Moments In Tax History | The Child Labor Tax Case | What's A Tax?

• Published date: 24 August 2022
• Subject Matter: Litigation, Mediation & Arbitration, Tax, Trials & Appeals & Compensation, Tax Authorities
• Law Firm: Freeman Law
• Author: Mr TL Fahring

Moments in Tax History | The Child Labor Tax Case | What's a Tax?

Bailey v. Drexel Furniture Co., 259 U.S. 20 (1922) (a/k/a "Child Labor Tax Case")

Summary: In the Child Tax Labor Case, the U.S. Supreme Court ruled that a purported "tax" was really a "penalty" and therefore an unconstitutional exercise of Congress's power to tax. While the breadth of the decision has been limited in light of subsequent interpretations of Congress's power to regulate interstate commerce, it remains relevant when Congress passes a "tax" that's unsupported by any other enumerated power.

Background: Among the powers that the U.S. Constitution grants to Congress are "Power To lay and collect Taxes, Duties, Imposts and Excises"¹ (the "Taxing Power") and "to regulate commerce . . . among the several states" (the "Interstate Commerce Clause").² The Tenth Amendment to the Constitution clarifies that "[t]he powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people."³

In 1916, Congress enacted a law prohibiting the interstate transportation of products of mines and factories that employed children under certain ages within a certain period of time of the product's removal from the place of production (the "Child Labor Law").⁴

Two years later, the Child Labor Law met its demise with the Court's 5-to-4 decision in Hammer v. Dagenhart (with Justices Holmes, McKenna, Brandeis, and Clarke dissenting). ⁵ The Court held that the law was not a proper exercise of the Congress's power under the Interstate Commerce Clause in light of the Tenth Amendment. The Court was of the opinion that:

[t]o sustain this statute would not be in our judgment a recognition of the lawful exertion of congressional authority over interstate commerce, but would sanction an invasion by the federal power of the control of a matter purely local in its character, and over which no authority has been delegated to Congress in conferring the power to regulate commerce among the States.⁶

Not to be deterred, Congress passed the Revenue Act of 1919 ("Child Labor Tax Law"). The Child Labor Tax Law imposed an excise tax of 10% of the net profits received or accrued in any year by a mine, quarry, cannery, workshop, factory, or manufacturing establishment that:

1. in the case of mine or quarry, employed during the taxable year children under the age of sixteen years old, or

2. in the case of a mill, cannery, workshop, factory, or manufacturing establishment employed during the taxable year:

a. children under the age of fourteen years old, or

b. children...