Committee on Economic Security (CES)
Volume VI. Social Insurance
A. Constitutional Issue
MEMORANDUM ON CONSTITUTIONALITY OF A STRAIGHT NATIONAL OLD AGE INSURANCE AND UNEMPLOYMENT INSURANCE SCHEME
Barbara N. Armstrong
It is proposed to provide unemployment and old age insurance for manual wage earners and non-manual wage-earners employed at a rate of not more than $250 a month.
This is to be done either by two separate measures or by a joint taxing and appropriation measure.
Assuming the first alternative, there will be one taxing measure and one appropriation measure. It is proposed that Congress levy (1) a payroll tax upon eligible payroll, defined as payroll of all manual wage earners and non-manual wage earners employed as a rate of not more than $250 a month, the payroll for both manual and non-manual workers to be assumed for taxation purposes not to exceed $250 per month per employed persons: (2) a tax upon wages of all persons involved in the payroll taxed in (1) such wages to be collected for the government through the agency of the employer who will be authorized and directed to withhold the wages tax due from each employee from the wages payable to each employee.
The wage of each taxable employee shall for taxation purposes be deemed not to exceed $250 per month. The taxes levied shall represented by coupon stamps provided that, under regulations to be promulgated by the Internal Revenue Division, employers may on filing proper bonds to be authorized to substitute a mechanical stamping device for the entering of coupon stamps in the pass books of taxable employees. The provisions of laws governing the engraving, issue, sale, accountability, effacement and destruction of stamps relating to tobacco, snuff and oleomargarine, as far as applicable, shall apply to the stamps provided for the payment of the taxes.
Employers shall be require to (1) forward a duplicate payroll each month _______ federal offices, together with the cause of separation from employer _____ employee leaving the service of the employer during the period _______ forwarded payroll; 92) keep for each insurable employee an insurance ______________ must be entered each pay day (and not less frequently than every other weeks) (a) an insured stamp, or (b) by specific arrangement under rules promulgated by the Internal Revenue Department, some other record of payment of the appropriate tax due from the employee; (3) display to each insured employee for countersigning by him, such stamp or substitute record of payment of the tax.
It is proposed, by the appropriate provisions, that the equivalent of the proceeds of the payroll and wages tax be placed in two separate finds — one to be used for unemployment benefits, the other for old age pensions. The unemployment benefits shall be provided in conformity with the plan laid down in Appendix____of the document for reference purposes designated as the Preliminary Report. Old age pensions shall be provided in conformity with the plan laid down in Appendix___of this same document. The taxation provisions and the appropriation provisions will be separately discussed.
Proposed Taxation Provisions
The Proposed (social insurance) taxation measure does not fall within the pattern of the measures lying in the constitutionality contested field in which are found the conflicting decisions of the oleomargarine case (McCray vs. U.S. 195 U.S. 27). The Indiana Child Labor Case (Bailey vs. Drexel Furniture Co.), the very recent state oleomargarine Tax Case, (Magnano Co, vs. Hamilton) (54 Sup. Ct. 599-1924) all of which involve a tax levied not to raise revenue but to oppress and discourage the subject of the tax. The undoubted purpose of the proposed payroll and wages tax is to raise revenue. It is worth remarking, moreover, in view of the emphasis place upon the Child Labor Taxation Case (Bailey vs. Drexel Furniture Co.) In forecasts of future "attitudes" on the part of the Supreme Court of the United States, that a very recent decision) (decided April 2, 1934) of the U.S. Supreme Court (Magnano Co. vs. Hamilton, 292 U.S. 40) has reaffirmed the attitude the much discussed Oleomargarine Tax Case which preceded the Child Labor decision, (McCray vs. United States, 195 U.S. 27). The Magnano case involved the constitutionality of a tax of 15 cents on all butter substitutes. The court is its opinion says (p. 44) "collateral purposes or motives of a legislature is levying a tax within the reach of its lawful power are matters beyond the scope of judicial inquiry." Citing the McCray case and again on p. 45 quoting the Veazie Bank vs. Tenn. and the McCray case, "The power to tax may be exercised oppressively upon persons, but the responsibility of the legislature is not to the courts but to the people by whom its members are elected."
