In the Child Labor Tax Case, J.W. Bailey and J.W. Bailey, Collector of Internal Revenue for the District of North Carolina v. Drexel Furniture Company (1921), the U.S Supreme Court ruled that a tax on employers using child labor was unconstitutional because it was more like a penalty than a tax. The case arose when Congress passed an act in 1919 imposing heavy taxes on companies employing children under certain ages or working conditions as part of its efforts to regulate child labor practices across states. However, Drexel Furniture Company challenged this law after being fined for violating it by employing underage workers in their factories in North Carolina. The court held that while Congress had broad powers to levy taxes, these should not be used as means to enact regulatory measures which were otherwise beyond its constitutional authority - such as regulating labor standards within individual states.

In the dissenting opinion for Bailey v. Drexel Furniture Company, Justice Holmes argued that the Child Labor Tax Law should not be considered a penalty but rather an excise tax within Congress's power to levy. He contended that it was irrelevant whether or not Congress had ulterior motives in passing this law; what mattered was if they possessed the constitutional authority to do so. Furthermore, he disagreed with the majority's view that child labor issues were solely under state jurisdiction and believed federal intervention could be justified on economic grounds as child labor can distort interstate commerce by depressing wages and working conditions. Therefore, according to him, striking down this law would limit congressional powers excessively and unnecessarily.