The Constitutionality Of Elizabeth Warren's Proposed Federal Wealth Tax

Following up on yesterday's post, Elizabeth Warren Proposes Annual Federal Wealth Tax On Net Worth > $50 Million:

Ari Glogower (Ohio State), A Constitutional Wealth Tax:

Policymakers and scholars are giving serious consideration to a federal wealth tax. Wealth taxation could address the harms from rising economic inequality, promote equality of social and economic opportunity, and raise the revenue needed to fund critical government programs. These reasons for taxing wealth may not matter, however, if a federal wealth tax is unconstitutional.

Scholars debating the constitutionality of a wealth tax generally focus on a specific question: Would a tax on a base of a taxpayer’s wealth (a “traditional wealth tax”) be a “direct tax” under the Constitution that is subject to apportionment among the states by population? Apportionment would be impossible such a tax, which explains the centrality of this question in the prior literature.

This Article argues, in contrast, that the possible constitutional restrictions on a traditional wealth tax may not matter. If the Supreme Court were to find that the Constitution foreclosed a traditional wealth tax, Congress could instead tax wealth indirectly, by adjusting a taxpayer’s income tax liability on account of her wealth. This Article describes three methods for making this adjustment (collectively, “Wealth Integration” methods): A taxpayer’s wealth could affect her base of taxable income (the “Base Method”), the applicable rate schedule (the “Rate Method”) or the availability of credits against tax (the “Credit Method”).

This Article first describes the economic effect of these Wealth Integration methods and why they may be more versatile than previously appreciated in the literature. As under a traditional wealth tax, Wealth Integration methods will account for a taxpayer’s wealth in determining her tax liability. The amount of this effective tax on wealth, however, will depend on the amount of the relevant income tax adjustment.

The constitutional analysis of Wealth Integration methods would be intrinsically different from that of a traditional wealth tax. The Court could strike down Wealth Integration methods only by overruling settled prior precedent, invalidating many current features of the income tax, and fundamentally restricting Congress’ power to tax income under the Sixteenth Amendment.

Finally, this Article considers the broader implications of Wealth Implication methods for the constitutionality of a traditional wealth tax. The possibility that Congress could instead tax wealth through Wealth Integration methods provides a new argument why the Court should uphold traditional wealth tax as well. Otherwise, the Court would have to choose between restricting the Sixteenth Amendment or introducing a formal distinction between economically similar taxes that would still diminish the effect of the apportionment requirement.