Is a Wealth Tax Constitutional?
With the Washington Post breaking the news today that Elizabeth Warren has proposed a wealth tax, my super-smart tax colleague Ari Glogower has posted to SSRN a working draft of a new paper that explores the constitutionality of various approaches to a wealth tax.
For those interested in the subject, it’s definitely worth a read. The draft paper is available here. And here is the abstract:
Policymakers and scholars are giving serious consideration to a federal wealth tax. Wealth taxation could address the harms from rising economic inequality, promote equality of social and economic opportunity, and raise the revenue needed to fund critical government programs. These reasons for taxing wealth may not matter, however, if a federal wealth tax is unconstitutional.
Scholars debating the constitutionality of a wealth tax generally focus on a specific question: Would a tax imposed on a base of a taxpayer’s wealth (a “traditional wealth tax”) be a “direct tax” under the Constitution that is subject to apportionment among the states by population? Apportionment would be impossible for any modern progressive tax, which explains the centrality of this question in the prior literature.
This Article argues, in contrast, that the possible constitutional restrictions on a traditional wealth tax may not matter. If the Supreme Court were to find that the Constitution foreclosed a traditional wealth tax, Congress could instead tax wealth indirectly, by adjusting a taxpayer’s income tax liability on account of her wealth. This Article describes three methods for making this adjustment (collectively, “Wealth Integration” methods): A taxpayer’s wealth could affect her base of taxable income (the “Base Method”), the applicable rate schedule (the “Rate Method”) or the availability of credits against tax (the “Credit Method”).
This Article first describes the economic effect of these Wealth Integration methods and why they may be more versatile than previously appreciated in the literature. As under a traditional wealth tax, Wealth Integration methods will account for a taxpayer’s wealth in determining her tax liability. At the same time, Wealth Integration methods would not generate a tax liability based on a taxpayer’s wealth alone.
The constitutional analysis of Wealth Integration methods would be intrinsically different from that of a traditional wealth tax. While the Supreme Court could find grounds for striking down a traditional wealth tax based on prior precedent and reasonable interpretation of the constitutional provisions, the Court could strike down Wealth Integration methods only by overruling settled prior precedent, invalidating many current features of the income tax, and fundamentally restricting Congress’ power to tax income under the 16th Amendment.
Finally, this Article considers the broader implications of Wealth Implication methods for the constitutionality of a traditional wealth tax. The possibility that Congress could instead tax wealth through Wealth Integration methods provides a new argument why the Court should uphold traditional wealth tax as well. Otherwise, the Court would have to choose between restricting the Sixteenth Amendment or introducing a formal distinction between economically similar taxes that would still diminish the effect of the apportionment requirement.
This post is part of the Administrative Law Bridge Series, which highlights terrific scholarship in administrative law and regulation to help bridge the gap between theory and practice in the regulatory state. The Series is further explained here, and all posts in the Series can be found here.