Constitution May Block Progressives on Wealth Tax

(Bloomberg Opinion) -- Debates about the idea of a wealth tax are suddenly sounding a lot less hypothetical.

With massive expenditures related to the Covid-19 pandemic, the U.S. needs to find ways to raise revenue. And with the economic burdens of the calamity falling disproportionately on the less affluent, income inequality has only become more glaring. No wonder the call to target the richest has increasing appeal.

But is a wealth tax constitutional? It’s a question legal scholars have long discussed. Unfortunately, the answer is elusive. For that reason alone, there is a good argument that progressives should focus on other options – such as imposing higher income taxes on the wealthy and closing the many loopholes that benefit them.

Let’s start with the 16th Amendment to the Constitution, ratified in 1913, which provides: “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.”

If Congress wants to raise rates on the wealthy, it’s perfectly entitled to do that. Notably, however, the 16th Amendment is limited to “taxes on incomes,” so it does not authorize wealth taxes.

Still, Congress imposes a lot of other kinds of taxes, such as the ones on cigarettes, alcohol and gasoline. Everyone agrees that these are “indirect” taxes, in the sense that they are not paid directly by consumers.

That matters, because the Constitution imposes a serious barrier to direct taxes. Article I, section 9, clause 4 of the Constitution provides, “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken."

This means that any “direct” tax must be apportioned among the states by population. And if a wealth tax counts as a direct tax, and thus has to be apportioned, almost everyone agrees that it’s dead in the water, simply as a matter of political reality.

The reasons are a bit technical, so in brief: Under the Constitution, a state's tax burden, under a direct tax, is determined by the size of its population. Since New York has 6.1 percent of the U.S. population, it would have to pay 6.1 percent of the total tax national burden. Since Utah has 0.9 percent of the U.S. population, it would have to pay 0.9 percent of that total.

Here’s the kicker. A state’s per capita income or wealth doesn’t matter. It follows that the arithmetic can’t be made to work unless tax rates on the wealthy are much higher in some states than in others. There’s no way that Congress would agree to allow that.

The big question, then, is whether a wealth tax is, in fact, a direct tax. Alexander Hamilton, who knew something about taxes, wrote in the Federalist No. 36 that taxes on “houses and lands” are direct. And in a brief before the Supreme Court, Hamilton said that taxes “on the whole property of individuals” count as direct.

Hamilton is easily read to say that wealth taxes, as such, are indeed direct. The Supreme Court has embraced that position.

The defining case dates back to 1895. In Pollack v. Farmers’ Loan and Trust Co., the justices struck down a national income tax.

The court began by noting that ordinarily, “a tax upon property holders in respect of their estates, whether real or personal, or of the income yielded by such estates, and the payment of which cannot be avoided, are direct taxes.” It added, “Nothing can be clearer than that what the Constitution intended to guard against was the exercise by the general government of the power of directly taxing persons and property within any State through a majority made up from the other States.”

The court’s logic plainly prohibits wealth taxes, unless they are apportioned. And while the 16th Amendment overruled the court’s decision in Pollock, it is limited to income taxes, and does nothing to validate wealth taxes.

Defenders of such taxes insist that the court was egregiously wrong in Pollock. Yale law professor Bruce Ackerman, an expert on the issue, so argues. He points to a 1796 ruling in which the court, upholding a national tax on carriages, seemed to give a lot more flexibility to Congress than the court did in Pollock.

Ackerman thinks that the court’s reasoning in Pollock was “radical” and “murky.” Like many others, he believes that the better approach, vindicated by history, is a “rule of reason,” which allows Congress to dispense with apportionment when it has compelling reasons for doing so.

Maybe he’s right. But the court has never overruled Pollock, and if wealth taxes really do count as direct, the Constitution says that they have to be apportioned. So the constitutional objection is far from crazy. There’s a good chance that a majority of the current court would accept it.

Sure, enthusiastic defenders of a wealth tax might want to urge Congress to move forward anyhow, and hope that the court will ultimately find a way to uphold it. But there are many ways to reduce inequality while raising revenue, and from the legal standpoint, a wealth tax is the most vulnerable. Do progressives really want to roll the constitutional dice?

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Cass R. Sunstein is a Bloomberg Opinion columnist. He is the author of “The Cost-Benefit Revolution” and a co-author of “Nudge: Improving Decisions About Health, Wealth and Happiness.”

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