Reference is specifically made to the child labor case and quotations that case in regard to the difference between a tax and a penalty, and emphasizing that the case held that it must be deduced from language of the act itself that prohibition instead of a tax is intended and that such may not be inferred solely from its heavy burden. Concluding, "from the beginning of our government, the courts have sustained taxes, although imposed with the collateral intend of effecting ulterior ends, which, considered apart, were beyond the constitutional power of the lawmakers to realize by legislation directly addresses to their accomplishment."
This latter statement states the policy on which the main contention of this brief rests. This contention is that even from an orthodox standpoint the proposed scheme is immune from constitutionality attack.
Only one aspect of the proposed insurance tax can be called even debatable, to wit—the regulations requiring from the employer a statement of the cause of severing employment relations, i.e., whether a voluntary quitting or a dismissal for cause.
Such regulations fall quite within the Supreme Court's description of the regulatory requirements of the Harrison Act of 1914 ( in reality a Narcotic's Control Act) which forms Section 211 of the Internal Revenue Law, and can be justified on precisely the same ground.
In the Case of Doremus vs. United States (249 U.S. 86) in passing upon the constitutionality of this Harrison Act, which required inter alia elaborate records of drugs dispensed by physicians and dentists, the Supreme Court of the United States said in reference to these regulations, "Considered of themselves, we think they tend to keep the traffic above board and subject to inspection by those authorized to collect the revenue. They tend to diminish the opportunity of unauthorized persons to obtain the drugs and sell them clandestinely without paying the tax imposed by federal law."
Regulations requiring the employer to state whether a man was fired for cause or left to his own accord, tend to furnish information that fits within the logic of the foregoing sentence. "It is calculated to keep the traffic above board and subject to inspection", for it enables the enforcement officers to check integrity of employer in keeping payroll records, and integrity of employer in keeping such records is basic in enforcement of wages and payroll tax.
The Doremus case has never been overruled. The Linder Case (Linder vs. U.S. 268 U.S. 5, 1925) merely determined that the particular act challenged (i.e. failure of a physician to make written application for the dispensing of a drug upon government form) involved a regulation which the statute could not be validly construed to forbid, the language by Mr. McReynolds being mere generalization representing his view expressed in dissent to the Doremus case. Moreover, in Nigro vs. U.S. in 1928 (276 U.S. 332) the U.S. Supreme Court reaffirmed the Doremus case and again held the Harrison Act valid. Moreover, Chief Justice Taft specifically implied that any possible questionableness of the Act had rested merely in its nominal tax ($1 annual tax only being imposed) and remarked that the increase of tax from $1 to $6 to $24 and the addition of an excise tax on the sale of drugs had rendered the act immune from attack. Said Mr. Justice Taft:
"Thus the income from the tax for the government becomes substantial. Under the Narcotic Act, as now amended, the tax amounts to about one million dollars a year, and since the amendment in 1919 it has benefitted the treasury to the extent of nearly nine million dollars. If there was doubt as to the character of this a ct as an alleged subterfuge, it has been removed by the change whereby what was a nominal tax before was made a substantial one." (p. 773)
The provisions requiring the employer to collect the wages tax find ample precedent in the 962 and 989 of the U.S. Income Tax provisions as to collecting at the source. The numerous federal stamp taxes, such as the tobacco, snuff, eleo, white phosphorous taxes ad many others, show that the coupon stamp device of tax collection is a conventional device.
There seems to be no procedure whereby the U.S. may be questioned in its expenditure of funds. Even should these be doubted as to the public purpose involved in the disbursement of funds (which obviously need not be conceded) there would be no available judicial method for calling Congress into account in its appropriation policy.