Much of the constitutional debate about federal taxes centers on the obscure notion of what constitutes a “direct tax” which would be subject to the Constitution’s apportionment requirement. That requirement demands that the states bear the burden of a direct tax according to the relative sizes of their populations. Historically, the Supreme Court had limited direct taxes to taxes that fell on property; that is, until the Pollock cases held that a national income tax was a direct tax, effectively prohibiting Congress from imposing an income tax until the passage of the Sixteenth Amendment exempted income taxes from the apportionment requirement.
But “income tax” does not mean “wealth tax,” right? Not so fast, according to Glogower. The federal income tax burdens wealth through a number of “Wealth Integration Methods”: a taxpayer’s wealth can impact her income tax base by permitting or denying deductions from gross income, her wealth can impact her tax rate by pushing her income into higher marginal tax brackets, and her wealth can impact the credits available to her to apply against her income tax liability. In each instance, the taxpayer’s wealth is a deciding factor in her ultimate tax burden; the income tax burdens wealth in practice.
These Wealth Integration Methods are, or should be, constitutional. To deny that conclusion would be to destroy the foundation of the federal income tax and convert it into a head tax (or, in an alternate and narrower denial, to unfairly benefit wealthy taxpayers vis-à-vis less wealthy taxpayers). The Supreme Court has long recognized that the subject of a tax—income in Glogower’s argument—may be measured by other factors—wealth—even if using those factors necessarily burdens those factors indirectly. For instance, a tax on the subject of the “privilege of doing business” can be measured by the business’ income and the Court would not necessarily consider the tax to be an income tax.
Once he establishes that wealth may be indirectly taxed through the Wealth Integration Methods, Glogower finds no principled reason to deny that wealth could be taxed directly. This conclusion is compelling and intuitive when one considers the substance of a tax rather than the form. If we look to the incidence of the income tax and it turns out to fall on wealth, why make Congress jump through hoops to impose that burden directly on wealth?
However, this conclusion may go too far. Yes, some part of wealth is burdened through the Wealth Integration Methods, but the income tax is still limited by the taxpayer’s income. Though the door to a tax directly on wealth may be cracked, income serves as the chain lock that prevents the door from swinging wide open. Glogower recognizes this potential limitation, but ultimately dismisses it because of the view—suggested most recently by Justice Roberts in NFIB—that the federal tax power should not depend on formalistic distinctions.
But, at the risk of relying on the now-disgraced Quill decision, the Supreme Court has declared that “not all formalism is alike.” One reason that some formalism might be more tolerable than others could arise from a due process of law perspective. Under a notice principle, allowing the direct taxation of wealth for the reasons argued may be problematic. The Constitution permits an income tax, and thus taxpayers have notice that income will be the base of the tax. In other words, the doctrine may hold Congress to the democratic expressions of the subject of the tax. It might be impermissibly unfair to thus impose tax on a base that is broader than that of the taxpayer’s income.
One might push back and claim that the Sixteenth Amendment does not prescribe tax rate limitations for the income tax, so Congress could theoretically impose a high tax rate (e.g. over 100%) on the narrower base of income that would reach the same economic result as a lower tax rate on the wider base of wealth. However, an extremely high tax rate might also raise due process concerns; in the state tax context, a tax must be reasonably related to benefits provided by the state. This requirement is not a high obstacle to taxes that pass the political process, but the dubiousness of passing an income tax rate of over 100% through the political process should cast doubt on whether the federal government could reach the same economic result through a wealth tax. Or maybe I’m trying too hard to bring state tax jurisprudence into the wealth tax debate.
In any event, A Constitutional Wealth Tax is an informative, thoughtful, and creative read. The new perspective it presents on the current debate over the constitutionality of federal wealth taxes steps away from (but doesn’t ignore) the familiar issue of direct versus indirect taxes and is sure to broaden the discussions in this area. As it turns out, form versus substance has a role to play in seemingly every constitutional tax issue.