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

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TL Fahring focuses on helping individuals and businesses with a wide variety of matters involving state, federal, and international taxation. He has represented clients in all stages of federal and state tax disputes, including audits, administrative appeals, litigation, and collection matters. Mr. Fahring also has used his tax knowledge to assist clients in planning complex domestic and international transactions, including advising as to potential reporting and withholding requirements.

Mr. Fahring received his J.D. from the University of Texas School of Law, where he graduated with high honors and was inducted into the Order of the Coif and Chancellors honors societies. After clerking for a year at the Texas Eleventh Court of Appeals, he attended New York University School of Law, where he received an LL.M. (Master of Laws) in Taxation and served as a student editor on the Tax Law Review.

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:
      1. children under the age of fourteen years old, or
      2. children between the ages of fourteen and sixteen years old:
        1. for more than eight hours during any given day;
        2. for more than six days in any given week; or
        3. after 7pm or before 6pm on any given day.[7]

It was a defense to the imposition of the tax that an employer employed a child because he believed him to be of proper age and relied on a certificate to this effect issued by the appropriate authority.[8]

Drexel Furniture Company (the “Company”) was in the business of manufacturing furniture.[9] The Collector of Internal Revenue for the district in which the Company was located sent the Company a notice that it had been assessed tax for taxable year 1919 due to its having employed a boy under fourteen years old in its factory.[10]

As in Dagenhart, the Company challenged the Child Labor Tax Law by arguing that it was an attempt to regulate the employment of child labor in the states, which was a power exclusively reserved to the states under the Tenth Amendment.[11] On the other hand, the government argued that the law was within Congress’s broad taxing power.[12]

Holding: In an 8-to-1 decision, the Court held that the Child Labor Tax Law to be a penalty, not a tax. Therefore, the law was not within Congress’s Taxing Power and was an unconstitutional infringement on the reserved powers of the states under the Tenth Amendment.

Rationale Behind Holding: The Court noted that:

[t]he difference between a tax and a penalty is sometimes difficult to define and yet the consequences of the distinction in the required method of their collection often are important. . . . Taxes are occasionally imposed in the discretion of the legislature on proper subjects with the primary motive of obtaining revenue from them and with the incidental motive of discouraging them by making their continuance onerous. They do not lose their character as taxes because of the incidental motive. But there comes a time in the extension of the penalizing features of the so-called tax when it loses its character as such and becomes a mere penalty with the characteristics of regulation and punishment.[13]

In this case, the Court determined that the following features of the Child Labor Tax Law revealed it to be a penalty rather than a tax:

As such, the Court held that the Child Labor Tax Law clearly was “imposed to stop the employment of children with the age limits prescribed.”[18]  As such, the case could not be distinguished from Hammer.[19] To allow Congress to impose these regulations under the Taxing Power would be to provide Congress with an end run around the Tenth Amendment:

Grant the validity of this law, and all that Congress would need to do, hereafter, in seeking to take over to its control any one of the great number of subjects of public interest, jurisdiction of which the States have never parted with, and which are reserved to them by the Tenth Amendment, would be to enact a detailed measure of complete regulation of the subject and enforce it by a so-called tax upon departures from it. To give such magic to the word “tax” would be to break down all constitutional limitation of the powers of Congress and completely wipe out the sovereignty of the States.[20]

This was so, even if one were to grant that the aims of the law (i.e., preventing child labor) promoted the public good:

We can not avoid the duty [to decline to recognize laws of Congress that are outside of its power] even though it require us to refuse to give effect to legislation designed to promote the highest good. The good sought in unconstitutional legislation is an insidious feature because it leads citizens and legislators of good purpose to promote it without thought of the serious breach it will make in the ark of our covenant or the harm which will come from breaking down recognized standards.[21]

Reactions to Decision: Only Justice Clarke dissented in the Child Labor Tax Case, meaning that three of the four justices who had dissented to Hammer joined the majority opinion here.[22] It’s unclear what differences between the cases caused these justices to switch sides.[23]

