December 10, 2019 | Joshua Blustein
Edited by: Ian Elliott
The “wealth tax” promoted by Sen. Elizabeth Warren on the 2020 campaign trail has morphed into one of the most polarizing policies, moving billionaire hedge fund manager Leon Cooperman to tears on national television.[i] Her plan calls for a 2% annual tax on households with a net worth between $50 million and $1 billion and a 3% annual tax on households with a net worth over $1 billion. While much of this heated debate surrounds economic ramifications, enforcement complications, and ethical challenges, one pesky question stands firmly in the way: is a wealth tax legal? The constitutionality of the proposal depends chiefly on the definition of “wealth.” Is it income? If so, a future wealth tax bill could find shelter under the 16th Amendment’s umbrella. In the negative (and considered a “direct tax”), the plan would invoke the apportionment clause, de facto rendering the motion dead. A number of Supreme Court cases and historical precedents weigh in on the pressing issue.
Article I, Section II, Clause III as well as Article I, Section IX, Clause IV of the Constitution prohibits the national government from imposing direct taxes unless they are apportioned among the states on the basis of population. Accordingly, the total amount of revenue collected each year from each state must be proportional to each state’s population. In other words, under a direct tax, a state with triple the population of another state would have to pay triple the tax, even if the more populous state’s share of the national tax base were smaller. Thus, billionaires could escape it by simply moving to Wyoming or Vermont. But, if Congress sought to trap the rich by matching revenue fractions to population percentages, it is estimated that the wealth tax rate in West Virginia — the poorest state per capita — would need to be roughly 10 times higher than the rate in more affluent California and exceed 20 times the rate in prosperous Connecticut.[ii] Few, if any, taxes can meet this standard. Marking Warren’s wealth tax as a direct tax– therefore requiring apportionment– would put the bill on the chopping block.
The Framers wanted this cumbersome process for a reason. During the Articles of Confederation era, the severely indebted masses successfully pushed the state legislatures to enact paper money laws which would either devalue or cancel their loan repayments. The result? The lenders had been fleeced. James Madison’s 1787 Vices of the Political System of the United States targeted the legislatures for oppressing the few wealthy individuals at the behest of the disgruntled borrowers. Echoing Madison, Thomas Jefferson chides this legislative overreach, famously declaring in Notes on the State of Virginia, “[a]n elective despotism was not the government we fought for.” Fearing a majoritarianism, the Constitution enshrined the apportionment clause to impede the use of direct taxation to target minority groups and less-populous states. Though the spirit of the law has been established, the question still remains: what is considered direct taxation? Well, this inquiry is as old as the term itself. Madison recounts an August 20th, 1787 debate in the Constitutional Convention, writing, “Mr [Rufus] King asked what was the precise meaning of direct taxation? No one answd [sic].”[iii]
Alexander Hamilton was absent from the Convention that day, but he answered King’s question later in Federalist Paper No. 36, writing that taxes on “houses and land” were in fact direct taxes. His legal brief in Hylton v. United States (1796) held consistent, asserting that “general assessments … on the whole property of individuals” (read: “wealth taxes”) are direct taxes and obligate apportionment.The Court concurred. The unanimous decision in this case defined direct taxes as “capitation” taxes (those imposed equally on every individual, at a uniform, fixed rate) and taxes on land. In agreement, later Supreme Court majorities have ruled on at least seven occasions that federal taxes on real property (land and buildings) are direct taxes.[iv] For example, the Court in Scholey v. Rew (1874) ruled that “[t]axes on lands, houses, and other permanent real estate have always been deemed to be direct taxes.”[v] Furthermore, the Court in Springer v. United States (1880) found that: “[D]irect taxes, within the meaning of the Constitution, are only capitation taxes . . . and taxes on real estate.”[vi] Congress enacted at least five federal property taxes in 1798, in 1814, 1815, and 1816, and in 1861 and apportioned them based on state population each time.[vii]
Based on this Constitutional understanding, how could Warren’s plan not fall into the direct tax bucket? After all, her wealth tax is a tax on net worth. Net worth is calculated as total assets minus total liabilities. Total assets include many of the categories of wealth, like real estate, whose taxing has been branded a direct tax by over 200 years of judicial precedents and law study. Warren is not hiding this fact. Her campaign website page detailing the tax specifies that it “includ[es] residences.”[viii] A residence epitomizes the quintessential real estate asset. Moreover, as stated earlier, Hamilton wrote that any levy on the total wealth of an individual was undoubtedly a direct tax. What is a net worth tax if not, to use Hamilton’s words, “general assessments … on the whole property of individuals”?
