The distinction between direct and indirect taxes was first examined
by Adam Smith in his Wealth of Nations, where we find at V.2.154
Taxes upon luxuries have no
tendency to raise the price of any other commodities except that
of the commodities taxed. Taxes upon necessaries, by raising the
wages of labour, necessarily tend to raise the price of all
manufactures, and consequently to diminish the extent of their
sale and consumption. Taxes upon
luxuries are finally paid by the consumers of the commodities taxed without any retribution. They fall
indifferently upon every species of revenue, the wages of labour,
the profits of stock, and the rent of land. Taxes
upon necessaries, so far as they affect the labouring poor, are
finally paid, partly by landlords in the diminished rent of their
lands, and partly by rich consumers, whether landlords or others,
in the advanced price of manufactured goods, and always with a
considerable overcharge. The advanced price of such manufactures
as are real necessaries of life, and are destined for the
consumption of the poor, of coarse woollens, for example, must be
compensated to the poor by a further advancement of their wages.
The middling and superior ranks of people, if they understand
their own interest, ought always to oppose all taxes upon the necessaries of life, as
well as all directtaxes upon the wages of labour.
In other words, taxes were not direct or indirect in themselves, but
in the impact they had on the decisions of taxpayers and consumers.
We may attempt to summarize them by saying that direct taxes were
those that fell on the proximate taxpayers and could not be passed
on, and indirect on those who paid higher prices on items on which a
tax had been paid before they were sold.
So in the sense Smith uses the term (he does not use "indirect
tax"), a "direct" tax can be applied to wages, but that will raise
the cost of labor to the employers. An indirect tax is a tax on
luxuries, not on necessities consumed by the taxpayer.
Now the framers, or at least some of them, were familiar with Adam
Smith, although they may not have systematized his use of those
terms very well, and they were aiming at what Smith was examining
when they drafted the Constitution. The result is that the tax
provisions of the Constitution are based on a misunderstanding of
economics (which was not a term of art in 1787, when the subject was
discussed under the term "commerce" see //constitution.org/hist/encbr/encbr2_commerce.htm).
The Pollock Court was not aware of this discussion. All they came up
with were two examples of "direct tax", on real property and a head
tax on each living individual. That became their "definition of it,
and we have stuck with it ever since. However, they got it wrong.
So to better understand the distinction applied to an income tax, a
tax on wages is direct, because the taxpayer can't pass the tax on
to the next buyer. It might have an aggregate effect on the cost of
labor, but not a proximate one. The proper definition of "income"
would be earnings on land and capital, in the forms of rents,
interest, dividends, or profits on sales. Thus, wages would not be
profit on the sale of labor, but an equal exchange. If the employer
held back payment of wages, thereby taking it as a loan to himself,
and he paid interest for doing so, that interest would be properly
taxed as income, but not the wages themselves. This is the
distinction made by Jeff Dickstein in Judicial Tyranny. //constitution.org/tax/us-ic/dickstein/jtyit-1.pdf
The problem with the Income tax Amendment is that it did not define
"income", but left it to bureaucrats to presume it meant all
revenues received, not just rents, interest, dividends, and profits.
That is why it needs to be struck down, preferably by Congress
rescinding the certification that it had been ratified. It was not.