301 U.S. 619 (1937)
The Social Security Act was enacted on August 14, 1935.1 Title VIII of the Act imposes an income tax on employees measured by wages paid during the calendar year and an excise tax on employers with respect to having individuals in their employ, also measured by wages.2 Both taxes start at one percent for 1937 to 1939 and increase by one-half of one percent every three years thereafter up to three percent.3 It exempts agricultural labor, domestic service, government service, and persons over age 65.4 Wages in excess of $3,000 per year are excluded from the computation.5
Title II of the Act creates an Old-Age Reserve Account in the Treasury and authorizes annual appropriations to it beginning with the fiscal year ending June 30, 1937.6 The amount is determined on a reserve basis using actuarial principles and a three percent interest rate.7 It provides for monthly pensions beginning in 1942 to persons who have attained age 65, worked at least one day in each of five separate years since December 31, 1936, earned at least $2,000 since that date, and are not receiving wages from regular employment.8 Benefits do not exceed $85 per month and are measured by a percentage of wages that decreases as wages increase, as well as certain lump sum payments in specified contingencies.9
A shareholder of the Edison Electric Illuminating Company of Boston brought suit in the United States District Court for the District of Massachusetts to enjoin the corporation from making the payments and deductions required by the Act.10 The bill alleged that the corporation had decided to obey the statute despite the shareholder's protests.11 Compliance would cause employee unrest, demands for increased wages, and irreparable loss to the corporation and its shareholders from which recovery would be impossible as a practical matter.12
The corporation appeared and answered without raising any issue of fact.13 The United States Commissioner of Internal Revenue and the United States Collector for the District of Massachusetts intervened as defendants.14 The District Court held that the tax upon employees was not properly at issue and that the tax upon employers was constitutional.15 It denied the injunction and dismissed the bill.16 The Circuit Court of Appeals for the First Circuit reversed the decree.17
The intervening defendants petitioned for a writ of certiorari.18 The petition presented two questions: whether the tax imposed upon employers by section 804 is within the power of Congress under the Constitution, and whether the validity of the tax imposed upon employees by section 801 is properly in issue and if so whether that tax is within the power of Congress under the Constitution.19 The Supreme Court granted certiorari.20
Whether the tax imposed upon employers by § 804 of the Social Security Act is within the power of Congress under the Constitution?21
Congress possesses the power under Article I, Section 8 to lay and collect excises upon the relation of employment in aid of the general welfare, and such a tax is valid when measured by wages, applied uniformly to the employment relationship, and paid into the general Treasury without earmarking.22
Yes. The established facts demonstrate that Title VIII imposes an excise tax on employers measured by wages paid with respect to having individuals in their employ.23 The tax commences at one percent for 1937-1939 and rises by one-half percent every three years to three percent.24 It exempts agricultural labor, domestic service, government service, and persons over age 65 while excluding wages above $3,000.
These features establish a valid excise on the employment relation that Congress may impose to fund general welfare expenditures.25 The proceeds enter the Treasury without restriction and the exemptions reflect reasonable legislative classifications rather than arbitrariness.26
The tax imposed upon employers by § 804 is within the power of Congress under the Constitution.27
Related opinions on this issue
Joined by Justice Butler
Justice McReynolds, joined by Justice Butler, filed a dissent stating that the provisions of the act here challenged are repugnant to the Tenth Amendment.28 They concluded that the decree of the Circuit Court of Appeals should be affirmed rather than reversed by this Court.29 Their position rested on the view that the challenged taxes and benefits invaded powers reserved to the states.30
This dissent diverged from the majority by insisting that the federal legislation exceeded constitutional bounds in a manner that could not be justified as an exercise of the spending power.31
Whether the validity of the tax imposed upon employees by § 801 of the Social Security Act is properly in issue in this case, and if it is, whether that tax is within the power of Congress under the Constitution?
A shareholder lacks standing to challenge the employee income tax provisions when the employer is not subject to those provisions and the corporation has raised no factual issue regarding compliance.32
No. The established facts show that the District Court held the tax upon employees was not properly at issue.33 The employer is not subject to tax under those provisions and the shareholder's rights are no greater than the corporation's.34 The intervening defendants moved to strike the portions of the bill relating to the tax on employees.35 The Supreme Court granted certiorari on the question but affirmed the District Court decree after addressing only the employer tax and benefits provisions.36
This confirms that the employee tax challenge was not reached on the merits.37
The validity of the tax imposed upon employees by § 801 is not properly in issue in this case.38
Whether the scheme of benefits created by the provisions of Title II is in contravention of the limitations of the Tenth Amendment?39
Congress may spend money in aid of the general welfare under Article I, Section 8, and the determination whether a particular expenditure serves the general welfare belongs to Congress unless the choice is clearly arbitrary.40
No. The established facts establish that Title II authorizes appropriations to an Old-Age Reserve Account on an actuarial basis beginning in fiscal year 1937.41 It provides monthly pensions after 1942 to persons aged 65 who have worked at least one day in each of five years since 1936 and earned at least $2,000, with benefits capped at $85 per month.42 These provisions address a national problem of increasing aged dependency in an industrial society where states lack resources and face competitive disadvantages.43 They demonstrate a non-arbitrary judgment by Congress that the expenditures promote the general welfare rather than invading powers reserved to the states.44
The scheme of benefits created by the provisions of Title II is not in contravention of the limitations of the Tenth Amendment.45
Related opinions on this issue
Joined by Justice Butler
Justice McReynolds, joined by Justice Butler, filed a dissent stating that the provisions of the act here challenged are repugnant to the Tenth Amendment. They concluded that the decree of the Circuit Court of Appeals should be affirmed rather than reversed by this Court. Their position rested on the view that the challenged taxes and benefits invaded powers reserved to the states.
This dissent diverged from the majority by insisting that the federal legislation exceeded constitutional bounds in a manner that could not be justified as an exercise of the spending power.