Reformers left the Child Labor Tax Case believing that a constitutional amendment would be necessary in order to achieve the objectives of the laws in Hammer and the Child Labor Tax Case.[24]

Continued Relevance:  The expansion of the Court’s interpretation of Congress’ Interstate Commerce Power in subsequent decades tended to reduce the instances in which the tax/penalty distinction was relevant for determining a tax’s constitutionality.[25]  Nevertheless, the distinction appears to have persisted in cases where Congress passing a law that was unsupported by any other enumerated power.[26]  More recently, the Court in National Federation of Independent Business v. Sebelius referred to the Child Labor Tax Case in holding that the individual mandate imposed under the Affordable Care Act was a “tax” that was a constitutional exercise of Congress’s Taxing Power.[27]




[1] U.S. Const. art. I, sec. 8., cl. 1.


[2] U.S. Const. art. I, sec. 8, cl. 3.


[3] U.S. Const. Amendment X.


[4] Keating-Owen Child Labor Act, 64th Cong., 39 Stat. 675; see also Drexel Furniture Co., 259 U.S. at 34-35; Thomas Reed Powell, Child Labor, Congress, and the Constitution, 1 N.C.L. Rev. 61, 62 (1922)


[5] Hammer v. Dagenhart, 247 U.S. 251 (1918).


[6] Id. at 276.


[7] Revenue Act of 1919, 65th Cong., 40 Stat. 1138.


[8] Id.


[9] Drexel Furniture Co., 259 U.S. at 34.


[10] Id.


[11] Id. at 36.


[12] Id.


[13] Id. at 38.


[14] Id.


[15] Id.


[16] Id. at 36-37.


[17] Id. at 37.


[18] Id.; see also Powell, supra note 4, at 69 (“No one can doubt that such a law would have a depressing effect on child labor. Miners and manufacturers would naturally prefer to enjoy this ten per cent of their net income in pursuits of their own rather than to devote it to the more or less laudable enterprises of the national government. Thus children would be likely to find the factory doors barred against them except when operators would figure that they might be hired at sufficiently low wages to make a saving in labor cost greater than ten per cent of anticipated net income. Such anticipations would be infrequent.”).


[19] Drexel Furniture Co., 259 U.S. at 39; see also Powell, supra note 4, at 73 (“The question now is whether there must be some line drawn between form and substance. On this question, as applied to the formal, exercise of the taxing power of Congress, there can be no debate unless one is to conceive of the federal system ordained by the Constitution as one giving Congress full power of police throughout the country, provided only this power is exercised under some other name than that of police. Such a conception may find support in fine-spun formalistic reasoning, but it so violates history and common sense that it may be dismissed without more ado.”).


[20] Drexel Furniture Co., 259 U.S. at 38.


[21] Id. at 37.


[22] Barry Cushman, NFIB v. Sebelius and the Transformation of the Taxing Power, 89 Notre Dame L. Rev. 133, 145 (2013).


[23] Id. at 145 n. 101 (citing Alexander M. Bickel, The Unpublished Opinions of Mr. Justice Brandeis 18-19 (1957) (suggesting that Brandeis was suppressing his dissenting opinion in the Child Labor Tax Case for “tactical” reasons) and Stephen B. Wood, Constitutional Politics in the Progressive Era 286-92 (1968) (arguing that Holmes and Brandeis in fact believed that the statute in the Child Labor Tax Case was unconstitutional).


[24] Cushman, supra note 22, at 171.


[25] Id. at 185 (“To be sure, the expansion of the commerce power narrowed the range of instances in which that distinction would be relevant: if an ostensible excise was imposed in order to encourage compliance with a regulation that Congress was empowered to enact under the Commerce Clause, it would not matter whether the imposition was categorized as a tax or as a penalty.”).


[26] Id.


[27] National Federation of Independent Business v. Sebelius, 567 U.S. 519, 565-66, 574 (2012).