Friday, February 22, 2019
Weekly SSRN Tax Article Review And Roundup: Holderness Reviews Glogower's A Constitutional Wealth Tax
This week, Hayes Holderness (Richmond) reviews Ari Glogower (Ohio State), A Constitutional Wealth Tax:
As media coverage, politicians, commenters, and last week’s SSRN Roundup indicate, wealth taxation is hot right now. As various arguments emerge about the constitutionality of a wealth tax in the U.S., Ari Glogower presents a new view on the question in A Constitutional Wealth Tax. At the core of his argument, Glogower invokes substance-over-form reasoning: wealth is already constitutionally taxed indirectly through the income tax, so there should not be a problem taxing wealth directly.
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.
Here’s the rest of this week's SSRN Tax Roundup:
- Vidar Christiansen (Oslo), Zhiyang Jia (Statistics Norway), & Thor Olav Thoresen (Oslo), Assessing Income Tax Perturbations, CESifo Working Paper No. 7428
- Bryan K. Church (Georgia Tech), Lucien Joseph Dhooge (Georgia Tech), Karie Davis-Nozemack (Georgia Tech), & Shankar Venkataraman (Bentley), The Impact of Juror Knowledge of Deductibility and Defendants’ Tax Rates on Punitive Damages Awards: Experimental Evidence
- John D’Attoma (Exeter), Clara Volintiru (Bucharest), & Antoine Malezieux (Exeter), Gender, Social Value Orientation, and Tax Compliance, CESifo Working Paper No. 7372
- Lars P. Feld (Freiburg), Christian Frey (Lucerne), Christoph A. Schaltegger (Lucerne), & Lukas Schmid (Lucerne), Fiscal Federalism and Income Inequality: An Empirical Analysis for Switzerland, CESifo Working Paper No. 7407
- Domenico Ferraro (ASU), Soroush Ghazi (Duke), & Pietro F. Peretto (Duke), Lessons for Tax Reform from an Equilibrium Model of Innovation, Economic Research Initiatives at Duke (ERID) Working Paper No. 282
- Bernd Genser (Konstanz) & Robert Holzmann (Malaya), Frontloaded Income Taxation of Old-Age Pensions: For Efficiency and Fairness in a World of International Labor Mobility, CESifo Working Paper No. 7423
- Shafik Hebous (IMF) & Alexander Klemm (IMF), A Destination-Based Allowance for Corporate Equity, CESifo Working Paper No. 7363
- Shafik Hebous (IMF), Alexander Klemm (IMF), & Saila Stausholm (Copenhagen), Revenue Implications of Destination-Based Cash-Flow Taxation, CESifo Working Paper No. 7457
- Mardhiah Mardhiah (Canberra), Riyana Miranti (Canberra), & Robert Tanton (Canberra), The Slippery Slope Framework: Extending the Analysis by Investigating Factors Affecting Trust and Power, CESifo Working Paper No. 7494
- Antonio Lopo Martinez (Coimbra) & Marcelo Lopes Bello Coelho (FUCAPE), Tax Morals and the Brazilian Citizen: Empirical Study
- Antonio Lopo Martinez (Coimbra) & Eloy Paste Junior, The Relation Between Operational Efficiency and Tax Aggressiveness in Brazil.
- Gaetan Nicodeme (Bruxelles), Antonella Caiumi (ISTAT), & Ina Majewski (EU), What Happened to Cit Collection? Solving the Rates-Revenues Puzzle, CESifo Working Paper No. 7412
- Katherine Pratt (Loyola LA), The Curious State of Tax Deductions for Fertility Treatment Costs, S. Cal. Rev. & Social Justice (forthcoming)
- Kitty Richards, Taxes and Rents: The Power of Tax Policy to Shape the Distribution of Pre-Tax Income
- Gilles Saint-Paul (Paris School of Economics), Pareto-Improving Structural Reforms, CESifo Working Paper No. 7387
- Nikolai Stahler (Deutsche Bundesbank), Who Benefits from Using Property Taxes to Finance a Labor Tax Wedge Reduction?, Deutsche Bundesbank Discussion Paper No. 03/2019
- Steinar Strom (Oslo) & Jon Vislie (Oslo), Wealth Management and Uncertain Tipping Points, CESifo Working Paper No. 7487
- Ewout Verriest (NYU), Household Labor Supply, Child Development and Childcare Policies in the United States
Only a lawyer could fail to understand that a flow (income) is not a stock (wealth).
Posted by: mike | Feb 22, 2019 2:14:33 PM