The Constitutional Line On Direct Taxes

Rob Natelson (Montana; Google Scholar), The Constitutional Line on Direct Taxes:

The idea of a federal wealth tax recently has become a popular cause among “progressives.” The question arises, however, of whether such a tax would be constitutional.

In theory, a federal wealth tax could pass constitutional muster. But unless it qualified under the Constitution as an “indirect tax” rather than as a “direct” one, its projected revenue would have to be allocated (“apportioned”) among the states according to their respective populations. The apportionment rule likely would render such a levy impractical.

Many wealth tax advocates contend, therefore, that wealth taxes qualify as “indirect.” But this contention seems plausible only because most Supreme Court pronouncements on direct and indirect taxes have been conflicting, uncertain—and wrong.

The confusion at SCOTUS can be traced to Hylton v. United States (1796), where Justice Samuel Chase suggested in dictum that direct taxes were limited to capitations (head or “poll” taxes) and land levies. With the exception of the correct holding that income taxes are direct (1895), the confusion continued in the nineteenth century and has carried forward into modern times. In 1937, the Supreme Court held that an imposition on wages was an “excise” and therefore indirect, and in 2012 the court ruled that a penalty for not purchasing health insurance was an indirect tax.

Most recently, in a concurring opinion in the June, 2024 case of Moore v. United States, Justice Ketanji Brown Jackson relied on the dictum by Justice Chase to suggest that direct taxes were limited to capitations and land levies. By contrast, Justice Brett Kavanaugh’s opinion for the court defined a direct tax as one imposed on persons and property and an indirect levy as one imposed on activities and transactions. He therefore categorized the income tax as “indirect.”

As explained below, the founding-era record shows that all of these statements are inaccurate.

In defense of the justices, it must be said that legal commentary has been little help. On this issue, as on so many others, it has been plagued by two maladies common to productions from the law school professorate. That is, it has been both agenda-driven and poorly researched.

Thus, the uncertainty persists even though the future Chief Justice John Marshall—surely a credible source—testified at the Virginia ratifying convention that the definition of direct taxes was then “well understood.” ...

The Constitution’s favoritism of indirect taxes reflects in part a moral choice. One reason a constitutional wealth tax would be difficult to craft is that by adopting the Constitution, the American people endorsed the same virtues that advocates of wealth taxes now wish to punish. 

Prior TaxProf Blog coverage:

• Rob Natelson (Montana), Clarifying The Uncertainty Over Direct And Indirect Taxes In Moore v. United States (July 13, 2024)
• Rob Natelson (Montana), More Evidence That ‘Direct Taxes’ Include Levies On Wealth And Income (July 24, 2024)

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