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Friday, June 21, 2024

Weekly SSRN Tax Article Review And Roundup: Eyal-Cohen Reviews An Originalist Analysis Of Wealth Taxes Under The Constitution By Schizer & Calabresi

This week, Mirit Eyal-Cohen (Alabama; Google Scholar) reviews David M. Schizer (Columbia) & Steven G. Calabresi (Northwestern), Wealth Taxes Under the Constitution: An Originalist Analysis, 28 Fla. Tax Rev. ___ (2024).

Eyal-Cohen

This Article delivers a timely and persuasive originalist examination of the federal wealth tax’s constitutionality, particularly relevant given the recent national and international initiatives to implement such taxes. Schizer and Calabresi lay out a detailed historical and legal examination and offer valuable insights into the Framers’ intent and the practical challenges of the legal concept of apportionment. They begin with the axiom that wealth taxes are “direct taxes” requiring apportionment among the states. This apportionment necessitates that each state’s contribution to the tax must be proportionate to its population, a requirement leading to significant practical challenges and undesirable consequences: states with a smaller share of national wealth would need to impose higher tax rates to meet their apportioned contribution. 

Prominent scholars have dismissed apportionment as outdated or tied solely to slavery in an attempt to exempt wealth taxes from being distributed proportionally. Yet Schizer and Calabresi argue that such commentators fail to acknowledge the full extent of the Framers’ contributions. They demonstrate that the Framers aimed to address the inherent issue of inadequate revenue under the Articles of Confederation while avoiding the recurrence of the problem of being taxed without representation, as experienced under imperial rule. Their objective was to deter fiscal raids, a practice where states collaborate to implement nationwide taxes that disproportionately affect other states. The South was shielded from bearing the disproportionate burden of an unapportioned tax on enslaved persons through the use of apportionment, which ensured that the tax would be collected mainly in the South. 

According to Schizer and Calabresi, the Framers believed that a tax is considered “direct” if it is imposed on the taxpayers directly rather than on their transactions. A direct tax could be imposed solely based on one’s residency or ownership of property within the jurisdiction. Conversely, taxes imposed on transactions, also known as “duties,” were not required to be distributed proportionally; rather, they had to be consistent and equal across the entire nation. Thus, the concept of apportionment was designed to protect against regional biases and was not solely a mechanism to safeguard slavery-related interests, as many contemporary scholars have emphasized. Schizer and Calabresi’s constitutional interpretation critiques this kind of narrow interpretation of “direct tax” that limits it to head and real estate taxes. They rely on the interpretations of John Marshall, Oliver Ellsworth, and other Framers who presented a more comprehensive approach during the ratifying conventions. This interpretation encompassed livestock, business assets, and other forms of personal property. 

Schizer and Calabresi substantiate their claim through key judicial precedents. They survey significant court cases like Hylton v. United States (upholding a tax on horse-drawn carriages without requiring it to be divided among the states based on population) and Pollock v. Farmers’ Loan & Trust Co. (holding that there exist direct taxes beyond head and real estate taxes). The argument posits that a yearly tax imposed on the proprietor of a property (such as a carriage) is not considered “direct” and therefore does not require proportional distribution. Schizer and Calabresi assert that a simpler way to resolve the conflict would have been to categorize the carriage tax as a sales tax rather than a wealth tax.

Thereafter, they discuss the Sixteenth Amendment in its historical context, seemingly reversing Pollock, clarifying that it meant to authorize income taxes but not wealth taxes in its intent to resolve the matter of income taxes and apportionment. The Framers’ intention in designing the taxing power was to achieve the same goals as other clauses of the Constitution, namely, to secure necessary funding while also protecting states from potential misuse of federal authority. The Framers of the Sixteenth Amendment were less interested in theoretical equivalence than in the practical aspects of a workable tax system. Direct and indirect taxes were collected on transactions, and apportioning one was administratively feasible while apportioning the other was not. The assumption of costless scaling up seemed unrealistic in a world of sophisticated financial markets, and the economy was more agrarian than in 1787 or 1913. The Framers deliberately enacted a narrow rule, exempting only income taxes while retaining apportionment for wealth taxes and other direct taxes.

