Paul L. Caron

Saturday, January 26, 2019

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.

Scholarship, Tax | Permalink


I have always thought that the employment tax---the employer's share of the FICA/FUTA taxes---is a consumption tax imposed on employers for the consumption of labor. Am I wrong on that? Even though it is measured by the amount of salary paid to the employee, I did not think that transformed it into an income tax. In contrast, both the employee's share of the FICA/FUTA taxes and a self-employed taxpayer's full liability for FICA/FUTA taxes are both income taxes because there is no transaction being taxed as there is between an employer and employee. That is one reason I have always thought it might be fairer to imposed the employer's share of FICA/FUTA on anyone who consumes another person's labor, regardless of whether the relationship is employer/employee or employer/independent contractor.

Posted by: bryan | Feb 6, 2019 5:56:58 AM

The first Federal Tax was a direct tax on states, that is, requisition allocated among the states according to their wealth. Articles of Confederation, Article VIII. provided that the federal treasury, shall be supplied by the several States in proportion to the value of all land within each State, including the buildings and improvements thereon

Posted by: Calvin H. Johnson | Feb 5, 2019 2:33:09 PM

And of course Trinova wasn't a case about the direct tax definition in the first instance and used this logic in a different context. But it is a great case study emphasizing this distinction: Even though the Court has (sort of) used this logic elsewhere, it would be much harder (or impossible I suggest) to import this logic to the context of classifying taxes as direct or not.

Posted by: Ari Glogower | Feb 2, 2019 6:22:05 PM

Thanks @Anand - Under the logic in Trinova, if a wealth tax is unconstitutional then many income tax rules are as well, which is exactly the point of this paper. (And of course this logic directly conflicts with the logic in Pollock)

Posted by: Ari Glogower | Feb 2, 2019 11:06:38 AM

DCJ: "And how many people here know that the first federal tax was a wealth tax?"

Unless I'm mistaken, the Tariff Act of 1789, placing duties on imported goods, was the first federal tax enacted by the U.S. government:

Perhaps Mr. Johnson would like to name the wealth tax he's referring to, specifically?

Posted by: MM | Jan 31, 2019 6:23:22 PM

Mr Johnston: according to the Statutes at Large the first federal tax was the Act of July 4, 1789, imposing duties on certain imported items. To what tax do you refer?

Posted by: guy helvering | Jan 30, 2019 6:25:11 PM

And how many people here know that the first federal tax was a wealth tax? Because of it we have extensive records the property ownership 230 years ago.

Posted by: David Cay Johnston | Jan 30, 2019 4:12:38 AM

Thumbs up @ Anand

Posted by: Anon | Jan 27, 2019 2:26:38 AM

"A tax on sleeping measured by the number of pairs of shoes you have in your closet is a tax on shoes." Trinova Corp. v. Dept. of Treasury, 498 U.S. 358 (1991), citing Jenkins, State Taxation of Interstate Commerce, 27 Tenn.L.Rev. 239, 242 (1960).

Posted by: Anand Desai | Jan 26, 2019 1:27:09 PM

PPL Corp. v. Comm'r of Internal Revenue, 569 U.S. 329 (2013)?

Posted by: Anon | Jan 26, 2019 7:54:07 AM