. Thus, the power of the Congress to charter a bank was seriously challenged at one time, and yet today, we have in this country a network of national banks. Many statesmen questioned the power of the Federal Government to acquire territory when President Jefferson purchased the vast areas known as Louisiana. Had their views been followed, this country would still consist of thirteen states bordering on the Atlantic coast, instead of being one of the great powers of the world. The power of the Congress to provide paper money and make it legal tender was seriously assailed. Today paper money is part and parcel of our economic life. (Compare the Legal Tender Cases, supra, and the recent Gold Clause Cases.) There may also be taken into consideration the strong presumption which exists in favor of the constitutionality of an act of the Congress, in the light of which and of the foregoing discussion, it is reasonably safe to assume that the Social Security Bill, if enacted into law, will probably be upheld as constitutional. It is suggested, therefore, that if the Congress deems the Bill to be meritorious, it ought not to fail of passage on any pre-judgment that it is unconstitutional.

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