In Schizer and Calabresi’s opinion, the primary objectives of the Framers were to rectify the inherent weakness in the Articles of Confederation, prevent unjust taxation in the absence of representation, and establish an equitable allocation of tax responsibilities among the states. In addition, they took into account modern tax policy objectives such as the capacity to pay and ease of administration. The apportionment requirement for direct taxes was intentionally crafted to be efficacious yet restricted, safeguarding states from both federal power abuses and inter-state conflicts. The Framers encountered a dilemma when it came to utilizing population as a basis for distributing both taxation and representation. They had to determine the appropriate treatment of enslaved individuals. The South desired equal treatment for both enslaved and free individuals, as this would enhance their representation. Nevertheless, a significant number of delegates from the Northern States were opposed to including enslaved individuals in the population count, primarily with the intention of diminishing the South’s influence in Congress. The Framers intended to prevent the new taxing power from unfairly burdening their own states. Therefore, they mandated that direct taxes be apportioned and that duties, imposts, and excises be uniform. They also wanted to protect states from being singled out to pay extra national taxes. They were aware that certain states would be disproportionately affected by certain taxes for three reasons: their higher levels of wealth, their distinct economies, and the fact that states themselves also levied taxes. Coalitions of states might try to enact national taxes that mainly burden other states, known as “fiscal raids.”

That apprehension regarding fiscal raids was the primary factor that led the Framers to impose restrictions on the authority to tax, employing the method of apportionment for direct taxes and uniformity for duties, imposts, and excise. Apportionment discourages fiscal raids by requiring states to pay their population-based share. It was a fundamental aspect of federalism that safeguarded the institution of slavery and other economic practices between states. States with an equal total population were obligated to contribute an equivalent amount of revenue, irrespective of the number of enslaved Americans they possessed. Apportionment also provided safeguards in cases where an economic practice was distributed unequally among the states. States differed in their population of enslaved individuals and other aspects, such as possessing an imbalanced portion of wealth, including commodities like tobacco, ships, timber, and farms. Apportionment ensured that the North was safeguarded against an unfair tax burden on these assets. It stemmed from the broader concern that direct taxes could have varying impacts on states due to their distinct economies. 

The Framers prioritized the equitable allocation of resources among states, the capacity to meet financial obligations, the provision of incentives, and the ease of administration. Their belief was that affluent taxpayers should bear a greater tax burden, and they had a preference for indirect taxes such as tariffs and excises. The Framers were also concerned about the administrability of the system, specifically regarding liquidity, enforcement, and valuation. They favored transaction taxes because taxpayers had readily available cash to pay the tax, whereas direct taxes were referred to as “dry” taxes due to the absence of transactions and cash. In addition, they expressed concerns regarding the valuation process, as direct taxes necessitate appraisals and meticulous recordkeeping, which can pose challenges in countries with incomplete settlement.

Population was the most suitable indicator of wealth in the eyes of the Framers, as it exhibited a strong correlation with wealth. The sole and feasible criterion was the population count. According to the original interpretation of Article I, a wealth tax must be distributed proportionally if it is imposed on individual taxpayers rather than their financial activities. This perspective is bolstered by the textual content and structure of the clause, statements made during the ratifying conventions, and the current practices observed in the states. Ultimately, the Framers’ objective was to prevent the shortcomings of the Articles, such as insufficient income and oppressive taxation without representation under British rule, while also safeguarding states from financial plundering. Accordingly, Schizer and Calabresi conclude that direct taxes during the Founding era encompassed not only head taxes and real estate taxes but also taxes on various other forms of wealth.

Schizer and Calabresi have done a great job providing a unique methodological perspective. They situate the debate on wealth taxes within a broader historical and constitutional context and their detailed recounting of the Articles of Confederation and the Constitutional Convention provides a solid foundation for the arguments. They bridge the scholarly gap between old and modern studies by utilizing historical analysis with the contemporary relevance of the current debate on imposing a wealth tax in an attempt to close the ever-growing inequity gap. A modest suggestion for a broader engagement could be placing opposing constitutional views in their historical context to provide a deeper analysis of why such an account does not support the current scholarly dismissal of apportionment as outdated. Moreover, a more comprehensive discussion can be developed on how originalist constitutional interpretation aligns or conflicts with present-day judicial trends. This could help bridge the gap between historical interpretations and modern judicial reasoning and demonstrate how courts nowadays might view originalist arguments on apportionment. Moreover, exploring how apportionment could impact current federal-state relations and the overall structure of the federal tax system would provide a richer analysis. Lastly, a brief discussion of the potential economic and social impacts of wealth taxes, even from a constitutional perspective, could provide valuable context. Understanding such practical implications of legal arguments can offer readers a more holistic view of the issue. 

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

https://taxprof.typepad.com/taxprof_blog/2024/06/moore-originalist-analysis-of-wealth-taxes-under-the-constitution-schizer-calabresi.html

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