Supporters of Warren seek to hitch the ‘Ultra-Millionaire Tax’ to the 16th Amendment of 1913, which allows for the unapportioned taxing of income. However, the wealth tax includes non-income assets. Again, Warren is forthcoming about this, differentiating between ‘income’ and ‘wealth’: “Our tax code focuses on taxing income, but a family’s wealth is also an important measure”[ix] (emphasis added). Since the Sixteenth Amendment refers exclusively to income, the tax on non-income property in Warren’s plan (on land, art, unrealized capital gains, etc.) would invalidate application of the Amendment. Post-1913 courts have reiterated this notion. In Eisner v. Macomber (1920), the Court stated that the Sixteenth Amendment did not “repeal or modify, except as applied to income, those provisions of the Constitution that require an apportionment according to population for direct taxes upon property, real and personal.”[x] Similarly, the Court in Fernandez v. Wiener (1945) affirmed that “Congress may tax real estate or chattels if the tax is apportioned . . . .”[xi] Recently, and in defense of the individual mandate in the Affordable Care Act, Chief Justice Roberts held, in National Federation of Independent Business v. Sebelius (2012), that even after the Sixteenth Amendment, “we continued to consider taxes on personal property to be direct taxes.”[xii]
The Roman statesman Marcus Cicero quipped that “we learn nothing from history except that we learn nothing from history.” Indeed, like the angry debtors of the early-to mid 1780’s, Elizabeth Warren again seeks to use the mantle of government to puncture the property rights of the wealthy. In response to this, the Framers built guardrails to protect civil liberties. Per the Constitution, and subsequent judicial and legislative proceedings, the Ultra-Millionaires Tax cannot be enforced as currently outlined by the Warren campaign. Apportionment or the highway.
Joshua Blustein is a senior at the Johns Hopkins University, where he double majors in Economics and International Studies. He is a contributing writer to JHULR Online.
[i] Hains, Tim. “Billionaire Leon Cooperman Cries Over Prospect Of Election Between ‘Polarizing’ Trump And Warren’s ‘Idiocy’: ‘I Care.’” RealClearPolitics, https://www.realclearpolitics.com/video/2019/11/05/billionaire_hedge-fund_manager_leon_cooperman_cries_over_prospect_of_trump-warren_election_i_care.html.
[ii] Hemel, Daniel, and Rebecca Kysar. “The Big Problem With Wealth Taxes.” The New York Times, 7 Nov. 2019, https://www.nytimes.com/2019/11/07/opinion/wealth-tax-constitution.html.
[iii]Dellinger, Walter E, and Dawn Johnsen. “We Need a National Debate on a Federal Tax on Wealth.” American Constitution Society, 5 Feb. 2019, https://www.acslaw.org/expertforum/we-need-a-national-debate-on-a-federal-tax-on-wealth/.
[iv] Hemel and Kysar, The Big Problem.
[v] Scholey v. Rew, 90 U.S. (23 Wall.) 331, 347 (1874)
[vi] Springer v. United States, 102 U.S. 586, 602 (1880)
[vii] Wallis, John Joseph. “A History of the Property Tax in America.” P.11 http://econweb.umd.edu/~wallis/MyPapers/PTFinal.pdf
[viii] “Ultra-Millionaire Tax.” Elizabeth Warren, https://elizabethwarren.com/ultra-millionaire-tax/.
[x] Hemel, Daniel. “Taxing Wealth in an Uncertain World”, P.24-25 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3446746
Photo: Getty Images