Weekly SSRN Tax Article Review And Roundup: Layser Reviews The Constitutionality Of A National Wealth Tax

This week, Michelle Layser (Illinois) reviews Dawn Johnsen (Indiana–Bloomington) & Walter E. Dellinger III (Duke), The Constitutionality of a National Wealth Tax, 93 Ind. L.J. 111 (2018).

Presidential Candidate and Senator Elizabeth Warren recently proposed a wealth tax on household net worth over $50 million, prompting observers from across the political spectrum to question whether the proposed tax was constitutional (see here, here and here). Critics point to a constitutional requirement that would be impossible to satisfy without serious geographic inequities. But Professors Dawn Johnsen and Walter Dellinger argue that a national wealth tax may not trigger such requirements after all—precisely because they would be impossible to satisfy without such inequities.

The requirement at issue is the “apportionment requirement” imposed by Article I, § 2 of the U.S. Constitution. That provision states that “direct Taxes shall be apportioned among the several States . . . according to their respective Numbers.” In other words, “direct taxes” must be apportioned among the states based on population size. For example, consider two states with the same population but residents with different net worth. The first state has a large number of wealthy residents, and the second has only a few. An apportioned wealth tax would require both states to render the same aggregate amount of tax. So the few wealthy residents of the poorer state would be unfairly burdened, forced to pay proportionately more than the wealthy taxpayers in the wealthier state.

According to conventional wisdom, any national wealth tax would be a “direct tax” subject to the apportionment requirement. And since apportionment would be impossible in all practical respects, many have assumed that a national wealth tax would be untenable, at least until the Constitution is amended. The authors challenge this conventional wisdom. If they are right, there is no need to be quite so pessimistic, and a national wealth tax may be a viable policy response to soaring wealth inequality. 

This is because, according to the authors, a national wealth tax probably would not be categorized as a direct tax under today’s constitutional law jurisprudence. And if it is not a direct tax, then it also is not subject to the apportionment requirement. The authors reach this conclusion by revisiting a pair of 1895 Supreme Court cases called Pollock v. Farmers’ Loan & Trust Co. (Pollock I) and Pollock v. Farmers’ Loan & Trust Co. (Pollock II) (referred to in this post simply as Pollock).

Pollock held that an unapportioned national income tax was an unconstitutional direct tax. The central holding was rendered irrelevant by the Sixteenth Amendment, which expressly authorized an unapportioned national income tax. The case has nevertheless survived as the landmark ruling that established the broad interpretation of “direct tax.” That interpretation is the source of the assumption that a national wealth tax is a direct tax subject to apportionment. There’s just one problem. According to the authors, Pollock was wrongly decided and an anomaly in the case law—and a national wealth tax probably is not a direct tax after all.

The authors analyze the Court’s interpretation of “direct tax” for the century preceding Pollock, beginning with Hylton v. United States. Hylton involved the 18th century’s version of a wealth tax. Namely, the tax at issue was an annual tax on carriages, luxury property owned by the wealthy. The carriage tax was challenged on the basis that it was an unapportioned direct tax. The Court rejected the challenge, reasoning that apportionment would have been unworkable and interpreting “direct taxes” as “limited to those to which the apportionment requirement justly and sensibly could apply.”

The authors argue that the functional test used in Hyland was still good law when Pollock was decided, and that the Court “went very wrong in abandoning the understanding of Congress’s tax power that dated back to 1796.” Then they analyze the cases since Pollock and demonstrate that “the Court typically has distinguished it and rejected its reasoning, almost always to the end of upholding federal taxes against challenges that they constituted ‘direct’ taxes under Pollock.” In short, Pollock is “fundamentally at odds” with constitutional law both before and after the decision. For these reasons, the authors conclude that, since apportionment of a national wealth tax would be unworkable, it probably is not a direct tax subject to the apportionment requirement.

Johnsen and Dellinger present a compelling argument that Pollock was wrong when decided and no longer good law today, and that an unapportioned national wealth tax would survive if tested in the courts. Nevertheless, the authors acknowledge that that Pollock has never been fully repudiated, owing in no small part to the Sixteenth Amendment, which superseded its central holding. If Senator Warren were to succeed in introducing a national wealth tax, however, one could expect an immediate constitutional challenge and, with it, an opportunity for the Court to finally put Pollock to rest.

This article contains insights relevant to any tax scholar interested in constitutional law, federalism, tax and inequality, or wealth taxation.

Here’s the rest of this week’s SSRN Tax Roundup:

• Martin Fleisher (Independent) and Andrew L. Oringer (Dechert LLP), With Apologies to Billy Joel, We're in a New York State of Distributions, Practical Law (January 30, 2019)
• Ari D. Glogower (Ohio State), A Constitutional Wealth Tax (January 24, 2019).
• Zachary D. Liscow (Yale) and Daniel Giraldo Paez (Yale), Inequality Snowballing (January 24, 2019)
• Dr. Jerome Okoro (Aelex Legal Practitioner and Arbitrators) Holding the Taxman to His Word: The Doctrine of Legitimate Expectation and Tax Administration in Nigeria (January 25, 2019).
• Michael Simkovic (USC), Billionaire Taxes (January 31, 2019)
• Stephanus P van Zyl (U. South Africa) and Terrence R. Carney (U. South Africa) A Cry for Certainty as to the Application of “Accrued to” for Purposes of Section 1 of the Income Tax Act 58 of 1962 – M v CSARS, Journal of Contemporary Roman-Dutch Law, Vol. 81, p. 484-497 (August 1, 2018)