Wealth Tax’s Legality Depends on What ‘Direct’ Means
(Bloomberg Opinion) -- If I were on the U.S. Supreme Court, I would probably vote to find Senator Elizabeth Warren’s proposed wealth tax constitutional. But given the current composition of the court, that might well put me in the minority.
Warren, who is exploring a run for the Democratic presidential nomination in 2020, has suggested that the top 75,000 U.S. households pay an annual tax of 2 percent on each dollar of their net worth above $50 million. Billionaires would be taxed an additional 1 percent.
The truth is, in the light of the conservative resurgence on the court, it’s a genuinely open question whether the justices would strike down a tax on a proportion of total assets. A case would likely be decided 5-4, with Chief Justice John Roberts as the swing voter.
The intentions of the Constitution’s framers are unclear. The judicial precedent cuts both ways. And the 16th Amendment, which allowed an income tax, doesn’t address a wealth tax that isn’t on income. The court’s decision would have to consider all three.
Article I Section 8 of the Constitution says “the Congress shall have power to lay and collect taxes, duties, imposts and excises.” It also imposes the requirement that these taxes “be uniform throughout the United States.”
So far, so good: Congress can impose taxes so long as they are “uniform.”
But there’s a catch. Article I Section 9 says that “no capitation, or other direct, tax shall be laid, unless in proportion to the census or enumeration herein before directed to be taken.”
A “capitation tax” is a head tax (once also confusingly called a poll tax) — one that must be paid based on population. That kind of tax — or any other “direct” tax — can only be assessed based on the proportion of people who live in each state. In other words, each state or its residents must be assessed a pro-rata share of the total revenue to be raised.
Why would the framers have adopted this strange requirement? The answer, shamefully enough, is slavery. The clue lies in the reference to the “enumeration” requirement. That takes you back to the notorious Article I Section 2: the three-fifths compromise.
That provision says that “representatives and direct taxes shall be apportioned among the several states … according to their respective numbers,” determined by free persons, subtracting “Indians not taxed,” and adding “three fifths of all other persons” — the constitutional euphemism for enslaved African-Americans.
The basic idea of the three-fifths compromise was that the Southern states got more representatives in Congress than they would have if slaves hadn’t been counted, but they would also have to pay a higher percentage of a head tax, based on the same proportion of their slave population.
The 14th Amendment to the Constitution repealed the shameful three-fifths clause. But it didn’t repeal the proportionality requirement that originally went along with it. So yes, slavery is haunting us still in the Constitution.
Warren’s proposal then raises this basic constitutional issue: What is a “direct tax”? That’s a good question, and it came up at the constitutional convention in the summer of 1787 in Philadelphia. James Madison’s shorthand notes include this unfortunate notation: Rufus King of New York “asked what was the precise meaning of direct taxation? No one answd.”
The lack of an answer led to a 1795 court challenge to a federal law imposing a luxury tax on carriages. In Congress, Madison opposed the law, saying it was unconstitutional because it was a direct tax that wasn’t imposed proportionally. That fit the small-government philosophy he was espousing at the time, fueled by his fear of expanding congressional power. That means Madison can be invoked in support of the theory that Warren’s tax is unconstitutional.
Alexander Hamilton, Madison’s great antagonist at the time and George Washington’s secretary of the Treasury, supported the carriage tax and went to the Supreme Court to argue that it was constitutional because it was an “excise tax,” not a direct tax. Hamilton’s brief then explained what he thought were direct taxes:
Capitation or poll taxes, taxes on lands and buildings, general assessments, whether on the whole property of individuals or on their whole real or personal estate.
Notice that Hamilton did include a wealth tax here — making him another source for the view that Warren’s tax is unconstitutional.
The Supreme Court then allowed the carriage tax.
But a century later, in 1895, the court in Pollock v. Farmers’ Loan and Trust Co. cited Hamilton’s brief while striking down a federal income tax as unconstitutional because it was not proportional. The 16th Amendment was passed to repudiate that holding.
Professors Dawn Johnsen, of Indiana University Maurer School of Law, and Walter Dellinger, of Duke Law School, argue essentially that the Pollock opinion has been discredited as a product of a highly conservative, libertarian court. They emphasize that it would make no functional sense whatsoever to require a wealth tax to be applied proportionally by state.
This is sensible, but unlikely to convince originalists, like the most conservative justices on the Supreme Court today.
Professor Bruce Ackerman, of Yale Law School, offers the more technical answer that in a 1900 case, the Supreme Court upheld an estate tax on the wealthy, partly rejecting the logic of the Pollock case. In his view, the 16th Amendment was meant to repudiate the Pollock decision even more thoroughly.
The problem with Ackerman’s argument is that on its face the 16th Amendment only allows an income tax. It’s silent on other forms of direct taxes.
In the landmark Affordable Care Act case in 2012, Chief Justice John Roberts briefly reviewed the history of the direct tax issue while upholding the individual health-insurance mandate as a legitimate tax within Congress’s power. But he didn’t show his hand with respect to the true meaning of “direct,” noting only that the court “continued to consider taxes on personal property to be direct taxes” as late as 1920, after the 16th Amendment was passed.
The bottom line for me is that we shouldn’t interpret “direct” too broadly, given the tainted nature of the provision and the spirit of the 16th Amendment. As Justice Oliver Wendell Holmes put it while dissenting in the 1920 case, “the known purpose of this Amendment was to get rid of nice questions as to what might be direct taxes.”
But the court’s conservative originalists would almost surely go the other way. The decision would likely come down to Roberts’s vote — like so many other unsettled questions in today’s constitutional law.
To contact the editor responsible for this story: Stacey Shick at sshick@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Noah Feldman is a Bloomberg Opinion columnist. He is a professor of law at Harvard University and was a clerk to U.S. Supreme Court Justice David Souter. His books include “The Three Lives of James Madison: Genius, Partisan, President.”
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