Originally published on Forbes.com.
The notion of a wealth tax is definitely moving toward the mainstream as Dave Dawkins of Forbes reports on some of the billionaires who are now calling out for its passage. Here is the letter they wrote courtesy of the New York Times. Elizabeth Warren, my senator, by the way, rolled out the Ultra Millionaire Tax back in January.
This might be an example of how the non-binary parties (I hate calling them “third” since there are so many of them) end up having influence. I first encountered the wealth tax in the Green Party Platform while preparing to interview Jill Stein in 2012. Doctor Stein thinks it is quite a good idea.
Senator Warren’s team relies on economists Emmanuel Saez and Gabriel Zucman to score the plan. They bring it in at $210 billion a year. Saez and Zucman scored Warren’s proposal to have a Real Corporate Profits Tax and that was the extent of the analysis. Since the proposal involved taxing companies based on their GAAP income, they should have rounded up a couple of accounting professors.
The Warren team did better on the wealth tax addressing what is probably the major concern that will come up. The constitutionality of a wealth tax is somewhat dubious. They have two letters arguing in favor of the constitutionality of a wealth tax, one of which refers to an article in the Indiana Law Journal – The Constitutionality of a National Wealth Tax by Dawn Johnsen and Walter Dellinger. So that settles that? Maybe not.
Love That History
As an amateur historian, I love this debate. There are two big decisions you can learn about. The more recent one is Pollock v Farmers’ Loan And Trust Company. That was in 1895. Pollock is beloved by tax protesters. The decision ruled that the recently passed income tax was unconstitutional because as it related to property it was a “direct tax” requiring apportionment.
Thus, in the matter of taxation, the Constitution recognizes the two great classes of direct and indirect taxes, and lays down two rules by which their imposition must be governed, namely: the rule of apportionment as to direct taxes, and the rule of uniformity as to duties, imposts and excises.
There was an easy fix for that. Amend the Constitution. It only took about twenty years. The Sixteenth Amendment reads
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
Unfortunately, it does not clear up that “direct tax” question. It just says that when it comes to income taxes it doesn’t matter. Tax protesters have used Pollock and a couple of post-16th amendment decisions, most significantly Brushaber as gardens that allow them to create word salads that “prove” the income tax applies to hardly anybody.
Even better is the case that favors the constitutionality of the wealth tax. That would be Hylton v US , It was about whether a tax on carriages was a direct tax requiring apportionment. The Court ruled that it was not. There is a pretty troubling line in there.
Whether direct taxes, in the sense of the Constitution, comprehend any other tax than a capitation tax and tax on land is a questionable point. If Congress, for instance, should tax, in the aggregate or mass, things that generally pervade all the states in the Union, then perhaps the rule of apportionment would be the most proper, especially if an assessment was to intervene. This appears by the practice of some of the states to have been considered as a direct tax.
So even though that carriage tax was not a direct tax, the judges were not really sure what might be one. This is very troubling. You or I might not be able to ask the Founders what they thought a direct tax was, but that decision came down in 1796. William Paterson, one of the judges, was one of the signers of the Constitution. Go figure.
Another Opinion
I reached out to Louis Vlahos of Farrel Fritz for some thoughts on the constitutionality of a wealth tax. After a pretty good history lesson, he wrote:
Which brings me to the wealth tax. It is clearly a direct tax – period – which means that it has to satisfy the apportionment requirement . Given the geographic concentration of wealth (NYC, Miami, LA, etc.), how can such a tax ever be “apportioned” among the States according to their populations, in the commonly-accepted sense of that word? Or do we need to reconsider what we mean by apportionment or the relevant population?
We will hear legal arguments from every side of the debate. Unfortunately, much of it will be a question of semantics and wordplay. Much of it will be politically-motivated, in the worst sense of that phrase.
Moreover, if any legislation were enacted, the lawyers would be the primary beneficiaries of interpreting and planning for the new rules. (Just witness what has followed the TCJA.)
I am not going to comment on the impetus for such a tax, or on the need for it, or on the wisdom of imposing it. Nor am I going to comment on providing more funds to a dysfunctional Washington via a new tax rather than through an existing tax – the consequences will be the same.
