Paul L. Caron
Dean



Thursday, December 12, 2019

What Alexander Hamilton Would Have Thought About A Wealth Tax

Time, What Alexander Hamilton Would Have Thought About a Wealth Tax:

Wealth taxes are on the current political table and hotly debated. All taxation was on the framers’ table as they considered a new constitution. What would they make of the measures we are considering now? And more to the point: does the Constitution they drafted allow Congress to tax a person’s overall wealth?

The short answer: yes and no. The longer answer requires historical context. ...

Alexander Hamilton, while Secretary of the Treasury, recommended a federal tax on carriages, an item that only rich people could afford. Congress levied that tax, but Daniel Hylton, a carriage owner, challenged the measure on constitutional grounds. It was a direct tax, he argued, and Congress had failed to apportion it amongst the states. The case found its way to the Supreme Court. There, Associate Justice William Paterson, who had introduced the New Jersey plan at the Federal Convention, offered a coherent explanation of the framers’ treatment of taxation:

It was … obviously the intention of the framers of the Constitution, that Congress should possess full power over every species of taxable property, except exports. The term taxes, is generical, and was made use of to vest in Congress plenary authority in all cases of taxation… All taxes on expences or consumption are indirect taxes. … Indirect taxes are circuitous modes of reaching the revenue of individuals, who generally live according to their income. In many cases of this nature the individual may be said to tax himself.

An individual taxes himself because he chooses to participate in an activity that is taxed; he can circumvent the tax by not purchasing or consuming the item in question. That’s what makes it “indirect.” A “Capitation, or other direct, Tax” is not optional in this sense; both capitation taxes and property taxes were widespread in America, and a person does not choose to be a person (a capitation tax), nor willingly decide to own no property. But why didn’t the framers apply the simple rule of uniformity to such taxes? Paterson recalled that peculiar politics, not abstract reasoning, led to the Federal Convention’s approach:

“I never entertained a doubt, that the principal, I will not say, the only, objects, that the framers of the Constitution contemplated as falling within the rule of apportionment, were a capitation tax and a tax on land. … The provision was made in favor of the southern States. They possessed a large number of slaves; they had extensive tracts of territory, thinly settled, and not very productive. A majority of the states had but few slaves, and several of them a limited territory, well settled and in a high state of cultivation. The Southern states, if no provision had been introduced in the Constitution, would have been wholly at the mercy of the other states. Congress in such case, might tax slaves, at discretion or arbitrarily, and land in every part of the Union after the same rate or measure: so much a head in the first instance, and so much an acre in the second. To guard against imposition in these particulars, was the reason of introducing the clause in the Constitution, which directs that representatives and direct taxes shall be apportioned among the states, according to their respective numbers.”

In the end, Paterson and his fellow justices concluded that the tax on chariots must be considered indirect. To apportion the tax among the states would be absurd, they argued; if there was only one chariot owner in a state, he would have to assume his state’s entire liability. And if there were no chariots, how could that state ever meet its apportioned share? But to strike down a tax on chariots because it was unworkable would seriously undermine Congress’s critical authority “to lay and collect Taxes,” which buttressed the entire governmental apparatus. The only alternative was to declare Hamilton’s chariot tax indirect—and thereby constitutional.

In Hamilton’s estimation, any “general assessment” of a person’s “whole” property or estate—what we call today a wealth tax—was one of those “other” direct taxes that must be apportioned amongst the states. But to apportion a wealth tax would be absurd; today, a handful of wealthy individuals in West Virginia or Mississippi, to account for their state’s quota, would have to pay several times as much as those residing in states with numerous rich taxpayers. In Hylton v. United States, the Supreme Court used the unfairness of apportionment to declare the chariot tax indirect, and therefore constitutional, but according to Hamilton, that line of reasoning is off the table. A wealth tax is a direct tax, pure and simple, he reckoned; unless apportioned, it will be unconstitutional.

In Hamilton’s estimation, any “general assessment” of a person’s “whole” property or estate—what we call today a wealth tax—was one of those “other” direct taxes that must be apportioned amongst the states. But to apportion a wealth tax would be absurd; today, a handful of wealthy individuals in West Virginia or Mississippi, to account for their state’s quota, would have to pay several times as much as those residing in states with numerous rich taxpayers. In Hylton v. United States, the Supreme Court used the unfairness of apportionment to declare the chariot tax indirect, and therefore constitutional, but according to Hamilton, that line of reasoning is off the table. A wealth tax is a direct tax, pure and simple, he reckoned; unless apportioned, it will be unconstitutional. ...

