Committee on Economic Security (CES)

Volume VI. Social Insurance

A. Constitutional Issue

CONSTITUTIONAL ASPECTS OF SOCIAL INSURANCE

by
Alexander Holtzoff
Oct. 1934


The purpose of this memorandum is to discuss the constitutionality of social insurance, first, of the scheme is administered by the Federal Government, and second, if the scheme is administered by the states, subject to Federal control and in accordance with standards fixed by the Federal Government.


I. CONSTITUTIONALITY OF A FEDERALLY ADMINISTERED SCHEME

If it is desired that the social insurance plan be administered by the Federal Government, the following scheme would obviate many objections on the ground of alleged unconstitutionality and would stand the best chance of being sustained from a constitutional standpoint.

(1) The contributions to be made by employers and employees to the unemployment insurance fund, old age pension fund and health insurance fund, etc., should be levied as a tax on the employers and employees. The employer may be directed to withhold from the employee's wages the tax due from the latter and to pay it over to the Government. In Great Britain the contributions for the unemployment insurance fund are recorded in a book issued to each employee in which a stamp is pasted to evidence each contribution, both on the part of the employer and on pat of the employee. Such books could be issued here to evidence the payment of the tax. The employer could paste in the book of each employee stamps evidencing the respective contributions. The employer would then pay in the form of a tax to the Federal Government, the amount of his contribution and the contribution of his employees.

(2) The information needed for the purpose of determining the amount of unemployment insurance payable and the names of persons to whom it is due may be ascertained from information returns to be exacted from employers, showing the names of employees, the wages received by each, the number of weeks employed, the name of employees laid off, etc. Such information returns can properly be exacted in connection with the tax to be collected on the pay roll, since without such data it would be difficult, if not impossible, to calculate the amount of tax due.

(3) The contributions collected as above in the form of taxes should be covered into the Treasury, and not set aside as a trust fund for social insurance purposes.

(4) The money collected as a tax and covered into the Treasury as above described should then be appropriated for the purpose of paying the insurance benefits. The collection of the tax and the payment of the benefits could, of course, be handled by the same officials. In Great Britain this function is performed by employment offices, in view of the fact that one of the necessary functions connected with the payment of unemployment for those who are out of work. In the United States all of the duties could be performed by a chain of employment offices under the Secretary of Labor. The nucleus of such employment offices is already in existence.

A plan constructed as outlined above would obviate the necessity of meeting the objection that the Federal Government had no authority to enter the social insurance field.

The legal effect of such a measure would be a payroll tax imposed on employers and a wage tax on employees. Such a tax would probably be constitutional.

The tax would be an excise or indirect tax. It has been uniformly held that in connection with the power to levy indirect taxes, Congress may select the subject matter on which the impost is to be levied; it may create exemptions; and it may subdivide the taxpayers into groups and levy taxes varying in amounts, percentages, etc., on the various groups. The only limitation is that of geographical uniformity and the requirement that all persons in the same group must be treated alike.

Thus, is McCray vs. United States, 195 U.S. 27, 61 it was said: Whilst undoubtedly both the Fifth and Tenth Amendments qualify, in so far as they are applicable, all the provisions of the Constitution, nothing in those amendments operates to take away the grant of power to tax conferred by the Constitution upon Congress.

Likewise in Billings vs. United States, 232 U.S. 201, 282, the court wrote as follows: It has been conclusively determined that the retirement of uniformity which the Constitution imposes upon Congress in the levy of excise taxes is not an 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 doe 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.

Again it was stated in Brushaber vs. Union Pacific Railroad Co., 240 U.S. 1, 12, 24: That the authority conferred upon Congress by Par. 8 of Article I "to lay and collect taxes duties, imposts and excises" is exhaustive and embraces every conceivable power of taxation has never been questioned, or, if it has, has been so often authoritatively declared as to render it necessary only to state the doctrine.

So afar as the due process clause of the Fifth Amendment is relied upon, it suffices to say that there is no basis for such reliance since it is equally well settled power conferred upon Congress by the Constitution; in other words, that the Constitution does not conflict with itself by conferring upon the one hand a taxing power and taking the same power away on the other by the limitation of the due process clause.

In United States vs. Doremus, 249 U.S. 86, 93, these principles were summarized as follows: 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 not in the exercise of federal power exert authority wholly reserved to the States. Many decisions of this court have so declared. And from an early day the court has held that the fact that other motives may impel the exercise of federal taxing power does not authorize the courts to inquire into that subject. If the legislation enacted has some reasonable relation to the exercise of the taxing authority conferred by the Constitution, it cannot be invalidated because of the supposed motives, which induced it. Veazie Bank vs. Fenno, 8 Wall. 533, 541, in which case this court sustained a tax on a state bank issue of circulating notes. McCray vs. United States, 195 U.S. 27, where the power was thoroughly considered, and an act levying a special tax upon oleomargarine artificially colored was sustained. And see Flint vs. Stone-Tracy Co., 220 U.S. 107, 147, 153, 156, and cases cited.