Does It Matter Who Is Right?
The Johnsen/Delinger article might be more persuasive than attorney Vlahos’s opinion, but you might want to consider this from that very article. Commenting on how prevalent the view is that a wealth tax would be unconstitutional, they write:
As erroneous conventional wisdom goes, this instance is formidable, with origins dating back more than a century and since reinforced by judicial precedent, tax policy, and powerful economic interests. Its foundations, however, have been rotten from the start: an 1895 U.S. Supreme Court decision, Pollock v. Farmers’ Loan & Trust Company, that was contrary to all authority when a bare majority announced it.
…………
Without any sound explanation or basis in law, and ignoring considerations of stare decisis, Pollock greatly expanded the reach of this onerous apportionment requirement to circumstances in which it imposed an insurmountable obstacle: taxes on not only real property but also personal property and income from real and personal property, as well as a comprehensive income tax that included income from real and personal property among the sources of income.
So the people that Warren and the billionaires cite for arguing that a wealth tax would be constitutional grant that there is common belief and Supreme Court precedent supporting the notion that it is not.
Can there be any doubt that there would be a constitutional challenge to the wealth tax? And wrong as the Pollock court might have been in the view of some scholars, is there any reason to think that the current court might lean in the favor of the wealthy?
Another Way
I spoke with Professor Calvin Johnson of the University of Texas at Austin, who is passionate in his belief that a wealth tax would be constitutional and it is so obvious that even the current conservative court would not rule otherwise. He said that the Constitution did not enact idiocy and that the current court does not believe in idiocy. When it comes to Pollock, don’t get him started.
Pollock is an ignorant misreading of history and the meaning of the apportionment clause. The Founders’ purpose for the apportionment clause is not to protect wealth from the force of mere numbers but rather to apportion, originally a requisition, to reach the wealth of the states. Population was an index of wealth not a thing to be taxed. Apportionment is not an individual taxpayer right vis a vis the government, but an assault on wealth by allocating taxes to reach wealth. The rules regarding direct taxation were never intended as an impediment on the taxing power of the United States.
Nonetheless, he sees other tools that might be more effective in getting the wealthy to pay a larger share. Among them are repeal of the step up in basis on death and marking to market where it can be applied.
Mr. Vlahos expressed similar views.
What I am going to say is that the tools needed to impose and collect income and transfer taxes from the “wealthy”/the “one percent”/the “super rich”/etc. – whatever that means – and from anybody else who owes them, are already in place. What is missing is the political willpower in Congress to enforce them; that includes funding for the IRS.
I guarantee you, once taxpayers start to pay their fair share under existing rules – before any true reform – we will be in a position to lower rates overall. The tax gap is akin to the “missing” dark matter in the universe, except that we’re in a better position to quantify it.
Then we can turn to some low-hanging fruit, much of which was identified in the administration budgets and regulatory projects before the 2016 election.
Conclusion
Being a cynical bastard I have to wonder whether the billionaires are proposing a tax that the Supreme Court may bail them out from having to pay to keep progressives from enacting other measures that would be more effective like having their interest in publically traded securities marked to market or simply stronger enforcement. Regardless, studying the arguments can be a great history lesson. Be sure to check out Apportionment of Direct Taxes: The Glitch in the Center of the Constitution by Calvin Johnson.
Other Coverage
On Americans For Tax Reform, John Kartch has a comment from Michael Bloomberg in which Bloomberg argues a wealth tax would not be constitutional. The analysis was not very deep.
Well number one, I think the Constitution lets you impose income taxes only. So it probably is unconstitutional. Number two, I don’t know of any country that has done that — people earn money, they pay their taxes, and then they don’t have — expect the government to come back and take some of it away.
The “income taxes only” comment is just wrong.
There is, of course, quite a bit of coverage of the billionaire letter, but that is all that I could find that mentions the constitutional problem other than in passing.
Update
I heard again from Professor Calvin Johnson and he is doubling down on the wealth tax being constitutional.
There are lots of mark to market and subF cases that are inconsistent with Pollock, indeed the challenge is usually dismissed without mentioning Pollock anymore. I do think assault on the wealth tax is trivial even before a conservative majority court.
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