[A]ll conservatives, likely the majority for years to come, will weaponize Hamilton to support their preconceived aversion to wealth taxes. They will not be swayed, as some scholars contend, by Knowlton v. Moore, which in 1900 upheld an inheritance tax by treating it as indirect. There’s plenty of wiggle room between taxing a person’s “whole real or personal estate”—a wealth tax—and taxing how a person chooses to dispense with that estate. When conservative justices weigh an obliquely relevant case from 1900 versus Hamilton’s forceful pronouncement that yields the result they prefer, there is little doubt as to which they will favor. ...

In Pollock v. Farmers’ Loan and Trust Company (1895), the Supreme Court declared that taxing income derived from wealth (rents, interest, and dividends) was a direct tax and therefore had to be apportioned, while taxing income derived from labor (wages and salaries) was indirect and therefore did not have to be apportioned. This meant that Congress could tax working people readily, while taxing wealthy people would be unworkable. Workers cried foul. They pushed for, and got, the Sixteenth Amendment, which repudiated Pollock by lifting the apportionment requirement from all income taxes.

Today, facing rampant inequality, we can cry foul again—but we remain saddled with a provision of the Constitution geared to protect the slave-owning interests of Southern states in 1787. Even so, taxing income rather than wealth is always possible. There is no constitutional limit on the tax rate, so long as it is “uniform throughout the United States.”

(Hat Tip: Selina Farrell)

https://taxprof.typepad.com/taxprof_blog/2019/12/what-alexander-hamilton-would-have-thought-about-a-wealth-tax.html

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Comments

“but we remain saddled with a provision of the Constitution geared to protect the slave-owning interests of Southern states in 1787." Everything progressives dislike is because of SLAVERY.
And while we are at it, let’s eliminate the other disliked Constitutional provisions. Since we can read Alexander Hamilton’s dead mind (whatever is left of it), truly nothing is beyond us.
If the law is inconvenient, change it. If the law is constantly mutable, how can anyone be protected by the “rule of law.”

Posted by: aircav65 | Dec 14, 2019 8:46:31 AM

Rep. Jerald Nadler has proposed there non-uniform tax rates for the Internal Revenue Code that would result in lower income tax rates applying in places like New York (where the cost of living is relatively high) and with relatively higher income tax rates applying in jurisdictions where the cost of living is lower - and where, presumably, the burden of higher rates could be more easily borne.

Posted by: Joseph W. Mooney | Dec 14, 2019 6:50:48 PM

aircav65: You wrote "And while we are at it, let’s eliminate the other disliked Constitutional provisions." That's an excellent idea. Let's start with the undemocratic Electoral College.

Posted by: Gerald Scorse | Dec 19, 2019 7:45:19 AM

Yes Gerald, and don't forget those pesky low number amendments. Seems most economical to just take them out in order.

Posted by: Michael Petrik | Dec 20, 2019 9:31:55 AM

After all, all those amendments are "undemocratic."

Posted by: Michael Petrik | Dec 20, 2019 9:34:23 AM

Here's a link to the first ten amendments. Please let me know which ones are undemocratic.
As for the Electoral College, it (undemocratically) elected a candidate who received nearly 3 million fewer votes than the candidate who lost. Nowhere else in the civilized world would any result such as that have occurred. https://www.aclu.org/united-states-bill-rights-first-10-amendments-constitution

Posted by: Gerald Scorse | Dec 21, 2019 11:39:02 AM

Each and every one of them, Gerald. Since by their nature they apply even if a majority of Americans, Congressmen, or state legislatures opposes them. Indeed they are a check against democracy and require some variant of a super-majority to overcome. Isn't that kind of elementary?

Posted by: Michael T Petrik | Dec 23, 2019 6:51:58 AM

Well, isn't it Gerald??

Posted by: Michael T Petrik | Dec 23, 2019 3:05:32 PM

"Since by their nature they apply even if a majority of Americans, Congressmen, or state legislatures opposes them."

That makes them undemocratic? Please. That's exactly what makes them *democratic*. If such a situation should ever occur, the majority could change the amendment.

Posted by: Gerald Scorse | Dec 23, 2019 3:40:06 PM