Paul L. Caron

Friday, April 8, 2022

Weekly SSRN Tax Article Review And Roundup: Roberts Reviews Taxation, Aristocracy, And The Constitution

This week, Tracey Roberts (Cumberland; Google Scholar) reviews new works by:

Roberts (2020)

Recently, ProPublica uncovered troves of tax information for the wealthiest Americans, revealing numerous pathways by which they avoid taxes. Last year the Department of the Treasury estimated that the tax gap, the difference between taxes that are owed and the taxes that have been paid, has increased to approximately $600 billion per year. Over the next ten years, this comes to $7 trillion in lost tax revenue, important resources that might be used to reduce the federal debt, for those concerned about such matters, and to address other needs as COVID 19 recedes and we recover from its impacts. Using tax data, Emmanuel Saez and Gabriel Zucman have estimated that the top one percent of taxpayers are responsible for one-third of that tax gap. These recent reports demonstrate that the federal income tax and the estate and gift taxes are inadequate in ensuring that the ultrawealthy in the United States pay their fair share. Two recent papers delve into historical resources, constitutional caselaw, and constitutional history to underscore that concerns about adequate taxation of the wealthy are not new, but are instead central to our nation’s founding, to the periods in which our country has faced its greatest challenges, and to democracy.

As every school child learns, Thomas Paine’s Common Sense spurred colonists to revolution. In Thomas Paine and Taxation as Freedom from Aristocracy, Jeremy Bearer-Friend and Vanessa Williamson examine Thomas Paine’s 1792 proposal, in The Rights of Man, to tax wealth on an annual basis. The article explores the design of his proposal, discusses ambiguities in his tax parameters, in particular what it means to tax the “produce” of wealth, delineates the tax brackets he designed, and estimates the impact that Paine’s wealth tax proposal had during his own era. The authors also consider what effects his plan would have if it were applied today, and further bridge the historical divide by engaging Paine in our current debate about the taxation of wealth. Finally, they underscore that the signal relationship between democracy and taxation that Paine identified during the revolutionary and post-revolutionary period remains true today: taxation is the normative expression of republican ideals.

In Taxation and the Constitution Reconsidered, Brooks and Gamage discuss the constitutional history and jurisprudence of federal taxation of wealth and similar subjects, focusing on two paths that would permit Congress to tax extreme concentrations of wealth. First some background. The Uniformity Clause provides that “all Duties, Imposts and Excises shall be uniform throughout the United States…” U.S. CONST. art. I, § 8, cl. 1. These taxes have been referred to as “indirect” taxes and have been primarily comprised, from the early years of our country, of excise taxes. Indirect taxes are distinguished from “direct taxes” which are subject to the apportionment clause. Article I, Section 2, Clause 3 contains one of the apportionment provisions: “Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers…” Article I, Section 9, clause 4 further provides: “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken.”

Brooks and Gamage argue that the requirements of uniformity and apportionment are methods of taxation, not barriers to taxation. First, they explore the array of excise taxes and the caselaw associated with them, arguing that several current wealth tax and similar reforms should be upheld as excises that conform to the requirements of uniformity. Second, they examine a pathway to impose a direct tax on wealth that satisfies the requirements of apportionment. Apportioning direct taxes among the states according to population would generally require that higher taxes be levied in poorer states and lower taxes be applied in higher-wealth and higher-income states. For the past hundred years, the unfairness of this structure has generally rendered the imposition of direct taxes an impossibility. Gamage and Brooks argue that tax expenditures, social welfare programs, and other transfers may now be used to offset such distributional inequities. Finally they propose strategies for drafting tax reform legislation that will navigate the requirements of both uniformity and apportionment.

Upon exiting the Constitutional Convention, a group of citizens approached Benjamin Franklin to ask what sort of government the delegates had planned. As the story goes, Franklin replied “A republic, if you can keep it.” Between the aggregation of dynastic wealth through Grantor Retained Annuity Trusts  and other mechanisms that escape the federal income tax and the estate and gift taxes, state creation of perpetual trusts, which evade the rule against perpetuities, and other rules to facilitate the development of dynasty trusts, and the curtailment of transparency, oversight, and limits to dark money entering politics via 501(c)(4) social welfare organizations, 501(c)(5) unions, and 501(c)(6) trade associations, there are significant questions as to whether we can keep it.

The new work by Bearer-Friend and Williamson underscores that the aggregation of dynastic wealth is not a new concern, but one central to the founding fathers’ plans for their nascent country. The new paper by Brooks and Gamage clarifies that Congress may ground new proposals for wealth taxation in interpretations of the Constitution set forth in Supreme Court case law and constitutional history. Ensuring that the rule of law, including the tax law, applies to all is essential for people to maintain faith in democracy.  It is incumbent on all of us to reflect on these issues and contributions as we consider the Constitution, congressional authority, the goals and purposes of government, and the continuation of our experiment in democracy.

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

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