Exemption features were sustained in Brushaber vs. Union Pacific Railroad Co., 240 U.S. 1, 12, 24, and a graduated tax was upheld in McCray vs. United States, 195 U.S. 27.

It would undoubtedly be argued that the measure is unconstitutional, because it was not intended as a revenue producing statute, but that the imposition of the tax was a mere pretext for the accomplishment of an entirely different purpose. Such objections, however, have been frequently interposed to tax statutes and have generally received but scant consideration. Perhaps the classic instance is found in Veazie Bank vs. Fenno, 8 Wall. 533, in which the Supreme Court upheld the constitutionality of a statute imposing a 10% tax on noted issued by the state banks. The purpose of the statute was not to collect any revenue, but to tax state bank notes out of existence. So successfully has its object been attained that not a dollar of revenue has ever been collected under that supposedly revenue-producing statute, although it has been on the books for almost three-quarters of a century, and that due to this act state bank notes have completely vanished.

In McCray vs. United States, 195 U.S. 27, the Supreme Court upheld the validity of a Federal tax on oleomargarine. The cat provided for a very low tax on white oleomargarine and a much higher tax on yellow oleomargarine, because the latter so closely resembled butter as to be frequently sold as a substitute. Again the actual intention of the Congress was not to provide a new source of revenue but to suppress the sale of oleomargarine as a butter substitute.

Another striking illustration of this principle is found in the Harrison Narcotic Act, which under the guise of the exercise of the taxing power placed traffic in narcotics under severe and stringent restrictions in an endeavor to suppress all dealings in drugs other than those expressly permitted. The constitutionality of this statute was sustained in United States vs. Doremus, 249 U.S. 86. There are indeed two cases that seem inconsistent with the foregoing line of authorities. They are the Child Labor Tax Cases, 259 U.S. 21, and Hill vs. Wallace, 259 U.S. 44. In the first of these cases the Supreme Court held unconstitutional a tax on all concerns employing child labor. In the second, there was held invalid a measure imposing a tax on dealings in grain futures, other than those consummated on boards of trade and embodying an elaborate scheme for regulating such boards. In each instance the decision of the Supreme Court was placed on the ground that the measure in question was a regulatory one and that its purpose was to regulate an intrastate business. These two decisions create a doubt as to whether the Supreme Court would go back to the doctrine of the earlier cases discussed above to the effect that if a statute purports on its face to be a tax measure, the Supreme Court will not consider the question whether the real purpose of the Congress was not to raise revenue but to accomplish some other object; or whether it will examine a tax measure for the purpose of ascertaining whether its primary purpose was other than to raise revenue. It might be well said, however, that the doctrines of the Child Labor Tax Case and of Hill vs. Wallace would not be applicable in connection with a consideration of the constitutionality if a social insurance measure, such as has been outlined above. It does not seem that it could be successfully contended that the primary purpose of such a measure was not to raise revenue. On the contrary, it would truly be a revenue-producing statute, for its object would be to collect tax. The purpose to which the proceeds of the tax are to be eventually devoted would not seem to be germane to the question of constitutionality.

It would seem, therefore, that there is a strong probability that the constitutionality of a federally administered social insurance plan constructed in the manner suggested in this memorandum would be upheld.

In principle the plan is much the same as that of the processing tax, the proceeds of which are devoted to paying certain benefits to farmers. For that reason the decision on the constitutionality of those taxes will throw much light upon the question here discussed.


II. CONSTITUTIONALITY OF A STATE ADMINISTERED SCHEME

There are various devices for a social insurance scheme administered by the states subject to Federal supervision and complying with minimum standards fixed by the Federal Government.

One very ingenious device is that of the Wagner-Lewis Bill, which imposes a payroll tax on employers, but exempts from its effect all employers doing business in any state which enacts an unemployment insurance statute meeting certain minimum requirements set forth in the bill. The constitutionality of such a device depends upon the question whether the Supreme Court would uphold the Wagner-Lewis Bill as a tax measure. The considerations heretofore discussed in this memorandum relative to a national system of pay roll and wage taxation are equally applicable to the Wagner-Lewis Bill.

Another device would be to allow as a deduction from income taxable under the Federal Income Tax Law all contributions paid by employers to a social insurance scheme in any state that enacts appropriate statutes for that purpose, meeting certain minimum requirements. Whether or not this would constitute a sufficient inducement for states to enact social insurance measures is something that would require consideration. The constitutionality of such device would seem to be beyond question.

Still a third expedient, which would be obviously valid, would be for the Federal Government to grant a subsidy to state social insurance schemes meeting certain minimum requirements.

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